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, 2011
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 ___ Smaller reporting company X
===
Indicate by check mark whether the registrant is a shell company(as defined in
Rule 12b-2 of the Exchange Act): ___ Yes X No
===
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 4,734,220 shares of common
stock, par value $.10, as of May 14, 2011.
INDEX
Page No.
---------
Part I. Financial Information:
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 2011(unaudited) and December 31, 2010 3-4
Condensed Consolidated Statements of Operations
for the Three Months Ended
March 31, 2011 and 2010 (unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2011
and 2010 (unaudited) 6-7
Notes to Condensed Consolidated Financial Statements (unaudited) 8-17
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-28
Item 3. - Quantitative and Qualitative Disclosures
About Market Risk 28
Item 4. - Controls and Procedures 28
Part II. Other Information:
Item 1 - Legal Proceedings 29
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3 - Defaults Under Senior Securities 29
Item 4 - (Removed and Reserved) 29
Item 5 - Other Information 29
Item 6 - Exhibits 29
Signatures 30
Exhibits 31-36
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 2011 2010
----------------- ---------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 804,000 $ 1,964,000
Investments in marketable securities 152,000 146,000
Accounts receivable (less allowance for
doubtful accounts of $145,000) 4,570,000 3,927,000
Inventories 12,770,000 11,627,000
Costs and estimated earnings in excess
of billings on uncompleted contracts 532,000 468,000
Deferred tax asset 602,000 391,000
Other current assets 982,000 1,043,000
---------- -----------
Total current assets 20,412,000 19,566,000
Property and equipment, net 1,171,000 1,172,000
Goodwill 1,688,000 1,688,000
Deferred tax asset 1,635,000 1,847,000
Other assets 104,000 106,000
----------- -----------
TOTAL ASSETS $25,010,000 $24,379,000
=========== ===========
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
March 31, December 31,
2011 2010
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
------------------------------------------
Current liabilities:
Current portion of long-term debt $ 931,000 $ 931,000
Accounts payable 1,188,000 794,000
Note payable - bank 1,017,000 387,000
Liability associated with former chief
executive officer 1,081,000 1,194,000
Accrued expenses 1,001,000 1,051,000
Customer advances 37,000 118,000
Deferred income 85,000 85,000
------------- --------------
Total current liabilities 5,340,000 4,560,000
Deferred income 64,000 86,000
Liability associated with former chief
executive officer, net of current portion 29,000 494,000
Long-term debt, net of current
portion 2,793,000 3,026,000
-------------- -------------
Total liabilities 8,226,000 8,166,000
-------------- -------------
STOCKHOLDERS' EQUITY
Common stock - $.10 par value, 10,000,000 shares
authorized, 5,103,000 and 5,101,000 shares issued
at 2011 and 2010, respectively, and 4,734,000 and
4,732,000 shares outstanding at 2011 and 2010,
respectively 510,000 510,000
Additional paid-in capital 22,403,000 22,360,000
Treasury stock, at cost, 369,000 shares
at 2011 and 2010 (915,000) (915,000)
Accumulated other comprehensive gain, net of tax 23,000 19,000
Accumulated deficit (5,237,000) (5,761,000)
-------------- --------------
Total stockholders' equity 16,784,000 16,213,000
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,010,000 $ 24,379,000
============== ==============
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
2011 2010
----------- -------------
Net sales $6,812,000 $5,532,000
Cost of sales 3,885,000 3,690,000
----------- -----------
Gross profit 2,927,000 1,842,000
----------- -----------
Selling, general and
administrative
expenses 2,368,000 2,469,000
Interest expense 53,000 57,000
Investment and
other income, net (34,000) (41,000)
----------- -----------
Income (loss) before
income tax provision 540,000 (643,000)
Income tax provision 16,000 4,000
----------- -----------
NET INCOME (LOSS) $ 524,000 $ (647,000)
=========== ===========
Net income (loss) per
common share:
Basic $ 0.11 $ (0.15)
=========== ===========
Diluted $ 0.11 $ (0.15)
=========== ===========
<FN>
The accompanying notes are in integral part of these condensed consolidated
financial statements.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
2011 2010
----------- -------------
