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ORBT > SEC Filings for ORBT > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for ORBIT INTERNATIONAL CORP

Form 10-Q for ORBIT INTERNATIONAL CORP


15-May-2014

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Statements in this Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this document are certain statements which are not historical or current fact and constitute "forward-looking statements" within the meaning of such term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual financial or operating results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. Such forward looking statements are based on our best estimates of future results, performance or achievements, based on current conditions and the most recent results of the Company. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "may", "will", "potential", "opportunity", "believes", "belief", "expects", "intends", "estimates", "anticipates" or "plans" to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission.

Executive Overview

We recorded a decrease in our operating results for the three months ended March 31, 2014 as compared to the prior year period. Our sales decreased by 22.3% and we recorded a net loss of $1,062,000 during the current year period as compared to a net loss of $80,000 in the prior year period. Our net loss during the current year period was primarily attributable to lower revenue and profitability from both our Electronics and Power Groups. Our net loss during the current year period also included a $728,000 operating loss from our TDL subsidiary which included costs associated with the consolidation of our Quakertown facility into our Hauppauge, NY facility. Beginning in June 2014, we do not expect to incur any additional costs associated with our Quakertown facility with the exception of some minor occupancy related costs. The decrease in sales during the current year period was principally due to an 8.9% and 35.7% decrease in sales at our Electronics and Power Groups, respectively.

Our backlog at March 31, 2014 was approximately $9,600,000 compared to $10,100,000 at December 31, 2013 and $14,700,000 at March 31, 2013. The decrease in backlog at March 31, 2014 from March 31, 2013 was attributable to lower backlogs at both our Electronics and Power Groups. There is no seasonality to our business. Our shipping schedules are generally determined by the shipping schedules outlined in the purchase orders received from our customers. Both of our operating segments are pursuing a significant number of business opportunities and while we are confident that we will receive many of the orders we are pursuing, there can be no assurance as to the ultimate receipt and timing of these orders.


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Our financial condition remains strong as evidenced by our 8.7 to 1 current ratio at March 31, 2014. During November 2012, we entered into a $6,000,000 line of credit facility with a new lender. This line of credit was used to pay off, in full, all of our obligations to our former primary lender and to provide for our general working capital needs. In June 2013, our Credit Agreement was amended whereby (i) the expiration date on our credit facility was extended to July 1, 2015 and (ii) we are permitted to purchase up to $400,000 of our common stock in each year beginning July 1 and ending June 30 during the term of our Credit Agreement. In April 2014, our Credit Agreement was further amended whereby (i) we are required, for a certain defined period of time, to have cash, marketable securities and excess availability under our borrowing base, in the aggregate, of no less than $3,000,000 (ii) the definition of our consolidated fixed charge coverage ratio was amended and compliance with such ratio was waived for the quarter ended March 31, 2014 and we are not required to comply with this ratio until the year ending December 31, 2014 and each fiscal quarter and year thereafter, and (iii) we are required to maintain consolidated tangible net worth of no less than $13,500,000 for the quarters ending June 30, 2014 and September 30, 2014. We anticipated the operating loss for the current quarter when we negotiated the amendment to our banking agreement with our primary lender. We were in compliance with the financial covenants contained in our Credit Agreement at March 31, 2014, except for the fixed charge coverage ratio which was waived by our bank. On November 6, 2013, our Board of Directors authorized management to purchase up to $400,000 of our common stock pursuant to a buy back program. In conjunction with the buy back program, our Board of Directors authorized management to enter into a 10b5-1 Plan through which we were permitted to repurchase up to $200,000 of our common stock under the $400,000 buy back program. We are authorized to repurchase up to the remaining $200,000 of common stock under the $400,000 buyback program outside of the 10b5-1 Plan. From November 6, 2013 to February 27, 2014, we purchased a total of approximately 58,000 shares of our common stock for total cash consideration of approximately $200,000 for an average price of $3.46 per share. We will most likely not make any further repurchases of our common stock until later in the second quarter of 2014, depending on the timing of receipt of certain material contracts.

