UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2010
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-3936
ORBIT INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 11-1826363
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
80 CABOT COURT, HAUPPAUGE, NEW YORK 11788
(Address of principal executive offices) (Zip Code)
631-435-8300
(Registrant's telephone number, including area code)
N/A
(Former name, former address and formal fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No___
===
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Registration S-T 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes__ No__
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
__ Large accelerated filer __ Accelerated Filer
__ Non-accelerated filer X Smaller reporting company
===
Indicate by check mark whether the registrant is a shell company(as defined in
Rule 12b-2 of the Exchange Act): Yes__ No X
===
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 4,632,277 shares of common
stock, par value $.10, as of May 19, 2010.
INDEX
Page No.
-----------
Part I. Financial Information:
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 2010(unaudited) and December 31, 2009 3-4
Condensed Consolidated Statements of Operations
for the Three Months Ended
March 31, 2010 and 2009 (unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2010
and 2009 (unaudited) 6-7
Notes to Condensed Consolidated Financial Statements (unaudited) 8-18
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-31
Item 3. - Quantitative and Qualitative Disclosures
About Market Risk 31
Item 4T. - Controls and Procedures 31
Part II. Other Information:
Item 1 - Legal Proceedings 32
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 3 - Defaults Under Senior Securities 32
Item 4 - (Removed and Reserved) 32
Item 5 - Other Information 32
Item 6 - Exhibits 32
Signatures 33
Exhibits 34-39
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 2010 2009
- ------ ---- ----
(unaudited)
Current assets:
Cash and cash equivalents $ 1,268,000 $ 2,321,000
Investments in marketable securities 910,000 1,019,000
Accounts receivable (less allowance for
doubtful accounts of $145,000) 3,496,000 3,857,000
Inventories 12,511,000 11,624,000
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,394,000 1,079,000
Deferred tax asset 999,000 714,000
Other current assets 258,000 287,000
----------- ----------
Total current assets 20,836,000 20,901,000
Property and equipment, net 1,336,000 1,246,000
Goodwill 2,483,000 2,483,000
Intangible assets, net 141,000 227,000
Deferred tax asset 1,116,000 1,403,000
Other assets 661,000 661,000
----------- ----------
TOTAL ASSETS $26,573,000 $26,921,000
=========== ===========
<FN>
The accompanying notes are an integral part of these condensed financial statements.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
March 31, December 31,
2010 2009
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
- ------------------------------------
Current liabilities:
Current portion of long-term obligations $ 931,000 $ 995,000
Note payable - bank 1,233,000 988,000
Accounts payable 1,352,000 1,084,000
Income taxes payable 20,000 57,000
Accrued expenses 1,107,000 1,102,000
Customer advances 61,000 32,000
Deferred income 85,000 85,000
------------ ------------
Total current liabilities 4,789,000 4,343,000
Deferred income 150,000 171,000
Long-term obligations, net of current
portion 3,724,000 4,034,000
------------ ------------
Total liabilities 8,663,000 8,548,000
------------ ------------
STOCKHOLDERS' EQUITY
Common stock - $.10 par value, 10,000,000 shares
authorized, 4,954,000 and 4,931,000 shares issued
at 2010 and 2009, respectively, and 4,585,000 and
4,563,000 shares outstanding at 2010 and 2009,
respectively 495,000 493,000
Additional paid-in capital 21,614,000 21,464,000
Treasury stock, at cost, 369,000 and
368,000 shares, respectively (915,000) (913,000)
Accumulated other comprehensive gain, net of tax 99,000 65,000
Accumulated deficit (3,383,000) (2,736,000)
------------ ------------
Total stockholders' equity 17,910,000 18,373,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,573,000 $26,921,000
=========== ===========
<FN>
The accompanying notes are an integral part of these condensed financial statements.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
2010 2009
----- ------
Net sales $5,532,000 $6,047,000
Cost of sales 3,690,000 3,773,000
----------- ----------
Gross profit 1,842,000 2,274,000
----------- -----------
Selling, general and
administrative
expenses 2,469,000 2,592,000
Interest expense 57,000 46,000
Investment and
other income, net (41,000) (20,000)
----------- ------------
Loss before provision
for income taxes (643,000) (344,000)
Provision for income
taxes 4,000 9,000
----------- -----------
NET LOSS $ (647,000) $ (353,000)
=========== ===========
Net loss per
common share:
Basic $ (0.15) $ (0.08)
Diluted $ (0.15) $ (0.08)
<FN>
The accompanying notes are in integral part of these condensed financial
statements.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
2010 2009
---- ----
Cash flows from operating activities:
Net loss $ (647,000) $ (353,000)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Share-based compensation expense 82,000 79,000
Amortization of intangible assets 86,000 124,000
Depreciation and amortization 67,000 55,000
Unrealized loss on write down
of marketable securities - 39,000
Loss on sale of marketable securities 5,000 -
Bond premium amortization 1,000 3,000
Deferred income (21,000) (22,000)
Changes in operating assets and liabilities:
Accounts receivable, net 361,000 3,066,000
Inventories (887,000) (403,000)
Costs and estimated earnings in excess of
billings on uncompleted contracts (315,000) -
Other current assets 29,000 37,000
Other assets - 1,000
Accounts payable 268,000 (104,000)
Accrued expenses 5,000 (140,000)
Income taxes payable (37,000) (20,000)
Customer advances 29,000 10,000
----------- -----------
Net cash (used in) provided by operating
activities (974,000) 2,372,000
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (157,000) (84,000)
Sale of property and equipment - 7,000
Sale of marketable securities 156,000 233,000
----------- -----------
Net cash (used in) provided by investing
activities (1,000) 156,000
----------- -----------
<FN>
(continued)
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
Three Months Ended
March 31,
2010 2009
---- --------
Cash flows from financing activities:
Purchase of treasury stock (2,000) (43,000)
Proceeds from issuance of long-term debt
and note payable-bank 1,233,000 2,000
Stock option exercises 53,000 -
Repayments of long-term debt
and note payable-bank (1,362,000) (843,000)
------------ ----------
Net cash used in financing activities (78,000) (884,000)
------------- ----------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (1,053,000) 1,644,000
------------ ---------
Cash and cash equivalents - January 1 2,321,000 2,080,000
------------ ----------
CASH AND CASH EQUIVALENTS - March 31 $ 1,268,000 $ 3,724,000
============= ===========
Supplemental cash flow information:
Cash paid for interest $ 70,000 $ 54,000
============= ===========
<FN>
The accompanying notes are an integral part of these condensed financial statements.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(NOTE 1) - Basis of Presentation and Summary of Significant Accounting Policies:
------ ---------------------------------------------------------------------
General
-------
The financial information herein is unaudited. However, in the opinion of
management, such information reflects all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results of
operations for the periods being reported. Additionally, it should be noted
that the accompanying condensed consolidated financial statements do not purport
to contain complete disclosures required for annual financial statements in
accordance with accounting principles generally accepted in the United States of
America.