Cash flows used in operating activities:
Net income (loss) $ 524,000 $ (647,000)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Share-based compensation expense 40,000 82,000
Amortization of intangible assets - 86,000
Depreciation and amortization 69,000 67,000
Inventory reserves 40,000 8,000
(Gain) loss on sale of marketable securities (5,000) 5,000
Bond premium amortization - 1,000
Deferred income (22,000) (21,000)
Changes in operating assets and liabilities:
Accounts receivable (643,000) 361,000
Inventories (1,183,000) (895,000)
Costs and estimated earnings in excess of
billings on uncompleted contracts (64,000) (315,000)
Other current assets 61,000 29,000
Other assets 2,000 -
Accounts payable 394,000 268,000
Accrued expenses (50,000) 5,000
Income taxes payable - (37,000)
Customer advances (81,000) 29,000
Liability associated with former
senior officer (578,000) -
------------ ------------
Net cash used in operating activities (1,496,000) (974,000)
----------- ------------
Cash flows from investing activities:
Purchases of property and equipment (74,000) (157,000)
Sale of property and equipment 6,000 -
Purchase of marketable securities (98,000) -
Sale of marketable securities 104,000 156,000
------------ ------------
Net cash used in investing activities (62,000) (1,000)
------------ ------------
(continued)
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
Three Months Ended
March 31,
2011 2010
----- ------
Cash flows from financing activities:
Purchase of treasury stock - (2,000)
Proceeds from issuance of long-term debt
and note payable-bank 750,000 1,233,000
Stock option exercises 1,000 53,000
Repayments of long-term debt
and note payable-bank (353,000) (1,362,000)
------------ ------------
Net cash provided by (used in) financing
activities 398,000 (78,000)
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,160,000) (1,053,000)
----------- -----------
Cash and cash equivalents - January 1 1,964,000 2,321,000
------------ -----------
CASH AND CASH EQUIVALENTS - March 31 $ 804,000 $ 1,268,000
============ ===========
Supplemental cash flow information:
Cash paid for interest $ 52,000 $ 70,000
============ ===========
Cash paid for income taxes. $ 16,000 $ 41,000
============ ============
<FN>
The accompanying notes are an integral part of these condensed consolidated 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 interim 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, 2011 are not
necessarily indicative of the results of operations that can be expected for the
year ending December 31, 2011.
These condensed consolidated statements should be read in conjunction with
the Company's consolidated financial statements for the year ended December 31,
2010 contained in the Company's Annual Report on Form 10-K.
Reclassification
----------------
For comparability, certain 2010 amounts have been reclassified where
appropriate, to conform to the financial presentation in 2011.
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, which at times 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, and manufacturing overhead and
estimated earnings less accounts receivable billings.
Stock Based Compensation
--------------------------
At March 31, 2011, 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. The Company estimates the fair value of its stock
option awards on the date of grant using the Black-Scholes valuation model.
Share-based compensation expense was $40,000 and $82,000 for the three months
ended March 31, 2011 and 2010, respectively.
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. As of March 31, 2011, the
Company had unearned compensation of $401,000 associated with all of the
Company's restricted stock awards, which will be expensed over approximately the
next four years.
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):
------------
Stock option activity during the three months ended March 31, 2011, 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, 2011 314,000 $4.24 3
Granted - - -
Forfeited (62,000) 5.24 -
Exercised (2,000) 0.60 -
-------- ---- ----
Options outstanding,
March 31, 2011 250,000 $4.03 3
======= ===== =
Outstanding exercisable
at March 31, 2011 207,000 $4.44 3
======= ===== =
At March 31, 2011 the aggregate intrinsic value of options outstanding and
exercisable was $120,000 and $59,000, respectively. At the comparable 2010
period, the aggregate intrinsic value of options outstanding and exercisable was
$432,000 and $329,000, respectively.