Our business is highly dependent on the level of military spending authorized by the U.S. Government. The current administration and Congress are under increasing pressure to reduce the federal budget deficit. This has resulted in a general decline in U.S. defense spending and could cause federal government agencies to reduce their purchases under contracts, exercise their rights to terminate contracts in whole or in part, issue temporary stop work orders or decline to exercise options to renew contracts, all of which could harm our operations and significantly reduce our future revenues. In particular, the Budget Control Act of 2011 commits the U.S. Government to significantly reduce the federal deficit over ten years through caps on discretionary spending and other measures. This had a dramatic effect on the defense budget, cutting $487 billion over a 10 year period. In addition, despite a bipartisan budget agreement in Washington reached in December 2013, there are further reductions to defense spending planned for 2014. A reduction in defense spending as a result of present and future sequestration cuts could have a profound negative impact on the entire defense industry.


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At the present time, it appears that consolidation resulting from budget pressure has created a resource issue with respect to the workloads on civilian government employees and the industry in general. Program contract delays have always been a factor on our business and our industry and these resource issues will more than likely exacerbate this problem for our industry. Consequently, significant delays in contract awards could adversely affect planned delivery schedules which could continue to impact our operating performance for 2014. As a result, our business, financial condition and results of operations could be materially adversely affected.

Critical Accounting Policies

There have been no changes to our critical accounting policies in the three months ended March 31, 2014. Those policies are discussed under "Critical Accounting Policies" in our "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7, as well as in our consolidated financial statements and footnotes thereto for the fiscal year ended December 31, 2013, as filed with the SEC with our Annual report on Form 10-K filed on March 31, 2014.

Inventories

Inventory is valued at the lower of cost (average cost method and specific identification) or market. Inventory items are reviewed regularly for excess and obsolete inventory based on an estimated forecast of product demand. Demand for our products can be forecasted based on current backlog, customer options to reorder under existing contracts, the need to retrofit older units and parts needed for general repairs. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have an impact on the level of obsolete material in our inventory and operating results could be affected, accordingly. However, world events which have forced our country into various conflicts have resulted in increased usage of hardware and equipment which are now in need of repair and refurbishment. This could lead to increased product demand as well as the use of some older inventory items that we had previously determined obsolete. In addition, recently announced reductions in defense spending may result in deferral or cancellation of purchases of new equipment, which may require refurbishment of existing equipment.

Deferred Tax Asset

At March 31, 2014, we continued to record a full valuation allowance on our net deferred tax asset. For the year ending December 31, 2013, we recorded a $2,252,000 deferred tax expense relating to a full valuation allowance taken on our net deferred tax asset. The full valuation allowance was recorded as a result of our conclusion that we will more likely than not be unable to generate sufficient future taxable income to utilize our net operating loss carryforwards and other temporary differences. This conclusion was based on the following: (i) pre-tax losses for the 2013 and 2012 calendar years, (ii) the challenging U.S. defense budget environment which has made it difficult to project revenue and profitability in future years with any degree of confidence, and (iii) the costs that have and will be incurred in the first half of 2014 related to the TDL consolidation, which will affect our profitability. We have an alternative minimum tax credit of approximately $573,000 with no limitation on the carry-forward period and Federal and state net operating loss carry-forwards of approximately $8,000,000 and $7,000,000, respectively, which expire from 2018 through 2033. We will evaluate the possibility of changing some or all of our valuation allowance relating to our deferred tax asset should we return to profitability in the future. Any future reduction of some or all of our valuation allowance would create a deferred tax benefit, resulting in an increase to net income in our consolidated statements of operations.


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Impairment of Goodwill

At December 31, 2013, in connection with the annual impairment testing of Behlman's goodwill pursuant to ASC 350, the analysis indicated that the fair value for the Behlman reporting unit was 47% greater than the carrying value and therefore the goodwill was not impaired.

Our analysis of Behlman's goodwill employed the use of both a market and income approach. Significant assumptions used in the income approach include growth and discount rates, margins and our weighted average cost of capital. We used historical performance and management estimates of future performance to determine margins and growth rates. Our weighted average cost of capital included a review and assessment of market and capital structure assumptions. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows. Changes in our actual results and/or estimates or any of our other assumptions used in our analysis could result in a different conclusion. The balance of our goodwill, as of March 31, 2014, is $868,000 for Behlman.