The results of operations for the three months ended March 31, 2010 are not
necessarily indicative of the results of operations that can be expected for the
year ending December 31, 2010.
These condensed consolidated statements should be read in conjunction with
the Company's consolidated financial statements for the year ended December 31,
2009 contained in the Company's Annual Report on Form 10-K.
Reclassification
----------------
For comparability, certain 2009 amounts have been reclassified where
appropriate, to conform to the financial presentation in 2010.
Marketable Securities
----------------------
The Company's investments are classified as available-for-sale securities
and are stated at fair value, based on quoted market prices, with the unrealized
gains and losses, net of income tax, reported in other comprehensive income
(loss). Realized gains and losses are included in investment income. Any decline
in value judged to be other-than-temporary on available-for-sale securities are
included in earnings to the extent they relate to a credit loss. A credit loss
is the difference between the present value of cash flows expected to be
collected from the security and the amortized cost basis. The amount of any
impairment related to other factors will be recognized in comprehensive income.
The cost of securities is based on the specific-identification method. Interest
and dividends on such securities are included in investment income.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(NOTE 1) - Basis of Presentation and Summary of Significant Accounting Policies
------- --------------------------------------------------------------------
(continued):
- ------------
Revenue and Cost Recognition
-------------------------------
The Company recognizes a substantial portion of its revenue upon delivery
of product, 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 into
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. Assets related to these contracts are included in costs and
estimated earnings in excess of billings on uncompleted contracts as they will
be liquidated in the normal course of contract completion, although this may
require more than one year. The components of cost and estimated earnings in
excess of billings on uncompleted contracts are the sum of the related
contract's direct material, direct labor, manufacturing overhead and estimated
earnings less accounts receivable billings.
Stock Based Compensation
--------------------------
At March 31, 2010, the Company has various stock-based employee
compensation plans. These plans provide for the granting of nonqualified and
incentive stock options as well as restricted stock awards to officers, key
employees and nonemployee directors. The terms and vesting schedules of
stock-based awards vary by type of grant and generally the awards vest based
upon time-based conditions. Share-based compensation expense was $82,000 and
$79,000 for the three months ended March 31, 2010 and 2009, respectively.
The Company estimated the fair value of its stock option awards on the date
of grant using the Black-Scholes valuation model. The assumptions used for stock
grants issued during the following periods were as follows:
Three Months Ended
March 31,
2010 2009
---- ----
Expected Volatility - 61.86%
Risk-free interest rate - 1.88%
Expected life of options (in years) - 4.5
Dividend Yield - -
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(NOTE 1) - Basis of Presentation and Summary of Significant Accounting Policies
- -------- --------------------------------------------------------------------
(continued):
- ------------
Expected volatility assumptions were based on the volatility of the
Company's stock price for 4.5 years prior to grant date. The risk-free rate is
derived from the 5 year U.S. treasury yield on grant date. Expected life was
estimated using the "simplified" method, as allowed under the provisions of the
Securities and Exchange Commission Staff Bulletin No. 107, since there was no
prior history of similar stock option grants. Dividend yield is based on prior
history of cash dividends declared.
The Company's stock-based employee compensation plans allow for the
issuance of restricted stock awards that may not be sold or otherwise
transferred until certain restrictions have lapsed. The unearned stock-based
compensation related to restricted stock granted is being amortized to
compensation expense over the vesting period, which ranges from two to ten
years. The share based expense for these awards was determined based on the
market price of the Company's stock at the date of grant applied to the total
number of shares that were anticipated to vest. During the three months ended
March 31, 2009, approximately 84,000 shares of restricted stock were awarded to
senior management and independent directors. As of March 31, 2010, the Company
had unearned compensation of $1,012,000 associated with all of the Company's
restricted stock awards, which will be expensed over the next four years.
Stock option activity during the three months ended March 31, 2010, under
all stock option plans is as follows:
Average
Weighted Remaining
Average Contractual
Number of Exercise Term
Shares Price (in years)
------ ----- -----------
Options outstanding,
January 1, 2010 476,000 $3.58 3
Granted - - -
Forfeited (34,000) 6.20 -
Exercised (28,000) 1.84 -
-------- ----- ----
Options outstanding,
March 31, 2010 414,000 $3.48 3
======= ===== =
Outstanding exercisable
at March 31, 2010 357,000 $3.72 3
======= ===== =
At March 31, 2010 the aggregate intrinsic value of options outstanding and
exercisable was $432,000 and $329,000, respectively. At the comparable 2009
period, the aggregate intrinsic value of options outstanding and exercisable was
$335,000 and $297,000, respectively.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(NOTE 1) - Basis of Presentation and Summary of Significant Accounting Policies
- -------- --------------------------------------------------------------------
(continued):
- ------------
The following table summarizes the Company's nonvested stock option
activity for the three months ended March 31, 2010:
Number of Weighted-Average
Shares Grant-Date Fair Value
------ -----------------------
Nonvested stock options
at January 1, 2010 71,000 $1.02
Granted - -
Vested (14,000) 1.02
Forfeited - -
------- -------
Nonvested stock options
at March 31, 2010 57,000 $1.02
======= =====
At March 31, 2010, there was approximately $12,000 of unearned compensation
cost related to the above non-vested stock options. The cost is expected to be
recognized over approximately the next four years.
(NOTE 2) - Financing Arrangements:
- -------- -----------------------
During March 2010, the Company entered into a new $3,000,000 line of credit
with a new commercial lender secured by all assets of the Company. In addition,
the Company refinanced its existing term loans with the same aforementioned
commercial lender with a new five-year $4,655,000 term loan facility that
matures April 2015. The unpaid balance on the term loan was $4,655,000 at March
31, 2010. The interest rate on the line of credit is equal to; at the Company's
option, either 2% plus the one-month LIBOR or the prime rate of interest plus
0%. The interest rate on the term loan is equal to; at the Company's option,
either 3% plus the one-month LIBOR or the prime rate of interest plus 0.5%. The
aggregate amount of principal outstanding under the line of credit cannot exceed
a borrowing base of eligible accounts receivable and inventory, as defined. The
line of credit will expire on June 1, 2011 unless sooner terminated for an event
of default including adherence to certain financial covenants. Outstanding
borrowings under the line of credit were $1,233,000 at March 31, 2010. The
Company was not in compliance with one of its financial covenant ratios as of
March 31, 2010. In May 2010, the Company's lender agreed (i) to waive the
covenant default; (ii) to amend the financial covenant ratio in question for
the remainder of 2010 and (iii) to permit, through July 15, 2010, amounts
borrowed under the Company's Term Loan and Line of Credit to exceed its
borrowing base by a defined amount. The lender, in consideration of such waiver
and amendment, assessed a waiver fee of $25,000 plus legal fees and increased
the interest rate on the Company's line of credit and term debt to the prime
rate of interest plus 1% and the prime rate of interest plus 1.5%, respectively.