The following table summarizes the Company's nonvested stock option
activity for the three months ended March 31, 2011:
Number of Weighted-Average
Shares Grant-Date Fair Value
------ -----------------------
Nonvested stock options
at January 1, 2011 57,000 $1.02
Granted - -
Vested 14,000 1.02
Forfeited - -
------ -----
Nonvested stock options
at March 31, 2011 43,000 $1.02
======= =====
At March 31, 2011, there was approximately $9,000 of unearned compensation cost
related to the above non-vested stock options. The cost is expected to be
recognized over approximately the next two years.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(NOTE 2) - Financing Arrangements:
-------- -----------------------
During March 2010, the Company entered into a $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 five-year $4,655,000 term loan facility that matures
March 2015. The unpaid balance on the term loan was $3,724,000 at March 31,
2011. The aggregate amount of principal outstanding under the line of credit
cannot exceed a borrowing base of eligible accounts receivable and inventory, as
defined. During March 2011, the expiration date on the line of credit was
extended to August 15, 2011 unless sooner terminated for an event of default
including adherence to financial covenants. Outstanding borrowings under the
line of credit were $1,017,000 at March 31, 2011.
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. The Company was in compliance with all of its
financial covenants as of June 30, 2010 and September 30, 2010.
The Company was not in compliance with one of its financial covenants as of
December 31, 2010. In March 2011, the Company and its lender agreed to (i) waive
the covenant default; (ii) replace a financial covenant ratio for the first two
quarters of 2011 with a new covenant related to the Company's operating
profitability; (iii) modify the definition of a financial covenant; (iv)
institute a new covenant related to the Company's liquidity; and (v) extend the
expiration date of the Company's line of credit to August 15, 2011. The lender,
in consideration of such waiver and amendment, assessed a waiver fee of $10,000
plus legal fees but did not change the interest rate on the Company's line of
credit or term debt. The Company was in compliance with all of its financial
covenants as of March 31, 2011.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(NOTE 3) - Net Income (loss) Per Common Share:
------ ----------------------------------
The following table sets forth the computation of basic and diluted net
income (loss) per common share:
Three Months Ended
March 31,
2011 2010
---- ----
Denominator:
Denominator for basic net income (loss)
per share - weighted-average common shares 4,638,000 4,367,000
Effect of dilutive securities:
Employee and directors stock options 22,000 -
Unearned portion of restricted stock awards 2,000 -
----- --------
Denominator for diluted net income (loss)
per share - weighted-average common
shares and assumed conversion 4,662,000 4,367,000
========= =========
The numerator for basic and diluted net income (loss) per share for the
three month periods ended March 31, 2011 and 2010 is the net income (loss) for
each period.
Options to purchase 166,000 shares of common stock were outstanding during the
three months ended March 31, 2011, but were not included in the computation of
diluted income (loss) per share. The inclusion of these options would have been
anti-dilutive as the options' exercise prices were greater than the average
market price of the Company's common shares during the relevant period.
During the three months ended March 31, 2010, the Company had a net loss
and therefore did not include 82,000 incremental common shares in its
calculation of diluted net loss per common share since an inclusion of such
securities would be anti-dilutive.
Approximately 97,000 and 258,000 shares of common stock were outstanding
during the three months ended March 31, 2011 and 2010, respectively, but were
not included in the computation of basic income (loss) 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,
2011 2010
---- ----
Raw Materials $ 8,301,000 $ 7,584,000
Work-in-process 3,831,000 3,512,000
Finished goods 638,000 531,000
----------- -----------
TOTAL $12,770,000 $11,627,000
=========== ===========
(NOTE 6) - Marketable Securities:
------- ---------------------
The following is a summary of the Company's available for sale marketable
securities at March 31, 2011 and December 31, 2010:
Unrealized
Adjusted Fair Holding
March 31,2011 Cost Value Gain
------------------ ---------- --------- ----------
Corporate Bonds $115,000 $151,000 $ 36,000
U.S. Government
Agency Bonds 1,000 1,000 -
---------- ----------- -----------
Total $116,000 $152,000 $ 36,000
========= ======== ===========
December 31, 2010
-------------------
Corporate Bonds $116,000 $145,000 29,000
U.S. Government
Agency Bonds 1,000 1,000 -
--------- ---------- --------
Total $117,000 $146,000 $ 29,000
======== ======== ========
(NOTE 7) - Fair Value of Financial Instruments:
------- -----------------------------------
Accounting Standards Codification ("ASC") 820, Fair Value Measurements and
Disclosures, requires 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:
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(NOTE 7) - Fair Value of Financial Instruments (continued):
------- -----------------------------------------------
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.
The table below presents the balances, as of March 31, 2011 and December 31,
2010, of assets and liabilities measured at fair value on a recurring basis by
level within the hierarchy.