Share-Based Compensation

We account for share-based compensation awards by recording compensation based on the fair value of the awards on the date of grant and expensing such compensation over the vesting periods of the awards, which is generally one to ten years. Total share-based compensation expense was $26,000 and $28,000 for the three months ended March 31, 2014 and 2013, respectively. During the three months ended March 31, 2014, no shares of restricted stock or stock options were granted. During the comparable period in 2013, 130,000 shares of restricted stock were awarded to senior management.

Revenue and Cost Recognition

We recognize a substantial portion of our revenue upon the delivery of product. We recognize such revenue when title and risk of loss are transferred to our customer and when: i) there is persuasive evidence that an arrangement with the customer exists, which is generally a customer purchase order, ii) the selling price is fixed and determinable, iii) collection of the customer receivable is deemed probable, and iv) we do not have any continuing non-warranty obligations. However, for certain products, revenue and costs under larger, long-term contracts are reported on the percentage-of-completion method. For projects where materials have been purchased, but have not been placed in production, the costs of such materials are excluded from costs incurred for the purpose of measuring the extent of progress toward completion. The amount of earnings recognized at the financial statement date is based on an efforts-expended method, which measures the degree of completion on a contract based on the amount of labor dollars incurred compared to the total labor dollars expected to complete the contract. When an ultimate loss is indicated on a contract, the entire estimated loss is recorded in the period the loss is identified. Costs and estimated earnings in excess of billings on uncompleted contracts represent an asset that will be liquidated in the normal course of contract completion, which at times may require more than one year. The components of costs and estimated earnings in excess of billings on uncompleted contracts are the sum of the related contract's direct material, direct labor, and manufacturing overhead and estimated earnings less accounts receivable billings. We had no contracts outstanding at March 31, 2014 or December 31, 2013, accounted for under the percentage-of-completion method.


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Marketable Securities

We currently have approximately $239,000 invested in corporate bonds. We treat our investments as available-for-sale which requires us to assess our portfolio each reporting period to determine whether declines in fair value below book value are considered to be other than temporary. We must first determine that we have both the intent and ability to hold a security for a period of time sufficient to allow for an anticipated recovery in its fair value to its amortized cost. In assessing whether the entire amortized cost basis of the security will be recovered, we compare the present value of future cash flows expected to be collected from the security (determination of fair value) with the amortized cost basis of the security. If the impairment is determined to be other than temporary, the investment is written down to its fair value and the write-down is included in earnings as a realized loss, and a new cost is established for the security. Any further impairment of the security related to all other factors is recognized in other comprehensive income. Any subsequent recovery in fair value is not recognized until the security either is sold or matures.

We use several factors in our determination of the cash flows expected to be collected including: i) the length of time and extent to which market value has been less than cost; ii) the financial condition and near term prospects of the issuer; iii) whether a decline in fair value is attributable to adverse conditions specifically related to the security or specific conditions in an industry; iv) whether interest payments continue to be made and v) any changes to the rating of the security by a rating agency.

Results of Operations

Three month period ended March 31, 2014 vs. March 31, 2013

We currently operate in two industry segments. Our Orbit Instrument Division, TDL subsidiary, and beginning January 1, 2014, our TDL Division which conducts all operations of TDL that were moved to our Hauppauge, NY facility, are engaged in the design and manufacture of electronic components and subsystems and our ICS subsidiary performs system integration for Gun Weapons Systems and Fire Control Interface, cable and harness assemblies, as well as logistics support and documentation (which collectively comprise our "Electronics Group"). Our Behlman subsidiary is engaged in the design and manufacture of commercial power units and COTS power solutions (which comprises our "Power Group").