In addition, the Company agreed to enhanced reporting and monitoring
requirements, to suspend its stock repurchase program and all future borrowings
will be on a prime rate basis only and not on a LIBOR basis.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(NOTE 2) - Financing Arrangements (continued):
- -------- ------------------------------------
The Company previously had a credit agreement and three term loan agreements
with a different commercial lender. As a result of lower profitability related
to customer contract and shipping delays during 2008 and 2009, the Company was
not in compliance with certain of its financial covenants for certain reporting
periods during 2008 and 2009. In all instances, such defaults were waived by the
Company's lender in consideration for waiver fees. The Company was in compliance
with all of the financial covenants of its new lender at December 31, 2009.
In March 2010, the Company fully paid the outstanding principal on its term
loans and line of credit with its previous commercial lender.
(NOTE 3) - Net Loss Per Common Share:
------ -------------------------
The following table sets forth the computation of basic and diluted net
loss per common share:
Three Months Ended
March 31,
2010 2009
---- ----
Denominator:
Denominator for basic net loss
per share - weighted-average common shares 4,367,000 4,267,000
Effect of dilutive securities:
Employee and directors stock options - -
Unearned portion of restricted stock awards - -
---------- ----------
Denominator for diluted net loss
per share - weighted-average common
shares and assumed conversion 4,367,000 4,267,000
========= =========
The numerator for basic and diluted loss per share for the three month
periods ended March 31, 2010 and 2009 is the net loss for each period.
During the three months ended March 31, 2010 and 2009, the Company had net
losses and therefore did not include 82,000 and 14,000 incremental common
shares, respectively, in its calculation of diluted net loss per common share
since an inclusion of such securities would be anti-dilutive.
Approximately 258,000 and 284,000 shares of common stock were outstanding
during the three months ended March 31, 2010 and 2009, respectively, but were
not included in the computation of basic earnings per share. These shares were
excluded because they represent the unvested portion of restricted stock awards.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(NOTE 4) - Cost of Sales:
------- ---------------
For interim periods, the Company estimates certain components of its
inventory and related gross profit.
(NOTE 5) - Inventories:
- ------- -----------
Inventories are comprised of the following:
March 31, December 31,
2010 2009
---- ----
Raw Materials $ 8,132,000 $ 7,569,000
Work-in-process 3,628,000 3,328,000
Finished goods 751,000 727,000
----------- -----------
TOTAL $12,511,000 $11,624,000
=========== ===========
(NOTE 6) - Marketable Securities:
- ------- ---------------------
The following is a summary of the Company's available for sale marketable
securities at March 31, 2010 and December 31, 2009:
Unrealized
Adjusted Fair Holding
March 31, 2010 Cost Value Gain
- -------------- ---- ----- --------
Corporate Bonds $ 754,000 $ 909,000 $ 155,000
U.S. Government
Agency Bonds 1,000 1,000 -
---------- ---------- ---------
Total $ 755,000 $ 910,000 $ 155,000
========== ========== ==========
December 31, 2009
- -----------------
Corporate Bonds $ 915,000 $1,018,000 103,000
U.S. Government
Agency Bonds 1,000 1,000 -
---------- ---------- ----------
Total $ 916,000 $1,019,000 $ 103,000
========== ========== ==========
The Company did not have an other than temporary impairment charge during the
three months ended March 31, 2010. During the three months ended March 31, 2009,
the Company charged $39,000 against investment and other income to record the
impairment in market value of certain available-for-sale securities deemed other
than temporary.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(NOTE 7) - Fair Value of Financial Instruments:
- ------- -----------------------------------
The Company applies Accounting Standards Codification("ASC") 820, Fair
Value Measurements and Disclosures, which applies to all assets and liabilities
that are being measured and reported on a fair value basis. ASC 820 requires new
disclosure that establishes a framework for measuring fair value in GAAP and
expands disclosure about fair value measurements. This statement enables the
reader of the financial statements to assess the inputs used to develop those
measurements by establishing a hierarchy for ranking the quality and reliability
of the information used to determine fair values. The statement requires that
assets and liabilities carried at fair value will be classified and disclosed in
one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or
liabilities.
Level 2: Observable market based inputs or unobservable inputs that are
corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
In determining the appropriate levels, the Company performs a detailed analysis
of the assets and liabilities that are subject to ASC 820. All of the Company's
cash and cash equivalents are considered level 1 investments.
The table below presents the balances, as of March 31, 2010 and December 31,
2009, of assets and liabilities measured at fair value on a recurring basis by
level within the hierarchy.
March 31, 2010 Total Level 1 Level 2 Level 3
- ---------------- -------- -------- ------- -------
Corporate Bonds $ 909,000 $ 909,000 $ - $ -
U.S. Government
Agency Bonds 1,000 1,000 - -
----------- ----------- ----- -----
Total Assets $ 910,000 $ 910,000 $ - $ -
=========== =========== ===== =====
December 31, 2009 Total Level 1 Level 2 Level 3
- ------------------- -------- -------- -------- --------
Corporate Bonds $ 1,018,000 $ 1,018,000 $ - $ -
U.S. Government
Agency Bonds 1,000 1,000 - -
----------- ----------- ----- -----
Total Assets $ 1,019,000 $ 1,019,000 $ - $ -
============ ============ ===== ======
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(NOTE 7) - Fair Value of Financial Instruments (continued):
- -------- -----------------------------------------------------
The Company's only asset or liability that is measured at fair value on a
recurring basis is marketable securities, based on quoted market prices in
active markets and therefore classified as level 1 within the fair value
hierarchy. The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and short-term debt reasonably approximate their fair value due
to their relatively short maturities. Long-term debt carrying value is
approximate to its fair value at the balance sheet date. The fair value
estimates presented herein were based on market or other information available
to management. The use of different assumptions and/or estimation methodologies
could have a significant effect on the estimated fair value amounts.
(NOTE 8) - Comprehensive Loss:
- ------- ------------------
For the three months ended March 31, 2010 and 2009, total comprehensive
loss, net of tax, was $613,000 and $357,000, respectively. Comprehensive loss
consists of the net loss and unrealized gains and losses on marketable
securities, net of tax.
(NOTE 9) - Business Segments:
- -------- -----------------
The Company operates through two business segments, the Electronics Segment
(or "Electronics Group") and the Power Units Segment (or "Power Group"). The
Electronics Segment is comprised of the Orbit Instrument Division and the
Company's TDL and ICS subsidiaries. The Orbit Instrument Division and TDL are
engaged in the design, manufacture and sale of customized electronic components
and subsystems. ICS performs system integration for Gun Weapons Systems and Fire
Control Interface as well as logistics support and documentation. The Company's
Power Units Segment, through the Company's Behlman Electronics, Inc. subsidiary,
is engaged in the design, manufacture and sale of distortion free commercial
power units, power conversion devices and electronic devices for measurement and
display.