March 31, 2011 Total Level 1 Level 2 Level 3
----------------- ----- -------- --------- ---------
Corporate Bonds $ 151,000 151,000 $ - $ -
U.S. Government
Agency Bonds 1,000 1,000 - -
-------- ------- ----------- ---------
Total Assets $ 152,000 152,000 $ - $ -
========= ========= =========== ==========
December 31, 2010 Total Level 1 Level 2 Level 3
----------------- -------- ----------- ----------- ---------
Corporate Bonds $ 145,000 145,000 $ - $ -
U.S. Government
Agency Bonds 1,000 1,000 - -
-------- -------- ------------ ----------
Total Assets $146,000 146,000 $ - $ -
======== ======= ============ ==========
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 and
liability associated with former chief executive officer are approximate to
their 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 Income (loss):
------- ---------------------------
For the three months ended March 31, 2011 and 2010, total comprehensive
income (loss), net of tax, was $528,000 and $(613,000), respectively.
Comprehensive income (loss) consists of the net income (loss) and unrealized
gains and losses on marketable securities, net of tax.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(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, 2011 and 2010:
Three Months Ended
March 31,
2011 2010
---- -----
Net sales:
Electronics
Domestic $4,243,000 $2,698,000
Foreign 193,000 779,000
----------- ----------
Total Electronics 4,436,000 3,477,000
----------- ----------
Power Units
Domestic 2,482,000 1,781,000
Foreign 181,000 403,000
----------- ----------
Total Power Units 2,663,000 2,184,000
----------- ----------
Intersegment Sales (287,000) (129,000)
----------- -----------
Total $6,812,000 $5,532,000
=========== ==========
Income (loss) before income tax provision:
Electronics Group $ 458,000 $ (402,000)
Power Group 419,000 93,000
Intersegment profit (38,000) 28,000
General corporate
expenses not allocated (280,000) (346,000)
Interest expense (53,000) (57,000)
Investment and other income, net 34,000 41,000
----------- ----------
Income (loss) before
income tax provision $ 540,000 $ (643,000)
========== ===========
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(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.
As of March 31, 2011 and December 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 - (8,110,000) $1,688,000
========== ============ =========== ===========
Intangible Assets:
Contract relationships 15 Years 2,000,000 $ (278,000) (1,722,000) -
Contract backlog 1-5 Years 1,750,000 (1,750,000) - -
Non-compete
agreements 3 Years 415,000 (386,000) (29,000) -
--------- ----------- ------------- -----------
$4,165,000 $(2,414,000) $(1,751,000) $ -
=========== ============ ============ ============
The Company recognized amortization expense of $86,000 for the three months
ended March 31, 2010.
(NOTE 11) - Income Taxes:
---------- --------------
For the three months ended March 31, 2011, the Company utilized net
operating loss carryforwards to offset income taxes, except for $16,000 of state
income and federal minimum tax expense. For the comparable period in 2010, the
Company recorded income tax expense of $4,000 for state income and federal
minimum taxes.
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, 2011.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
(NOTE 12) - Commitments:
---------- ------------
The Company elected not to renew the employment agreement of its former
chief executive officer, effectively terminating his employment as of December
31, 2010. The Company recorded an expense during the year ended December 31,
2010 of $2,000,000 representing its estimated contractual obligation, along with
associated costs, relating to the contract non-renewal. Included in the recorded
expense was $312,000 of stock compensation expense relating to the accelerated
vesting of restricted stock. As of March 31, 2011, the liability associated with
the former chief executive officer was approximately $1,110,000. A majority of
the obligation will be paid by January 2012. The former chief executive officer
has filed for an arbitration hearing in the City of New York to settle a dispute
regarding certain contractual provisions in connection with the contract
non-renewal. The Company is committed to paying the amount that it believes is
owed to its former chief executive officer. The Company believes any claims for
amounts over what it believes are contractually owed to him is without merit and
will be vigorously defended.
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 an increase in revenue and profitability for the three months ended
March 31, 2011 as compared to the same period in 2010. Our sales increase was
due to increased sales from both our Electronics and Power Groups. The increase
in sales from our Electronics Group was primarily attributable to an increase in
sales from our Orbit Instrument Division and TDL subsidiary. The increase in
sales from our Power Group was attributable to both its commercial and COTS
divisions. We recorded net income of $524,000 during the three months ended
March 31, 2011 compared to a net loss of $647,000 during the comparable 2010
period. The increase in net income was primarily attributable to an increase in
sales and gross profit and a decrease in selling, general and administrative
expenses during the three months ended March 31, 2011 compared to the prior year
period.
