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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

T

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended September 30, 2013

OR

o

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)

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 T   No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a 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 o   No T

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 4,551,598 shares of common stock, par value $.10, as of November 12, 2013.

 

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INDEX

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PART I - FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(continued)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(unaudited)

The accompanying notes are an integral part of these condensed financial statements.

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ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(continued)

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ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(continued)

The accompanying notes are an integral part of these condensed financial statements.

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 ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(NOTE 1) – Basis of Presentation and Summary of Significant Accounting Policies:

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 nine and three months ended September 30, 2013 are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 2013.

These condensed consolidated statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2012 contained in the Company’s Annual Report on Form 10-K filed on March 29, 2013.

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company maintains cash in bank deposit accounts, which, at times, exceed federally insured limits. The Company has not experienced any losses on these accounts.

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.

Accounts receivable are reported at their outstanding unpaid principal balances reduced by an allowance for doubtful accounts. The Company estimates doubtful accounts based on historical bad debts, factors related to specific customers' ability to pay and current economic trends. The Company writes off accounts receivable against the allowance when a balance is determined to be uncollectible.

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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):

Inventories, which consist of raw materials, work-in-process, and finished goods, are recorded at the lower of cost (average cost method and specific identification) or market. Inventories are shown net of any reserves relating to any potential slow moving or obsolete inventory.

Property and equipment is recorded at cost. Depreciation and amortization of the respective assets are computed using the straight-line method over their estimated useful lives ranging from 3 to 10 years. Leasehold improvements are amortized using the straight-line method over the remaining term of the lease or the estimated useful life of the improvement, whichever is less.

When impairment indicators are present, the Company reviews the carrying value of its long-lived assets in determining the ultimate recoverability of their unamortized values using future undiscounted cash flow analyses. In the event the future undiscounted cash flows of the long-lived asset are less than the carrying value, the Company will record an impairment charge for the difference between the carrying value and the fair value of the long-lived asset.

The Company records goodwill as the excess of purchase price over the fair value of identifiable net assets acquired. In accordance with Accounting Standards Codification (“ASC”) 350, goodwill is not amortized but instead tested for impairment on at least an annual basis. The Company, where appropriate, will utilize Accounting Standards Update (“ASU”) 2011-08 which allows the Company to not perform the two-step goodwill impairment test if it determines that it is not more likely than not that the fair value of the reporting unit is less than the carrying amount based on a qualitative assessment of the reporting unit. The Company’s annual goodwill impairment test is performed in the fourth quarter each year or when impairment indicators are present. If the goodwill is deemed to be impaired, the difference between the carrying amount reflected in the financial statements and the estimated fair value is recognized as an expense in the period in which the impairment occurs. In determining the recoverability of goodwill, assumptions are made regarding estimated future cash flows and other factors to determine the fair value of the assets.

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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 Company recognizes deferred tax assets and liabilities in accordance with ASC 740 based on the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances have been established to reduce deferred tax assets to the amount expected to be realized. The Company evaluates uncertain tax positions and accounts for such items in accordance with ASC 740-10. As of September 30, 2013, the Company has no material uncertain tax positions. The Company is subject to federal income taxes and files a consolidated U.S. federal income tax return. In addition to the federal tax return, the Company files income tax returns in various state jurisdictions. The Company is subject to routine income tax audits in various jurisdictions and tax returns from December 31, 2009 remain open to examination by such taxing authorities.

The Company recognizes a substantial portion of its revenue upon the delivery of product. The Company recognizes such revenue when title and risk of loss are transferred to the customer and when there is: i) persuasive evidence that an arrangement with the customer exists, which is generally a customer purchase order, ii) the selling price is fixed and determinable, iii) collection of the customer receivable is deemed probable, and iv) we do not have any continuing non-warranty obligations. However, for certain products, revenue and costs under larger, long-term contracts are reported on the percentage-of-completion method. For projects where materials have been purchased but have not been placed 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. Costs and estimated earnings in excess of billings on uncompleted contracts represent an asset that will be liquidated in the normal course of contract completion, which at times may require more than one year. The components of 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.

