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ORBT > SEC Filings for ORBT > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for ORBIT INTERNATIONAL CORP

Form 10-Q for ORBIT INTERNATIONAL CORP


14-Aug-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 our actual financial or operating results to be materially different from our 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 our most recent results. 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 our reports and registration statements filed with the Securities and Exchange Commission.

Executive Overview

We recorded a decrease in our operating results for the three and six months ended June 30, 2014 as compared to the comparable prior year periods. Our net sales for the three and six months ended June 30, 2014 decreased by 16.7% and 19.5%, respectively, as compared to the prior year three and six month periods. We recorded a net loss of $171,000 and $1,233,000, respectively, for the three and six months ended June 30, 2014 as compared to net income of $109,000 and $29,000 for the respective prior year periods. The decrease in operating results for both the three and six month current periods was primarily attributable to lower revenue and profitability from both our Electronics and Power Groups. Our net loss for the three and six months ending June 30, 2014 included a $351,000 and $1,079,000 operating loss, respectively, from our TDL subsidiary which included costs associated with the consolidation of our Quakertown facility into our Hauppauge, NY facility. Beginning June 30, 2014, we do not expect to incur any additional costs associated with our Quakertown facility with the exception of some minor occupancy related costs.

Our backlog at June 30, 2014 was approximately $8,200,000 compared to $10,100,000 at December 31, 2013 due primarily to a lower backlog at our Electronics Group. 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 amount 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 9.3 to 1 current ratio at June 30, 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 defined period of time, to have an aggregate of cash, marketable securities and excess availability under our borrowing base of no less than $3,000,000 (ii) the definition of our consolidated fixed charge coverage ratio was amended and compliance with such amended ratio was waived for the quarter ended March 31, 2014 and we are not required to comply with this amended 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 were in compliance with the financial covenants contained in our Credit Agreement at June 30, 2014. 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. Our previously authorized 10b5-1 Plan was completed and is no longer in effect.

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 do not expect to make any further repurchases of our common stock until certain expected material contracts for legacy hardware are received.

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, defense spending continues to be well below historical levels. 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 six months ended June 30, 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 2013 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 June 30, 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 incurred in the first half of 2014 related to the TDL consolidation, which have affected 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 condensed consolidated statements of operations and comprehensive income (loss).


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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 June 30, 2014, is $868,000 for Behlman.

Stock-Based Compensation

We account for stock-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 stock-based compensation expense was $52,000 and $56,000 for the six months ended June 30, 2014 and 2013, respectively. During the six months ended June 30, 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 shipment 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 June 30, 2014 or December 31, 2013 that were accounted for under the percentage-of-completion method.


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Marketable Securities

We currently have approximately $252,000 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 June 30, 2014 v. June 30, 2013

We currently operate in two industry segments, the "Electronics Group" and "Power Group". Our Electronics Group is comprised of our Orbit Instrument Division, our subsidiaries, TDL, ICS and beginning January 1, 2014, our TDL Division which conducts all operations of TDL that were moved to our Hauppauge, NY facility. The Orbit Instrument Division and TDL are engaged in the design and manufacture of electronic components and subsystems. 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. Our Power Group, through our Behlman subsidiary, is engaged in the design and manufacture of commercial power units and commercial-off-the-shelf ("COTS") power solutions.


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Consolidated net sales for the three month period ended June 30, 2014 decreased by 16.7% to $5,396,000 from $6,475,000 for the three month period ended June 30, 2013, due primarily to lower sales from both our Electronics and Power Groups. Sales from our Electronics Group decreased by 19.7% to $2,664,000 for the three months ended June 30, 2014 compared to $3,316,000 in the prior year period. The decrease in sales at our Electronics Group was primarily attributable to the absence of shipments in the current year period for a certain display used on a major helicopter program that was shipped by TDL in the prior year period. Sales from our Power Group decreased by 13.7% to $2,732,000 for the three months ended June 30, 2014 as compared to $3,166,000 in the prior year three month period. The decrease in sales at our Power Group was principally due to a decrease in sales at our commercial division which was partially offset by an increase in sales at our COTS division. The decrease in sales at our commercial division was primarily due to lower bookings in prior periods and the increase in sales at our COTS division was principally due to an increase in shipments pursuant to customer delivery schedules.

Gross profit, as a percentage of sales, for the three months ended June 30, 2014 increased to 41.5% from 38.6% for the three month period ended June 30, 2013. The increase was the result of higher gross profit at our Electronics Group and slightly higher gross profit at our Power Group. The increase in gross profit from our Electronics Group was principally due to the following: (i) higher gross profit at our Orbit Instrument division due to a change in product mix,
(ii) higher gross profit at our ICS subsidiary due to a change in product mix and also to lower overhead costs relating to ICS' move in April 2014 into a smaller facility, and (iii) reduced overhead costs due to the consolidation of our Quakertown facility into our Hauppauge facility. The slight increase in gross profit at our Power Group was principally due to a change in product mix which resulted in a lower material consumption in the current year period as compared to the prior year period.

Selling, general and administrative expenses increased by 1.2% to $2,384,000 for the three month period ended June 30, 2014 from $2,355,000 for the three month period ended June 30, 2013. The increase was due higher selling, general and administrative expenses from our Electronics Group which was partially offset by lower corporate costs and lower selling, general and administrative expenses from our Power Group. The higher selling, general and administrative expenses at our Electronics Group was principally due to higher selling costs. The decrease in corporate costs was primarily due to lower professional fees and other costs. The decrease in selling, general and administrative expenses from our Power Group was primarily due to lower selling costs associated with a decrease in personnel. Selling, general and administrative expenses, as a percentage of sales, for the three month period ended June 30, 2014 increased to 44.2% from 36.4% for the three month period ended June 30, 2013 principally due to a decrease in sales and a slight increase in costs.