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Consolidated net sales for the three month period ended March 31, 2014 decreased by 22.3% to $5,007,000 from $6,447,000 for the three month period ended March 31, 2013. The decrease was principally due to decreases of 8.9% and 35.7% from both our Electronics and Power Groups, respectively. The decrease in sales from our Electronics Group was primarily attributable to a decrease in sales from our Orbit Instrument Division and our TDL subsidiary that was partially offset by an increase in sales at our ICS subsidiary. The decrease in sales at our Orbit Instrument Division and TDL subsidiary was primarily due to a decrease in shipments pursuant to customer delivery schedules resulting from lower bookings in prior periods. The increase in sales at our ICS subsidiary was primarily attributable to the shipment of Signal Data Converter units during the current year period. The decrease in sales at our Power Group was principally due to a decrease in shipments at both our commercial and COTS divisions primarily due to a decrease in customer delivery schedules relating to lower bookings in prior periods.

Gross profit, as a percentage of sales, for the three months ended March 31, 2014 decreased to 30.0% from 38.6% for the three month period ended March 31, 2013. The decrease was primarily the result of lower gross profit from both our Electronics Group (26.3% in the current year period compared to 28.2% in the prior year period) and Power Group (35.0% in the current year period compared to 48.7% in the prior year period). The decrease in gross profit from our Electronics group was primarily due to lower sales and to costs related to the consolidation of our Quakertown facility. Exclusive of our TDL subsidiary, consolidated gross profit was 35.1%. The decrease in gross profit from our Power Group was principally due to lower sales during the current year period.

Selling, general and administrative expenses increased slightly to $2,543,000 for the three month period ended March 31, 2014 from $2,531,000 for the three month period ended March 31, 2013 principally due to higher selling, general and administrative expenses from our Electronics Group that was partially offset by lower selling, general and administrative expenses from our Power Group and lower corporate costs. The increase in selling, general and administrative expenses at our Electronics Group during the current year period was principally due to increases at our TDL and ICS subsidiaries. The increase in selling, general and administrative expenses at our TDL subsidiary were primarily due to $161,000 of accelerated non-cash depreciation and amortization expense and to other selling, general and administrative costs associated with the consolidated of our Quakertown, PA facility into our Hauppauge, NY facility. The increase in selling, general and administrative expenses at our ICS subsidiary was primarily attributable to costs relating to development of our VME/VPX product line. Selling, general and administrative expenses, as a percentage of sales, for the three month period ended March 31, 2014 increased to 50.8% from 39.3% for the three month period ended March 31, 2013 principally due to the decrease in sales and the slight increase in expenses.

Interest expense for the three months ended March 31, 2014 decreased to $11,000 from $17,000 for the three months ended March 31, 2013, principally due to a decrease in amounts owed under our line of credit.

Investment and other income for the three month period ended March 31, 2014 increased to $10,000 from $3,000 for the three month period ended March 31, 2013 principally due to $3,000 gain on the sale of a corporate bond during the current year period and also due to a $2,000 loss on the sale of a corporate bond during the prior year period.


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Net loss before income tax provision was $1,044,000 for the three months ended March 31, 2014 compared to a net loss before income tax provision of $54,000 for the three months ended March 31, 2013. The increase in net loss was principally due to lower sales and gross margin, the operating loss at our TDL subsidiary and slightly higher selling, general and administrative expenses which was partially offset by lower interest expense and higher investment and other income.

Income taxes for the three months ended March 31, 2014 and March 31, 2013 consist of $18,000 and $26,000, respectively, in state income and minimum taxes that cannot be offset by any state or Federal net operating loss carry-forwards.

As a result of the foregoing, net loss for the three months ended March 31, 2014 was $1,062,000 compared to a net loss of $80,000 for the year ended March 31, 2013.

Earnings (loss) before interest, taxes and depreciation and amortization (EBITDA) for the three months ended March 31, 2014 decreased to a loss of $787,000 from earnings of $31,000 for three months ended March 31, 2013. Listed below is the EBITDA reconciliation to net loss:

EBITDA is a Non-GAAP financial measure and should not be construed as an alternative to net income. An element of the Company's growth strategy has been through strategic acquisitions which have been substantially funded through the issuance of debt. This has resulted in significant interest expense and amortization expense. EBITDA is presented as additional information because the Company believes it is useful to our investors and management as a measure of cash generated by our business operations that will be used to service our debt and fund future acquisitions as well as provide an additional element of operating performance.