Our backlog at March 31, 2011 was approximately $21,200,000 compared to
$15,500,000 at March 31, 2010. 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 financial condition remains strong as evidenced by our 3.8 to 1 current
ratio at March 31, 2011. 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 up to $3,000,000 and (b) entered into a term loan in the amount of
approximately $4,700,000. These new facilities were used to pay off in full our
obligations to our former primary lender pursuant to a prior credit facility and
to provide us general working capital needs. As a result of our 2010 first
quarter loss due to shipping delays, we were not in compliance with one of our
financial covenants at March 31, 2010. In addition, as a result of our 2010
fourth quarter loss due mainly to costs associated with the non-renewal of our
former chief executive officer's employment contract, we were not in compliance
with one of our financial covenants at December 31, 2010. However, we did
negotiate amendments to our Credit Agreement in May 2010 and March 2011 and
obtained waivers relating to the covenant violations. We were in compliance with
our financial covenants at March 31, 2011.
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 March 31, 2011, 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 $22,000,000 and $8,000,000,
respectively that expire through 2030. Approximately, $15,000,000 of federal net
operating loss carry-forwards expire between 2011-2012. 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 had a significant amount of
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, 2010 for the remaining
carrying value of goodwill and intangible assets in connection with the
acquisition of ICS in 2007. An impairment charge was also taken at December 31,
2009 in connection with the recorded goodwill and intangible assets arising from
our ICS acquisition. As of December 31, 2010, all acquired intangible assets
have either been fully amortized or written off.
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, 2010 is as follows: TDL $820,000 and Behlman
$868,000. After the impairment charge taken on the remaining carrying value of
ICS' goodwill and intangible assets at December 31, 2010, of the two reporting
units with goodwill, TDL and Behlman have a fair value that is in excess of
their carrying value by approximately 23% and 27%, 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 $40,000 and $82,000 for
the three months ended March 31, 2011 and 2010, respectively. No restricted
stock or stock options were granted during the three months ended March 31,
2011. We account for stock option grants using the Black-Scholes model. 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 $152,000 invested primarily 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 the length of time and extent to which market value has been
less than cost; ii) the financial condition and near term prospects of the
issuer; iii) whether a decline in fair value is attributable to adverse
conditions specifically related to the security or specific conditions in an
industry; iv) whether interest payments continue to be made and v) any changes
to the rating of the security by a rating agency.
Results of Operations
---------------------
Three month period ended March 31, 2011 v. March 31, 2010
---------------------------------------------------------
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, 2011
increased by 23.1% to $6,812,000 from $5,532,000 for the three month period
ended March 31, 2010, due to higher sales from both our Electronics and Power
Groups. The increase in sales was mainly attributable to shipping schedules
related to our approximately $1,700,000 increase in consolidated backlog at
December 31, 2010 compared to December 31, 2009. Sales from our Electronics
Group increased by 27.6% due principally to higher sales from our Orbit
Instrument Division and TDL subsidiary. The increase in sales from our Power
Group was due to an increase in sales from both its commercial and COTS
divisions.
Gross profit, as a percentage of sales, for the three months ended March
31, 2011 increased to 43.0% from 33.3% for the three month period ended March
31, 2010. This increase was primarily the result of higher gross profit from
both our Electronics and Power Groups. The increase in gross profit from our
Electronics Group was principally due to higher gross profit from our Orbit
Instrument Division and TDL subsidiary. This increase was principally due to
operating leverage inherent in our business due to the increase in sales at both
operating units as well as product mix. The increase in gross profit from our
Power Group was principally due to operating leverage inherent in our business
due to the increase in sales during the current period.
Selling, general and administrative expenses decreased by 4.1% to
$2,368,000 for the three month period ended March 31, 2011 from $2,469,000 for
the three month period ended March 31, 2010 principally due to lower selling,
general and administrative expenses from our Electronics Group and lower
corporate costs which were primarily attributable to the non-renewal of the
contract of our former CEO and lower rent for our Hauppauge facility. These
lower costs were partially offset by slightly higher selling, general and
administrative expenses from our Power Group. Selling, general and
administrative expenses, as a percentage of sales, for the three month period
ended March 31, 2011 decreased to 34.8% from 44.6% for the three month period
ended March 31, 2010 principally due to the increase in sales and a decrease in
costs.