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately as they
manufacture and distribute distinct products with different production
processes.
The following is the Company's business segment information for the three
month periods ended March 31, 2010 and 2009:
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(NOTE 9) - Business Segments (continued):
- -------- -------------------------------
Three Months Ended
March 31,
2010 2009
---- ----
Net sales:
Electronics
Domestic $ 2,698,000 $ 3,286,000
Foreign 779,000 391,000
----------- -----------
Total Electronics 3,477,000 3,677,000
----------- -----------
Power Units
Domestic 1,781,000 2,223,000
Foreign 403,000 147,000
---------- -----------
Total Power Units 2,184,000 2,370,000
---------- -----------
Intersegment Sales (129,000) -
---------- ----------
Total $ 5,532,000 $ 6,047,000
=========== ===========
(Loss) income from operations:
Electronics $ (402,000) $ (143,000)
Power Units 93,000 185,000
Intersegment profit 28,000 (14,000)
General corporate
expenses not allocated (346,000) (346,000)
Interest expense (57,000) (46,000)
Investment and
other income, net 41,000 20,000
----------- -----------
Loss before
income taxes $ (643,000) $ (344,000)
============ ============
(NOTE 10) - Goodwill and Other Intangible Assets:
- --------- -------------------------------------
The Company applies ASC 350, Intangibles-Goodwill and Other. ASC 350
requires that an intangible asset with a finite life be amortized over its
useful life and that goodwill and other intangible assets with indefinite lives
not be amortized but evaluated for impairment. The Company performs its annual
impairment test of goodwill at the end of its fiscal year and tests its other
intangible assets when impairment indicators are present.
At March 31, 2010, the Company's goodwill and intangible assets consist of the
following:
Estimated Gross Net
Useful Carrying Accumulated Accumulated Carrying
Life Value Amortization Impairment Value
-------- --------- ------------- ----------- ---------
Goodwill $9,798,000 - (7,315,000) $2,483,000
========== ============ =========== ==========
Intangible Assets:
Contract relationships 15 Years 2,000,000 $ (270,000) (1,593,000) 137,000
Contract backlog 1-5 Years 1,750,000 (1,750,000) - -
Non-compete
agreements 3 Years 415,000 (382,000) (29,000) 4,000
----------- ----------- ----------- ---------
$4,165,000 $(2,402,000) $(1,622,000) $141,000
========== =========== =========== =========
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(NOTE 10) - Goodwill and Other Intangible Assets (continued):
- --------- -------------------------------------------------
At December 31, 2009, the Company's goodwill and intangible assets consist of
the following:
Estimated Gross Net
Useful Carrying Accumulated Accumulated Carrying
Life Value Amortization Impairment Value
---- ----- ------------ ---------- -----
Goodwill $9,798,000 - (7,315,000) $2,483,000
========== ========= =========== ===========
Intangible Assets:
Contract relationships 15 Years 2,000,000 $ (267,000) (1,593,000) 140,000
Contract backlog 1-5 Years 1,750,000 (1,668,000) - 82,000
Non-compete
agreements 3 Years 415,000 (381,000) (29,000) 5,000
----------- --------- ---------- ----------
$ 4,165,000 $(2,316,000) $(1,622,000) $227,000
=========== ========== ============ ========
19
Amortization expense for the next five years is expected to be as follows:
Year ending December 31,
2010 12,000
2011 11,000
2012 11,000
2013 11,000
2014 11,000
The Company recognized amortization expense of $86,000 and $124,000 for the
three months ended March 31, 2010 and 2009, respectively.
(NOTE 11) - Income Taxes:
- ---------- --------------
For the three months ended March 31, 2010 and 2009, the Company utilized
net operating loss carryforwards to offset income taxes, except for $4,000 and
$9,000, respectively, of state income and federal minimum tax expense.
The Company applies ASC 740 relating to accounting for uncertainty in
income taxes. A tax benefit from an uncertain position may be recognized only if
it is "more likely than not" that the position is sustainable based on its
technical merits. Additionally, this pronouncement provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company does not have any liabilities
for uncertain tax positions at March 31, 2010.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(NOTE 12) - Equity:
- ---------- -------
In August 2008, the Company's Board of Directors authorized a stock
repurchase program allowing the Company to purchase up to $3.0 million of its
outstanding shares of common stock in open market or privately negotiated
transactions in compliance with applicable laws and regulations including the
SEC's Rules 10b5-1 and 10b-18. The timing and amount of repurchases under the
program will depend on market conditions and publicly available information and,
therefore, repurchase activity may be suspended or discontinued at any time.
During the three month period ended March 31, 2010, the Company repurchased
approximately 1,000 shares of its common stock at an average purchase price of
$3.44 per share. Total cash consideration for the repurchased stock was
approximately $2,000. From August 2008 through May 10, 2010, the Company
purchased approximately 369,000 shares of its common stock for total cash
consideration of $915,000 representing an average purchase price of $2.48 per
share. In May 2010, in connection with an amendment to its Credit Agreement, the
Company suspended its stock repurchase program.
Item 2.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
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 revenue and profitability for the three months ended
March 31, 2010 due primarily from decreased sales from our Orbit Instrument
Division and TDL subsidiary due to production orders in our backlog, certain of
which was scheduled for shipment in the current quarter, that were delayed due
to technical issues at the prime contractor level that was unrelated to our
hardware. As a result, sales decreased by 8.5% for the quarter due to lower
sales from both the Electronics Group and Power Group. In addition to lower
sales and due to lower gross margins, an increase in interest expense and
despite lower selling, general and administrative expenses and an increase in
investment and other income, the Company recorded a net loss of $647,000 for the
three months ended March 31, 2010 compared to a net loss of $353,000 in the
prior period.
Our backlog at March 31, 2010 was approximately $17,600,000 compared to
$14,300,000 at March 31, 2009. 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 we are
confident that we will receive many of the orders we are pursuing, although
timing is always an uncertainty.
Our success of the past few years has significantly strengthened our balance
sheet evidenced by our 4.4 to 1 current ratio at March 31, 2010. In March 2010,
we entered into a new credit agreement with a new commercial lender pursuant to
which we (a) established a line of credit of up to $3,000,000, and (b) entered
into a term loan in the amount of approximately $4,700,000. These new credit
facilities were used to pay off in full our obligations to our former primary
lender pursuant to a prior credit facility and to provide for us general working
capital needs. The new credit facilities are secured by a first priority lien
and security interest in substantially all of our assets. As a result of our
first quarter loss, primarily due to shipping schedule delays, we were not in
compliance with one of our financial covenants at March 31, 2010. In May 2010,
our lender agreed (i) to waive the covenant default; (ii) to amend the
financial covenant ratio in question for the remainder of 2010 and (iii) to
permit, through July 15, 2010, amounts borrowed under our Term Loan and Line of
Credit to exceed our borrowing base by a defined amount. The lender, in
consideration of such waiver and amendment, assessed a waiver fee of $25,000
plus legal fees and increased the interest rate on our line of credit and term
debt to the prime rate of interest plus 1% and the prime rate of interest plus
1.5%, respectively. In addition, we agreed to enhanced reporting and monitoring
requirements, to suspend our stock repurchase program, and all future borrowings
will be on a prime rate basis only and not on a LIBOR basis.