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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):

Comprehensive income (loss) consists of net income (loss) and unrealized gains and losses on marketable securities, net of tax. The Company has elected to present the components of net income (loss), the components of other comprehensive income and total comprehensive income (loss) as a single continuous statement.

(Note 2) - Stock Based Compensation:

At September 30, 2013, the Company had a stock-based employee compensation plan. At September 30, 2013, there were no shares of common stock reserved for future issuance of stock options, restricted stock and stock appreciation rights. The plan provided for the granting of nonqualified and incentive stock options as well as restricted stock awards and stock appreciation rights to officers, employees and other key persons. 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 $84,000 and $28,000 for the nine and three months ended September 30, 2013, respectively, and was $196,000 and $44,000, respectively, for the comparable 2012 periods.

The Company's stock-based employee compensation plan allows 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 seven 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 nine months ended September 30, 2013, 130,000 shares of restricted stock were awarded to senior management which will vest over seven years. As of September 30, 2013, the Company had unearned compensation of $426,000 associated with all of the Company's restricted stock awards, which will be expensed over approximately the next seven years. The unvested portion of restricted stock awards at September 30, 2013 was approximately 148,000 shares.

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ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)

(Note 2) - Stock Based Compensation (continued):

The following table summarizes the Company's nonvested restricted stock activity for the nine months ended September 30, 2013:

Stock option activity during the nine months ended September 30, 2013, under all stock option plans is as follows:

At September 30, 2013, the aggregate intrinsic value of options outstanding and exercisable was $116,000 and $96,000, respectively. At the comparable 2012 period, the aggregate intrinsic value of options outstanding and exercisable was $115,000 and $76,000, respectively.

The following table summarizes the Company's nonvested stock option activity for the nine months ended September 30, 2013:

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ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)

(Note 2) - Stock Based Compensation (continued):

(NOTE 3) – Debt:

On November 8, 2012, the Company entered into a credit agreement (“Credit Agreement”) with a commercial lender pursuant to which the Company established a committed line of credit of up to $6,000,000. This line of credit was used to pay off, in full, all of the Company’s obligations to its former primary lender and to provide for its general working capital needs. In June 2013, the Company’s Credit Agreement was amended whereby (i) the expiration date on its credit facility was extended to July 1, 2015 and (ii) the Company is permitted to purchase up to $400,000 of its common stock in each year beginning July 1 and ending June 30 during the term of the Credit Agreement. Payment of interest on the line of credit is due at a rate per annum as follows: either (i) variable at the lender’s prime lending rate (3.25% at September 30, 2013) and/or (ii) 2% over LIBOR for 30, 60, or 90 day LIBOR maturities, at the Company’s sole discretion. The line of credit is secured by a first priority security interest in all of the Company’s tangible and intangible assets. Outstanding borrowings under the line of credit were $2,250,000 at September 30, 2013 at an interest rate of 2.18% representing 2% plus the 30 day LIBOR rate.

The Credit Agreement contains customary affirmative and negative covenants and certain financial covenants. Additionally, available borrowings under the line of credit are subject to a borrowing base of eligible accounts receivable and inventory. All outstanding borrowings under the line of credit are accelerated and become immediately due and payable (and the line of credit terminates) in the event of a default, as defined under the Credit Agreement. The Company was in compliance with the financial covenants contained in the Credit Agreement at September 30, 2013.

During March 2012, the Company entered into a two-year $65,000 installment loan agreement to finance the purchase of a leasehold improvement. The loan’s imputed interest rate is 3.25%, is payable in twenty-four (24) monthly payments of approximately $2,800, is secured by the related leasehold improvement, and matures March 2014. The unpaid balance on the installment loan agreement was $17,000 at September 30, 2013.