Interest expense for the three months ended March 31, 2011 decreased to $53,000
from $57,000 for the three months ended March 31, 2010 due to a decrease in the
amounts owed to lenders in the current period due to the pay down of its term
debt and despite an increase in the interest rate paid on balances outstanding
on our term loan and credit facility.
Investment and other income for the three month period ended March 31, 2011
decreased to $34,000 from $41,000 for the three-month period ended March 31,
2010 principally due to a decrease in the amounts invested during the period and
despite a $5,000 gain on the sale of a corporate bond during the current period.
Net income before taxes was $540,000 for the three months ended March 31, 2011
compared to net loss before taxes of $643,000 for the three months ended March
31, 2010. The increase in income was principally due to the increase in sales
and gross profit from both the Electronics and Power Groups and a decrease in
selling, general and administrative expenses.
Income taxes for the three months ended March 31, 2011 and March 31, 2010
consist of $16,000 and $4,000, 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 income for the three months ended March 31,
2011 was $524,000 compared to a loss of $647,000 for the year ended March 31,
2010.
Earnings before interest, taxes and depreciation and amortization (EBITDA)
for the three months ended March 31, 2011 increased to $662,000 from a loss of
$433,000 for three months ended March 31, 2010. Listed below is the EBITDA
reconciliation to net income (loss):
Three months ended
March 31,
----------
2011 2010
---- ----
Net income (loss) $ 524,000 $(647,000)
Interest expense 53,000 57,000
Income tax expense 16,000 4,000
Depreciation and amortization 69,000 153,000
------ -------
EBITDA $ 662,000 $(433,000)
========== ==========
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 slightly increased to $15,072,000 at March 31, 2011
compared to $15,006,000 at December 31, 2010. The ratio of current assets to
current liabilities was 3.8 to 1 at March 31, 2011 compared to 4.3 to 1 at
December 31, 2010. The increase in working capital was primarily attributable
to the net income for the period which was partially offset by the repayment of
debt.
Net cash used in operating activities for the three month period ended March 31,
2011 was $1,496,000, primarily attributable to the increase in inventory and
accounts receivable and a decrease in the liability associated with former chief
executive officer and despite the net income for the period and an increase in
accounts payable. 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.
Cash flows used in investing activities for the three month period ended March
31, 2011 was $62,000, attributable to the purchase of fixed assets and
marketable securities that was partially offset by the sale of marketable
securities and fixed assets. 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 from financing activities for the three month period ended March 31,
2011 was $398,000, primarily attributable to the proceeds from note payable-bank
which was partially offset by the repayment of long term debt. Cash flows used
in financing activities for the three month period ended March 31, 2010 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.
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 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 expiration date on the line of
credit was extended to August 15, 2011. Payment of interest on all loans was
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 2010 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 to (i) waive the covenant
default; and (ii) to amend the financial covenant ratio in question for the
remainder of 2010 and replace it with a new covenant related to the Company's
operating profitability. 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 to be on a prime rate basis only
and not on a LIBOR basis.
As a result of our loss in the fourth quarter of 2010, primarily due to the
costs associated with the non-renewal of our former chief executive officer's
employment contract, we were not in compliance with one of our financial
covenants at December 31, 2010. In March 2011, we and our lender agreed to (i)
waive the covenant default; (ii) replace a financial covenant ratio for the
first two quarters of 2011 with a new covenant related to the our operating
profitability; (iii) modify the definition of a financial covenant; (iv)
institute a new covenant related to the Company's liquidity; and (v) extend the
expiration date of our line of credit to August 15, 2011. The lender, in
consideration of such waiver and amendment, assessed a waiver fee of $10,000
plus legal fees but did not change the interest rate on our line of credit or
term debt. We were in compliance with all of our financial covenants at March
31, 2011.