In August 2008, our Board of Directors authorized a stock repurchase
program allowing us to purchase up to $3.0 million of our outstanding shares of
common stock in open market or privately negotiated transactions. During the
period from August 2008 through March 31, 2010, we repurchased approximately
369,000 shares at an average price of $2.48 per share. Total consideration for
the repurchased stock was approximately $915,000.
Critical Accounting Policies
- ------------------------------
The discussion and analysis of our financial condition and the results of
operations are based on our financial statements and the data used to prepare
them. Our financial statements have been prepared based on accounting
principles generally accepted in the United States of America. On an on-going
basis, we re-evaluate our judgments and estimates including those related to
inventory valuation, the valuation allowance on our deferred tax asset, goodwill
and intangible assets impairment, valuation of share-based compensation, revenue
and cost recognition on long-term contracts accounted for under the
percentage-of-completion method and other than temporary impairment on
marketable securities. These estimates and judgments are based on historical
experience and various other assumptions that are believed to be reasonable
under current business conditions and circumstances. Actual results may differ
from these estimates under different assumptions or conditions. We believe the
following critical accounting policies affect more significant judgments and
estimates in the preparation of the consolidated financial statements.
Inventories
- -----------
Inventory is valued at the lower of cost (specific, average and first-in,
first-out basis) 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 insure 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 have forced our country
into various situations of conflict whereby equipment is used and parts may be
needed for repair. This could lead to increased product demand as well as the
use of some older inventory items that we had previously determined obsolete.
Deferred Tax Asset
- --------------------
At December 31, 2009, we had 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 $20,000,000 and $7,000,000,
respectively, that expire through 2020. Approximately, $16,000,000 of federal
net operating loss carry-forwards expire between 2010-2012. In addition, we
receive a tax deduction when our employees exercise their non-qualified stock
options thereby increasing our deferred tax asset. We record a valuation
allowance to reduce our deferred tax asset when it is more likely than not that
a portion of the amount may not be realized. We estimate our valuation
allowance based on an estimated forecast of our future profitability. Any
significant changes in future profitability resulting from variations in future
revenues or expenses could affect the valuation allowance on its deferred tax
asset and operating results could be affected, accordingly.
Impairment of Goodwill
- ------------------------
We have a significant amount of goodwill and acquired intangible assets.
In determining the recoverability of goodwill and intangible assets, assumptions
are made regarding estimated future cash flows and other factors to determine
the fair value of the assets. After completing the impairment testing of
goodwill and intangible assets, we concluded an impairment charge should be
taken at December 31, 2009 in connection with the recorded goodwill and
intangible assets arising from the acquisition of ICS in 2007. In addition, we
concluded an impairment charge should be taken at December 31, 2008 in
connection with the recorded goodwill arising from our TDL and ICS acquisitions
made between 2005 and 2007.
Our analysis 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. Discount rates selected for each reporting unit varied. Our
weighted average cost of capital included a review and assessment of market and
capital structure assumptions. The balance of our goodwill for each of our
operating units as of December 31, 2009 is as follows: TDL $820,000, ICS
$795,000 and Behlman $868,000. After the impairment charges taken on the
goodwill and intangible assets of ICS at December 31, 2009, of the three
reporting units with goodwill, TDL, ICS and Behlman have a fair value that is in
excess of its carrying value by approximately 45%, 67% and 33%, respectively.
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.
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 $82,000 and $79,000 for
the three month periods ended March 31, 2010 and March 31, 2009, respectively.
The estimated fair values of stock options granted in 2009 were calculated using
the Black-Scholes model. No stock options have been granted in 2010. This model
requires the use of input assumptions. These assumptions include expected
volatility, expected life, expected dividend rate, and expected risk-free rate
of return.
Revenue and Cost Recognition
- -------------------------------
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. Assets related to these contracts are included in current assets
as they will be liquidated in the normal course of contract completion, although
this may require more than one year.
Marketable Securities
- ----------------------
We currently have approximately $900,000 invested in government and
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 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. Although we received all our
interest payments during the prior period, we recorded an other than temporary
impairment write-down of $39,000 for the three months ended March 31, 2009
consisting of bonds held in two separate issuers in which we determined the
decline in fair value was due to adverse conditions specifically related to the
security or specific conditions in an industry.
Results of Operations
- ---------------------
Three month period ended March 31, 2010 v. March 31, 2009
- ---------------------------------------------------------
We currently operate in two industry segments. Our Orbit Instrument
Division and our TDL subsidiary 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 as well as
logistics support and documentation (the "Electronics Group"). Our Behlman
subsidiary is engaged in the design and manufacture of commercial power units
and COTS power solutions (the "Power Group").
Consolidated net sales for the three month period ended March 31, 2010
decreased by 8.5% to $5,532,000 from $6,047,000 for the three month period ended
March 31, 2009 due to lower sales from both our Electronics Group and Power
Group. Sales from our Electronics Group decreased by 5.4%, due principally to
production orders in the backlog of our Orbit Instrument Division and TDL,
certain of which were scheduled for delivery in the current quarter, that were
delayed due to technical issues at the prime contractor level that was unrelated
to our hardware. Sales at ICS increased during the current year due to the
delay of new orders on the MK 119 Gun Console System during the prior period
which had an adverse effect on revenue since work on this contract is accounted
for under the percentage of completion method. Sales from our Power Group
decreased by 7.8% from the prior year due to decreased sales from its COTS
division and despite increased sales from its commercial division.
Gross profit, as a percentage of sales, for the three months ended March
31, 2010 decreased to 33.3% from 37.6% for the three month period ended March
31, 2009. This decrease resulted from a lower gross profit from our Company's
Electronics Group, principally due to a lower gross profit at our Orbit
Instrument Division and TDL due to lower sales and despite a higher gross profit
at ICS due to inefficient labor costs incurred in the prior period due to the
aforementioned delay in orders. Gross profit from the Power Group remained the
same from the prior year despite the decrease in sales.
Selling, general and administrative expenses decreased by 4.7% to
$2,469,000 for the three month period ended March 31, 2010 from $2,592,000 for
the three month period ended March 31, 2009 principally due to lower selling,
general and administrative expenses from the Electronics Group. Selling, general
and administrative expenses, as a percentage of sales, for the three month
period ended March 31, 2010 increased to 44.6% from 42.9% for the three month
period ended March 31, 2009 principally due to a decrease in sales that was
slightly offset by a slight decrease in costs.