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ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)

(NOTE 4) – Net Income (Loss) Per Common Share:

The following table sets forth the computation of basic and diluted net income (loss) per common share:

The numerator for basic and diluted net income (loss) per share for the nine and three month periods ended September 30, 2013 and 2012 is the net income (loss) for each period.

During the nine months ended September 30, 2012, the Company had a net loss and therefore did not include 24,000 incremental common shares in its calculation of diluted net loss per common share since an inclusion of such securities would be anti-dilutive.

Options to purchase 31,000 shares of common stock were outstanding during the nine and three month periods ending September 30, 2013, respectively, and options to purchases 158,000 and 155,000 shares were outstanding during the comparable 2012 periods 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.

Approximately 139,000 shares of outstanding common stock during the nine and three months ended September 30, 2013 and approximately 20,000 shares of outstanding common stock during the comparable periods in 2012 were not included in the computation of basic earnings per share. These shares were excluded because they represent the unearned portion of restricted stock awards.

(NOTE 5) - Cost of Sales:

For interim periods, the Company estimates certain components of its inventory and related gross profit.

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ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)

(NOTE 6) - Inventories:

Inventories are comprised of the following:

(NOTE 7) – Marketable Securities:

The following is a summary of the Company’s available for sale marketable securities at September 30, 2013 and December 31, 2012:

(NOTE 8) - Fair Value of Financial Instruments:

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:

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.

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ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)

(NOTE 8) - Fair Value of Financial Instruments(continued):

The table below presents the balances, as of September 30, 2013 and December 31, 2012, of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy.

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 is 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. 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 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 nine and three month periods ended September 30, 2013 and 2012:

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ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)

(NOTE 9) - Business Segments (continued):

(NOTE 10) - Goodwill:

As of September 30, 2013 and December 31, 2012, the Company's goodwill consists of the following:

(NOTE 11) – Income Taxes:

For the nine and three months ended September 30, 2013, the Company recorded $44,000 and ($2,000), respectively, of state income and federal minimum tax expense (benefit). For the comparable periods in 2012, the Company recorded income tax expense of $73,000 and $15,000, respectively, for state income and federal minimum taxes.

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ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)

(NOTE 12) – Liability Associated with Non-renewal of Senior Officer Contract:

In March 2012, the Company reached a decision that made it probable that the employment agreement of its former chief operating officer would not be renewed, which effectively terminated his employment as of July 31, 2012. Pursuant to the terms of his existing agreement, the Company recorded an expense of $1,194,000 during the three months ended March 31, 2012, representing its estimated contractual obligation relating to the contract non-renewal. In addition, relating to the non-renewal, all of his unvested restricted shares vested on July 31, 2012. As of September 30, 2013 and December 31, 2012, the liability associated with the non-renewal of the former chief operating officer contract was approximately $54,000 and $702,000, respectively.

In November 2012, the Company’s Board of Directors authorized management, in its discretion, to purchase up to $400,000 of its common stock. On March 6, 2013, the Company’s Board of Directors approved a 10b5-1 Plan through which the Company conducted its authorized stock buy back program. The Company repurchased all of the remaining shares available under its 10b5-1 Plan during the first and second quarters of 2013. From November 8, 2012 to June 20, 2013, the Company purchased a total of approximately 116,000 of its common shares for total cash consideration of approximately $400,000 for an average price of $3.45 per share. In June 2013, the Company’s Credit Agreement was amended whereby the Company is permitted to purchase up to $400,000 of its common stock in each year beginning July 1 and ending June 30 during the term of the Credit Agreement. On November 6, 2013, the Company’s Board of Directors authorized management to purchase up to $400,000 of its common stock pursuant to a buy back program. In conjunction with the buy back program, the Company’s Board of Directors authorized management to enter into a 10b5-1 Plan through which the Company will be permitted to repurchase up to $200,000 of its common stock. Management is authorized to repurchase up to the remaining $200,000 of common stock under the $400,000 buyback program outside of the 10b5-1 Plan.