Our existing capital resources, including our bank credit facilities and our
cash flow from operations, is 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
through December 2010, 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 May 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 the 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 first quarter of 2010, our revenue and profitability was
adversely affected by approximately $2.8 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. Shipments on the orders for our Orbit Instrument Division,
approximating $800,000, commenced in the fourth quarter of last year and have
continued into the first quarter of 2011. Shipment for $2,000,000 in orders for
our TDL subsidiary was initially postponed until 2011; however, in November
2010, TDL received notification that its prime contractor was terminated by the
U.S. Government. TDL does not have any significant termination claim on this
contract.
During the third and fourth quarters of 2010, our Orbit Instrument Division
received several new follow-on contract awards for its legacy hardware. Based
on these awards, our Orbit Instrument Division, in 2010, recorded bookings of
over $11,000,000, its highest level in many years. In addition, the Division
was recently notified by its prime contractor on a program that it provides one
of its products related to Federal Aviation Administration air traffic control
towers that it is seeking to procure a significant amount of units which could
approximate $4,400,000. The first order, in excess of $600,000 was received in
April 2011. Deliveries of these units are expected in the second half of 2011;
Delivery schedules for the remaining units have not yet been determined although
it is currently expected that the concentration of deliveries will be in 2013.
Due to its increasing backlog and this latest opportunity, our Orbit Instrument
Division appears well-positioned for increased revenue and profitability in
2011.
ICS experienced a delay in the awards for its MK 119 Gun Console System
which affected its shipments in 2009 and 2010. The delay in the receipt of
these awards led to inefficient production resulting in reduced profitability
for this operating unit during those periods. 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.
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 due to the severe recession resulting from the financial crisis. However,
bookings from the COTS division remained fairly strong. However, as economic
conditions started to improve into 2010, bookings from our commercial division
started to improve along with continued strength from our COTS division. As a
result, our Power Group had another strong year of revenue and profitability for
2010. Bookings for our Power Group have remained strong in 2011 due principally
to improved economic conditions which has this segment well-positioned for
increased revenue and profitability in 2011.
In April 2005, we 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. Although we are heavily dependent upon military spending
as a source of revenues and income, 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. Due to budget constraints, government spending is coming under
intense pressure and the defense budget, usually immune from such pressures, is
also under review.
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. However, we believe that
any future cuts in defense spending will be in certain areas of the defense
budget that will not materially affect us. In fact, we believe that as military
assets return from the Middle East, the need for refurbishment and modernization
should become a defense spending priority. Therefore, we believe there could be
significant opportunities for us as military efforts are curtailed and defense
spending priorities are refocused.
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 a number 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. However, once
initial production orders are received, we are generally well positioned to
receive follow-on orders depending on government needs and funding requirements.
There is no seasonality to our business. Our revenues are generally
determined by the shipping schedules outlined in the purchase orders received
from our 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.
Despite the expected increase in military refurbishment and modernization,
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 for our development costs, it will not generate any significant
profits.
In May 2009, we hired an investment banker to pursue strategic alternatives
to enhance shareholder value. The investment banker's activities were primarily
focused on a potential sale of the Company. In January 2011, we terminated the
services with such investment banker and we are no longer actively pursuing a
sale of the Company.
In March 2011, we hired a new investment banker to help us expand our
operations and achieve better utilization of our existing facilities 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. However, there is no assurance that any future acquisition will
be accomplished. In addition, 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 scheduled debt payments, in which case, we will be required
to pay them out of our existing operations which may be adversely affected.
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 4. 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, 2011 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
In March 2011, in connection with the non-renewal of his employment agreement,
our former chief executive officer filed for an arbitration hearing in the City
of New York to settle a claim regarding certain disputed contractual
obligations. At December 31, 2010, we recorded an expense of $2,000,000 for
estimated costs associated with such non-renewal. Included in the recorded
expense is $312,000 of stock compensation expense relating to the accelerated
vesting of restricted stock issued to such officer. We are committed to paying
the amount that we believe is owed to our former chief executive officer
pursuant to his employment contract. We believe any amount over what we believe
is contractually owed to him is without merit and will be vigorously defended by
us. The arbitration is pending.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit Number Description
--------------- -----------
10.1* First Amendment to Employment 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 16, 2011 /s/ Mitchell Binder
-------------------
Mitchell Binder, President,
Chief Executive Officer and
Director
Dated: May 16, 2011 /s/ David Goldman
----------------
David Goldman, Chief
Financial Officer