Interest expense for the three months ended March 31, 2010 increased to $57,000
from $46,000 for the three months ended March 31, 2009 due to an increase in the
interest rate paid and despite a decrease in the amounts owed to lenders in the
current period due to the pay down of its term debt.
Investment and other income for the three month period ended March 31, 2010
increased to $41,000 from $20,000 for the three-month period ended March 31,
2009 principally due to a $39,000 other than temporary impairment charge related
to certain corporate bonds held by us that was taken in the prior period and
despite a decrease in the amounts invested during the period.
Net loss before taxes was $643,000 for the three months ended March 31,
2010 compared to net loss before taxes of 344,000 for the three months ended
March 31, 2009. The decrease in income was principally due to the decrease in
sales from both the Electronics and Power Groups, a decrease in gross profit, an
increase in interest expense and despite a decrease in selling, general and
administrative expenses and increase in investment and other income.
Income taxes for the three months ended March 31, 2010 and March 31, 2009
consist of $4,000 and $9,000, 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 March 31, 2010
was $647,000 compared to a loss of $353,000 for the year ended March 31, 2009.
Earnings before interest, taxes and depreciation and amortization (EBITDA)
for the three months ended March 31, 2010 decreased to a loss of $433,000 from a
loss of $119,000 for three months ended March 31, 2009. Listed below is the
EBITDA reconciliation to net income:
Three months ended
March 31,
----------
2010 2009
---- ----
Net income $(647,000) $(353,000)
Interest expense 57,000 46,000
Income tax expense 4,000 9,000
Depreciation and amortization 153,000 179,000
--------- ----------
EBITDA $(433,000) $(119,000)
========== ==========
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.
Material Change in Financial Condition
- ------------------------------------------
Working capital decreased to $16,047,000 at March 31, 2010 compared to
$16,558,000 at December 31, 2009. The ratio of current assets to current
liabilities was 4.4 to 1 at March 31, 2010 compared to 4.8 to 1 at December 31,
2009. The reduction in working capital was primarily attributable to the net
loss for the period and repayments of debt.
Net cash used in operating activities for the three month period ended March 31,
2010 was $974,000, primarily attributable to the net loss for the period, the
increase in inventory and costs and estimated earnings in excess of billings on
uncompleted contracts and despite the decrease in accounts receivable and
increase in accounts payable. Net cash provided by operations for the three
month period ended March 31, 2009 was $2,372,000, primarily attributable to the
decrease in accounts receivable and the non-cash amortization of intangible
assets and despite the net loss for the period, the increase in inventory and
the decrease in accounts payable and accrued expenses.
Cash flows used in investing activities for the three month period ended March
31, 2010 was $1,000, attributable to the purchase of fixed assets that was
partially offset by the sale of marketable securities. Cash flows provided by
investing activities for the three month period ended March 31, 2009 was
$156,000, primarily attributable to the sale of marketable securities and the
sale of fixed assets that was partially offset by the purchase of fixed assets.
Cash flows used in financing activities for the three month period ended
March 31, 2009 was $78,000, primarily attributable to the repayment of long term
debt and note payable-bank which was partially offset by the proceeds from the
issuance of long term debt and note payable-bank. Cash flows used in financing
activities for the three month period ended March 31, 2009 was $884,000,
primarily attributable to the repayment of long term debt and the purchase of
treasury stock.
In April 2005, we entered into a five-year $5,000,000 term loan agreement
to finance the acquisition of TDL and its manufacturing affiliate ("TDL Term
Loan"). In December 2007, we entered into a five-year $4,500,000 term loan
agreement to finance the acquisition of ICS ("ICS Term Loan"). Principal
payments under the two term loan facilities were approximately $113,000 per
month. In December 2007, we also amended an existing $3,000,000 line of credit
facility with a commercial lender secured by accounts receivable, inventory and
property and equipment. In connection with the ICS Term Loan entered into in
December 2007, the interest rates on both term loan facilities and the line of
credit facility were amended to equal a certain percentage plus the one month
LIBOR (0.25% at March 31, 2010) depending on a matrix related to a certain
financial covenant. The line of credit facility was to continue from year to
year unless sooner terminated for an event of default including non-compliance
with certain financial covenants.
In April 2005, we entered into a five year $2,000,000 promissory note with the
selling shareholders of TDL ("TDL Shareholder Note") at an interest rate of
prime plus 2.00% (3.25% at December 31, 2009). Principal payments of $100,000
were made on a quarterly basis along with accrued interest. In June 2007, we
refinanced the $1,050,000 balance due on the TDL Shareholder Note with our
primary commercial lender. Under the terms of the new term loan entered into
with our primary commercial lender ("TDL Refinanced Shareholder Loan"), monthly
payments of $35,000 were made over a thirty-month period (through January 2010)
along with accrued interest pursuant to the interest terms described below. The
TDL Refinanced Shareholder Loan was paid off in January 2010.
As a result of lower profitability related to customer shipping delays in the
first and second quarter of 2008, we were not in compliance with two of our
financial covenants at September 30, 2008. In November 2008, our primary lender
waived the covenant default of two of our financial ratios at September 30, 2008
and we renegotiated the financial covenant ratios for the quarterly reporting
periods December 31, 2008 and March 31, 2009. Beginning June 30, 2009, the
covenants were to revert back to their original ratios with a modification to a
certain financial ratio covenant definition. The lender instituted an unused
line fee of .25% per annum, as a cost to us for the waiver and amendment to the
loan agreements. In connection therewith, the interest rate on the TDL Term
Loan and TDL Refinanced Shareholder Loan, increased to the sum of 2.50% plus the
one month LIBOR and the interest rate on the ICS Term Loan and line of credit
was increased to the sum of 2.25% plus the one month LIBOR. We were in
compliance with all financial covenants at March 31, 2009.
As a result of decreased revenue and profitability due to the customer contract
delay for the MK 119 that is recorded under the percentage of completion method,
we were not in compliance with two of our financial covenant ratios as of June
30, 2009. In August 2009, our primary lender agreed to waive these covenant
defaults. The lender, in consideration of such waiver, assessed a waiver fee of
$10,000 and increased the interest rate on all term debt, including the TDL Term
Loan, TDL Refinanced Shareholder Loan and ICS Term Loan, and the line of credit
equal to the sum of 3.50% plus the one month LIBOR. In addition, we agreed to
reduce our line of credit from $3,000,000 to $2,500,000 until October 31, 2009,
at which time it was further reduced to $2,000,000.