                                    Three months ended
                                        March 31,
                                    2014           2013
Net loss                        $ (1,062,000 )   $ (80,000 )
Interest expense                      11,000        17,000
Income tax expense                    18,000        26,000
Depreciation and amortization        246,000        68,000
EBITDA                          $  ( 787,000 )   $  31,000

Material Change in Financial Condition

Working capital increased to $15,066,000 at March 31, 2014 compared to $14,016,000 at December 31, 2013. The ratio of current assets to current liabilities was 8.7 to 1 at March 31, 2014 compared to 4.7 to 1 at December 31, 2013. The increase in working capital was primarily attributable to the reclassification of our line of credit as a non-current liability at March 31, 2014 which was partially offset by the net loss for the current period and by the purchase of treasury stock and property and equipment.


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Net cash used in operating activities for the three month period ended March 31, 2014 was $855,000, which was primarily attributable to the net loss for the period, an increase in accounts receivable and a decrease in accrued expenses and despite the increase in customer advances and accounts payable and the non-cash depreciation and stock based compensation. Net cash provided by operating activities for the three month period ended March 31, 2013 was $1,391,000, primarily attributable to a decrease in accounts receivable and inventory, an increase in accounts payable and the non-cash depreciation and stock based compensation that was partially offset by the net loss for the period, a decrease in customer advances, accrued expenses and the liability associated with the non-renewal of a senior officer contract.

Cash flows used in investing activities for the three month period ended March 31, 2014 was $21,000, attributable to the purchase of fixed assets and marketable securities that was partially offset by the sale of marketable securities. Cash flows used in investing activities for the three month period ended March 31, 2013 was $134,000, attributable to the purchase of fixed assets and marketable securities that was partially offset by the sale of marketable securities.

Cash flows used in financing activities for the three month period ended March 31, 2014 was $222,000, attributable to the repayment of note payable-bank and the purchase of treasury stock. Cash flows used in financing activities for the three month period ended March 31, 2013 was $688,000, attributable to the repayment of note payable-bank and long term debt and the purchase of treasury stock.

On November 8, 2012, we entered into a credit agreement ("Credit Agreement") with a commercial lender pursuant to which we established a committed line of credit of up to $6,000,000. This line of credit was used to pay off, in full, all of our obligations to our former primary lender and to provide for our general working capital needs. In June 2013, our Credit Agreement was amended whereby (i) the expiration date on our credit facility was extended to July 1, 2015 and (ii) we are permitted to purchase up to $400,000 of our common stock in each year beginning July 1 and ending June 30 during the term of our Credit Agreement. In April 2014, our Credit Agreement was further amended whereby (i) we are required, for a certain defined period of time, to have cash, marketable securities and excess availability under our borrowing base, in the aggregate, of no less than $3,000,000 (ii) the definition of our consolidated fixed charge coverage ratio was amended and compliance with such ratio was waived for the quarter ended March 31, 2014 and we are not required to comply with this ratio until the year ending December 31, 2014 and each fiscal quarter and year thereafter, and (iii) we are required to maintain consolidated tangible net worth of no less than $13,500,000 for the quarters ending June 30, 2014 and September 30, 2014.

Payment of interest on the line of credit is due at a rate per annum as follows:
either (i) variable at the lender's prime lending rate (3.25% at March 31, 2014) and/or (ii) 2% over LIBOR for 30, 60, or 90 day LIBOR maturities, at our sole discretion. The line of credit is collateralized by a first priority security interest in all of our tangible and intangible assets. Outstanding borrowings under the line of credit were $1,970,000 at March 31, 2014 at an interest rate of 2.16% representing 2% plus the 30 day LIBOR rate.


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The Credit Agreement contains customary affirmative and negative covenants and certain financial covenants. Additionally, available borrowings under the line of credit are subject to a borrowing base of eligible accounts receivable and inventory. All outstanding borrowings under the line of credit are accelerated . . .
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