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Interest expense for the three months ended June 30, 2014 decreased to $10,000 from $15,000 for the three months ended June 30, 2013, principally due to a decrease in amounts owed under our line of credit.

Investment and other (income) expense, net for the three month period ended June 30, 2014, decreased to an expense of $3,000 from income of $2,000 for the three month period ended June 30, 2013 principally due to the loss on the disposal of property and equipment in the current year period which was partially offset by the gain on the sale of corporate bonds in the current year period and the loss on the sale of corporate bonds in the prior year period.

Loss before taxes was $160,000 for the three months ended June 30, 2014 compared to income before taxes of $129,000 for the three months ended June 30, 2013. The loss in the current year period was principally due to a decrease in sales from both our Electronics and Power Groups, a $351,000 operating loss from our TDL subsidiary which included costs associated with the consolidation of our Quakertown, PA facility into our Hauppauge, NY facility, and a slight increase in selling, general and administrative expenses which was partially offset by an increase in gross margin and a decrease in interest expense.

The provision for income taxes for the three months ended June 30, 2014 and June 30, 2013 consist of $11,000 and $20,000, respectively, in state income and Federal 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 June 30, 2014 was $171,000 compared to net income of $109,000 for the three months ended June 30, 2013.

Earnings (loss) before interest, taxes and depreciation and amortization (EBITDA) for the three months ended June 30, 2014 decreased to a loss of $88,000 from earnings of $216,000 for the three months ended June 30, 2013. Listed below is the EBITDA reconciliation to net income:

EBITDA is a Non-GAAP financial measure and should not be construed as an alternative to net income. An element of our 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 we believe 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
                                        June 30,
                                   2014          2013
Net (loss) income               $ (171,000 )   $ 109,000
Interest expense                    10,000        15,000
Income tax expense                  11,000        20,000
Depreciation and amortization       62,000        72,000
EBITDA                          $  (88,000 )   $ 216,000


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Six month period ended June 30, 2014 v. June 30, 2013

Consolidated net sales for the six month period ended June 30, 2014 decreased by 19.5% to $10,403,000 from $12,922,000 for the six month period ended June 30, 2013 due to lower sales from both our Electronics and Power Groups. Sales from our Electronics Group decreased by 14.4%, due principally to a decrease in shipments resulting from lower bookings in prior periods. We recorded a 24.9% decrease in sales at our Power Group. The decrease was principally due to lower shipments at both our commercial and COTS divisions as a result of a lower backlog at December 31, 2013.

Gross profit, as a percentage of sales, for the six months ended June 30, 2014 decreased to 35.9% from 38.6% for the six month period ended June 30, 2013. This decrease was primarily the result of lower gross profit from our Power Group which was partially offset by higher gross profit from our Electronics Group. The decrease in gross profit at our Power Group was principally due to lower sales during the current year period. The increase in gross profit from our Electronics Group was primarily attributable to higher gross profit at our Orbit Instrument division due to a change in product mix and to higher gross profit at our ICS subsidiary due to higher sales and lower overhead costs relating to ICS' move in April 2014 into a smaller facility.

Selling, general and administrative expenses increased slightly by 0.8% to $4,927,000 for the six month period ended June 30, 2014 from $4,886,000 for the six month period ended June 30, 2013. The increase was primarily due to higher selling, general and administrative expenses from our Electronics Group which was partially offset by lower expenses at our Power Group and lower corporate costs. The increase in selling, general and administrative expenses at our Electronics Group was primarily due to $161,000 of accelerated non-cash depreciation and amortization expense relating to the consolidation of our Quakertown, PA facility and higher selling expenses during the current six month period as compared to the prior year period. The decrease in selling, general and administrative expenses at our Power Group was primarily due to lower selling costs associated with a decrease in personnel. Selling, general and administrative expenses, as a percentage of sales, for the six month period ended June 30, 2014 increased to 47.4% from 37.8% for the six month period ended June 30, 2013 principally due to a decrease in sales and a slight increase in costs.

Interest expense for the six months ended June 30, 2014 decreased to $21,000 from $32,000 for the six months ended June 30, 2013, principally due to a decrease in amounts owed under our line of credit.

Investment and other (income) expense, net for the six month period ended June 30, 2014 increased to income of $7,000 from income of $5,000 for the six month period ended June 30, 2013.

Loss before taxes was $1,204,000 for the six months ended June 30, 2014 compared to income before income taxes of $75,000 for the six months ended June 30, 2013. The loss in the current year period was principally due to a decrease in sales from both our Electronics and Power Groups, a $1,079,000 operating loss from our TDL subsidiary, which included costs associated with the consolidation of our Quakertown, PA facility into our Hauppauge, NY facility, and a slight increase in selling, general and administrative expenses which was partially offset by a decrease in interest expense.


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The provision for income taxes for the six months ended June 30, 2014 and June 30, 2013 consist of $29,000 and $46,000, respectively, in state income and Federal 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 six months ended June 30, 2014 was $1,233,000 compared to net income of $29,000 for the six months ended June 30, 2013.

Earnings (loss) before interest, taxes and depreciation and amortization (EBITDA) for the six months ended June 30, 2014 decreased to a loss of $875,000 from earnings of $247,000 for the six months ended June 30, 2013. Listed below is the EBITDA reconciliation to net income:

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