As a result of the customer contract delay for the MK 119 and capital
expenditures made for our new TDL operating facility, we were not in compliance
with two of our financial covenant ratios at September 30, 2009. In November
2009, our primary lender agreed to waive the covenant defaults as of September
30, 2009 and to amend the requirement for two of the financial ratios at
December 31, 2009 and for one of the financial ratios at March 31, 2010. Our
lender, in consideration of such waiver, assessed a waiver fee of $15,000 and
increased the interest rate on all term debt, including the TDL Term Loan, TDL
Refinanced Shareholder Loan and ICS Term Loan, and the Line of Credit to the sum
of 4.00% plus the one month LIBOR. In addition, we agreed to reduce our Line of
Credit from $2,000,000 to $1,500,000 at December 31, 2009. We were in compliance
with all financial covenants at December 31, 2009.
On March 10, 2010, we entered into a new credit agreement (the "Credit
Agreement") with a new commercial lender pursuant to which we (a) established a
new line of credit of up to $3,000,000, and (b) entered into a term loan in the
amount of approximately $4,655,000. These new credit facilities were used to
pay off all of our obligations to our former primary lender and to provide for
our general working capital needs. The new credit facilities are secured by a
first priority lien and security interest in substantially all of our assets.
The term loan is payable in 60 consecutive monthly installments of principal and
interest and matures on March 1, 2015. The line of credit matures on June 1,
2011. Payment of interest on all loans is due at a rate per annum (at our
option) as follows: (1) for a prime rate loan under the line of credit at a rate
equal to the Prime Rate established by the Bank plus 0%, (2) for a prime rate
loan under the term loan at a rate equal to the Prime Rate established by the
Bank plus 0.5%, (3) for a LIBOR loan under the line of credit at a rate equal to
LIBOR plus 2% and (4) for a LIBOR loan under the term loan at a rate equal to
LIBOR plus 3%.
The Credit Agreement contains customary affirmative and negative covenants and
certain financial covenants. Available borrowings under the line of credit are
subject to a borrowing base of eligible accounts receivable, inventory and, for
the term loan facility only, cash and marketable securities. The Credit
Agreement also contains customary events of default such as non-payment,
bankruptcy and material adverse change.
As a result of our first quarter loss, primarily due to shipping schedule
delays, we were not in compliance with one of our financial covenants at March
31, 2010. In May 2010, our lender agreed (i) to waive the covenant default; (ii)
to amend the financial covenant ratio in question for the remainder of 2010 and
(iii) to permit, through July 15, 2010, amounts borrowed under our Term Loan and
Line of Credit to exceed our borrowing base by a defined amount. The lender, in
consideration of such waiver and amendment, assessed a waiver fee of $25,000
plus legal fees and increased the interest rate on our line of credit and term
debt to the prime rate of interest plus 1% and the prime rate of interest plus
1.5%, respectively. In addition, we agreed to enhanced reporting and monitoring
requirements, to suspend our stock repurchase program, and all future borrowings
will be on a prime rate basis only and not on a LIBOR basis.
Our existing capital resources, including our bank credit facilities and
our cash flow from operations, are expected to be adequate to cover our cash
requirements for the foreseeable future.
In August 2008, our Board of Directors authorized a stock repurchase
program allowing us to purchase up to $3.0 million of our outstanding shares of
common stock in open market or privately negotiated transactions. During the
period from August 2008 through March 31, 2010, we repurchased approximately
369,000 shares at an average price of $2.48 per share. Total consideration for
the repurchased stock was approximately $915,000. In May 2010, in connection
with an amendment to our Credit Agreement, we suspended our stock repurchase
program.
Inflation has not materially impacted the operations of our Company.
Certain Material Trends
- -------------------------
During the second quarter of 2008, our Orbit Instrument Division was
verbally advised by one of its larger customers to provide support for the
immediate development of certain modifications to a critical product for the
division. This "out of scope" support caused a delay in a significant amount of
shipments scheduled throughout 2008 which resulted in a decrease in revenue and
profitability for 2008. We worked closely with this customer and shipment of
the units resumed in the third quarter. However, a significant number of units
scheduled for shipment by December 31, 2008 were shipped in 2009. In addition,
that same customer approached us and requested a modification to the existing
Memorandum of Agreement so that additional units could be procured before the
end of the year. However, this modification was delayed and not received by us
until August 2009. Consequently, certain shipments planned for 2009 will be
delayed until 2010. In addition, the modification also contained an option for
our customer to procure additional units provided such option was exercised by
the 2009 year end. Our customer requested and we agreed to additional units
being added to the option quantity and such option was exercised by year end.
These units are also scheduled for delivery in 2010 for our Orbit Instrument
Division.
During the first quarter of 2010, our revenue and profitability was adversely
affected by approximately $2.5 million in production orders contained in the
backlog of our Orbit Instrument Division and TDL subsidiary, some of which was
scheduled for delivery in the first quarter, that were delayed due to technical
issues at the prime contractor level that was unrelated to our hardware. We now
expect these orders to ship in the second half of 2010 although final technical
resolution and revised shipping dates are beyond our control.
ICS experienced a delay in the award for its MK 119 Gun Console System which
affected its first and second quarter shipments in 2009. This award was finally
received by ICS at the end of September 2009. ICS had commenced the procurement
process of material and labor resources were allocated to the job beginning in
the second quarter. As a result, certain cabinets were delivered by year end
2009 but due to the delay in the receipt of the award, other cabinets will not
be delivered until the second quarter of 2010. We expect a similar delay in the
award of the MK 119 Gun Console System to ICS for 2010. Shipment delays related
to contracting, funding and engineering issues are commonplace in our industry
and could, in the future, have an adverse effect on our financial performance.
During the fourth quarter of 2009, in addition to the significant delay in the
receipt of the MK 119 order, we were notified by our customer that a replacement
was under consideration for a portion of future MK 119 requirements for which
ICS was being considered but not guaranteed of future awards. Consequently, we
believe that cash flows for ICS in the immediate future, particularly with
respect to MK 119 orders, could potentially decrease. After completing the
impairment testing of goodwill and intangible assets pursuant to ASC 350 and ASC
360, we concluded an impairment charge of $1,622,000 and $426,000 should be
taken in connection with the recorded intangible assets and goodwill arising
from the acquisition of ICS in 2007. However, ICS, in addition to its bid on
two of the replacement programs, is currently being considered as a
subcontractor for one of the prime contractors currently bidding for the
Littoral Combat Ship which is a significant program being considered by the U.S.
Navy. In the event that MK 119 awards are even less than expected for 2010 and
the prospects for additional MK 119 awards or replacement opportunities
diminish, the fair market value of the goodwill for ICS of $795,000 could be
further impaired.
Our Power Group had a record year of bookings and revenue in 2008 and another
record year of revenue in 2009. The commercial division of our Power Group has
historically been vulnerable to a weak economy. Bookings in the commercial
division were weak during most of 2009 but bookings from the COTS division
remained fairly strong. However, despite current economic conditions and its
effect on capital spending, our Power Group's commercial division recorded its
strongest bookings of the year in the fourth quarter of 2009. However, this
improvement did not carry over into the first quarter of 2010 and due to
continued weakness in the economy; it is uncertain whether the commercial
division can sustain the improvement from the 2009 fourth quarter into the
current year. The strength of our COTS division will position our Power Group
for a strong year of revenue and profitability for 2010 but improvement in the
commercial division will be needed to continue its trend of record revenues.
In April 2005, our Company completed the acquisition of TDL and its operations
became part of our Electronics Group. In December 2007, we completed the
acquisition of ICS which also became part of our Electronics Group. Our
Electronics Group and the COTS Division of our Power Group are heavily dependent
on military spending. The events of September 11, 2001, have put a tremendous
emphasis on defense and homeland security spending and we have benefited from an
increasing defense budget. Although our Electronics Group and our COTS
Division of our Power Group are pursuing several opportunities for reorders, as
well as new contract awards, we have normally found it difficult to predict the
timing of such awards. In addition, we have an unprecedented amount of new
opportunities that are in the prototype or pre-production stage. These
opportunities generally move to a production stage at a later date but the
timing of such is also uncertain.
There is no seasonality to our business. Our revenues are generally
determined by the shipping schedules outlined in the purchase orders received
from its customers. We stratify all the opportunities we are pursuing by
various confidence levels. We generally realize a very high success rate with
those opportunities to which we apply a high confidence level. We currently
have a significant amount of potential contract awards to which we have applied
a high confidence level. However, because it is difficult to predict the timing
of awards for most of the opportunities we are pursuing, it is also difficult to
predict when we will commence shipping under these contracts. A delay in the
receipt of any contract from our customer ultimately causes a corresponding
delay in shipments under that contract. During 2007 through 2009, due to
shipping schedules resulting from contract delays, our second half of the year
was stronger than the first half. We again expect ICS's new orders for 2010 to
be received at a similar time as was received in 2009 so we once again expect
the second half of 2010 to be stronger than the first half.
Despite the increase in military spending, we still face a challenging
environment. The government is emphasizing the engineering of new and improved
weaponry and it continues to be our challenge to work with each of our prime
contractors so that we can participate on these new programs. In addition,
these new contracts require incurring up-front design, engineering, prototype
and pre-production costs. While we attempt to negotiate contract awards for
reimbursement of product development, there is no assurance that sufficient
monies will be set aside by our customers, including the United States
Government, for such effort. In addition, even if the United States Government
agrees to reimburse development costs, there is still a significant risk of cost
overrun that may not be reimbursable. Furthermore, once we have completed the
design and pre-production stage, there is no assurance that funding will be
provided for future production. In such event, even if we are reimbursed our
development costs it will not generate any significant profits.
We are heavily dependent upon military spending as a source of revenues and
income. However, even increased military spending does not necessarily
guarantee us increased revenues, particularly, when the allocation of budget
dollars may vary depending on what may be needed for specific military conflicts
Any future reductions in the level of military spending by the United States
Government due to budget constraints or for any other reason, could have a
negative impact on our future revenues and earnings. We believe that defense
budget dollars that are allocated to modernization and refurbishment of military
equipment will generally benefit us. In addition, due to major consolidations
in the defense industry, it has become more difficult to avoid dependence on
certain customers for revenue and income. Behlman's line of commercial products
gives us some diversity and the additions of TDL and ICS gives our Electronics
Segment a more diversified customer base.
Our business strategy had been to expand our operations through strategic,
accretive acquisitions. Through the past several years, we reviewed various
potential acquisitions and believe there are numerous opportunities presently
available, particularly to integrate into our current operating facilities. In
April 2005, we completed the acquisition of TDL and in December 2007, we
completed the acquisition of ICS. However, due to current economic
conditions and tightening of credit markets, there can be no assurance that we
will obtain the necessary financing to complete additional acquisitions and even
if we do, there can be no assurance that we will have sufficient income from
operations of such acquired companies to satisfy the interest payments, in which
case, we will be required to pay them out of our operations which may be
adversely affected.
During the second quarter of 2007, we expanded the activities of our investment
banker to include the pursuit of alternative strategies, including the potential
sale of the Company as a means of enhancing shareholder value. In June 2008, we
terminated such activities with the investment banker. In May 2009, we hired a
new investment banker and continue to pursue strategic alternatives to enhance
shareholder value. However, there is no assurance that a sale or any of the
other strategic alternatives will be accomplished.
Off-balance sheet arrangements
- --------------------------------
We presently do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Not applicable.
Item 4T. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and
chief financial officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the " Exchange
Act ")) as of the end of the period covered by this report. Based on such
evaluation, our chief executive officer and chief financial officer have
concluded that, as of the end of such period, our disclosure controls and
procedures are effective (i) to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms and (ii) to ensure that information required to be
disclosed by us in the reports that we submit under the Exchange Act is
accumulated and communicated to its management, including the Company's
principal executive and principal financial officers, or persons performing
similar functions, as appropriate, to allow timely decisions regarding required
disclosure.
Internal Control over Financial reporting
There has been no change to the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the three months ended March 31, 2010 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ISSUER'S PURCHASE OF EQUITY SECURITIES:
(a) (b) (c) (d)
Period Total Number Average Price Paid Total Number of Shares(or Units) Maximu Number(or
of Shares(or per Share(or Unit) Purchased as part of Publicly Approximate Dollar Value)
Units) Announced Plans or Programs of Shares(or Units) that May
Purchased Yet Be Purchased Under the
Plans or Programs
- ------------ -------------- ------------------- ------------------------------- -----------------------------
January 1- 31, 2010 700 $3.44 700 $2,085,000
February 1-28, 2010 - - - $2,085,000
March 1-31, 2010 - - - $2,085,000
------------- ------------------- ------------------------------- ------------------
Total 700 $3.44 700 $2,085,000
In connection with the Amendment and Waiver to the Credit Agreement dated
May 21, 2010, the Company agreed to suspend its stock repurchase program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
--------------- -----------
10.1* Amendment and Waiver to Credit Agreement.
31.1* Certification of the Chief Executive Officer.
Required by Rule 13a-14 (a) or Rule 15d-14(a).
31.2* Certification of the Chief Financial Officer.
Required by Rule 13a-14 (a) or Rule 15d-14(a).
32.1* Certification of the Chief Executive Officer.
Required by Rule 13a-14(b) or Rule 15d-14(b)
and 18 U.S.C. 1350.
32.2* Certification of the Chief Financial Officer.
Required by Rule 13a-14(b) or Rule 15d-14(b)
and 18 U.S.C. 1350.
_________________*Filed with this report.
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ORBIT INTERNATIONAL CORP.
------------------------
Registrant
Dated: May 24, 2010 /s/ Dennis Sunshine
-------------------
Dennis Sunshine, President,
Chief Executive Officer and
Director
Dated: May 24, 2010 /s/Mitchell Binder
------------------
Mitchell Binder, Executive
Vice President, Chief
Financial Officer
and Director