In October 2013, the Company decided to consolidate the operations of its TDL subsidiary, located in Quakertown Pennsylvania, into its Orbit International Corp. facility located in Hauppauge, New York, as part of the Company’s overall efforts to reduce costs. All production, engineering and administrative functions currently performed at the Quakertown, Pennsylvania facility are expected to be transitioned into the Hauppauge, New York facility by June 30, 2014. In connection with this consolidation, Orbit expects to incur approximately $400,000 in expenses and charges, consisting of: (i) approximately $300,000 of accelerated non-cash amortization expense on its leasehold improvements, (ii) approximately $50,000 in retention payments to certain key employees, and (iii) approximately $50,000 in general moving and consolidation expenses.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

During the three months ended September 30, 2013, we recorded a 22.3% decrease in sales and a decrease in net income to $127,000 from net income of $763,000 in the prior year period. The decrease in net income was principally due to the decrease in sales but was partially offset by a slight decrease in selling, general and administrative expenses and a decrease in interest expense. Although we recorded a significant decrease in sales, gross margin decreased only slightly (.2%) because of better product mix, particularly at our Orbit Instrument Division and TDL subsidiary. During the nine months ended September 30, 2013, we recorded an 11.6% decrease in sales but our net income increased to $156,000 from a loss of $413,000 during the prior year nine month period. The increase in profitability was primarily attributable to a $1,194,000 charge taken in the prior year in connection with the non-renewal of our former chief operating officer’s employment contract. The increase in profitability during the current nine month period was also attributable to a decrease in selling, general and administrative expenses and interest expense and a slight increase in gross margin which was partially offset by a decrease in sales.

Our backlog at September 30, 2013 was approximately $12,700,000 compared to $17,100,000 at September 30, 2012 due to a lower backlog at both our Electronics and Power Groups. There is no seasonality to our business. Our shipping schedules are generally determined by the shipping schedules outlined in the purchase orders received from our customers. Both of our operating segments continue to pursue a significant amount of business opportunities, and while we are confident that we will receive many of the orders we are pursuing, there can be no assurance as to the ultimate receipt and timing of these orders.

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Our financial condition remains strong as evidenced by our 9.8 to 1 current ratio at September 30, 2013. During November 2012, we entered into a $6,000,000 line of credit facility with a new lender. This line of credit was used to pay off, in full, all of our obligations to our former primary lender and to provide for our general working capital needs. In June 2013, our Credit Agreement was amended whereby (i) the expiration date on our credit facility was extended to July 1, 2015 and (ii) we are permitted to purchase up to $400,000 of our common stock in each year beginning July 1 and ending June 30 during the term of our Credit Agreement. Accordingly, as of September 30, 2013, our line of credit is classified as a non-current liability. We were in compliance with the financial covenants contained in our Credit Agreement at September 30, 2013. In November 2012, our Board of Directors authorized management, in its discretion, to purchase up to $400,000 of our common stock. On March 6, 2013, our Board of Directors approved a 10b5-1 Plan through which we conducted our authorized stock buy back program. We repurchased all of the shares available under our stock buy back program (including the related 10b5-1 Plan) during the first and second quarters of 2013. From November 8, 2012 to June 20, 2013, we purchased a total of approximately 116,000 shares of our common stock for total cash consideration of approximately $400,000 for an average price of $3.45 per share. On November 6, 2013, our Board of Directors authorized management to purchase up to $400,000 of our common stock pursuant to a buy back program. In conjunction with the buy back program, our Board of Directors authorized management to enter into a 10b5-1 Plan through which we will be permitted to repurchase up to $200,000 of our common stock. Management is authorized to repurchase up to the remaining $200,000 of common stock under the $400,000 buy back program outside of the 10b5-1 Plan.

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, impairment of goodwill, 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.

   

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

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At September 30, 2013, we had an alternative minimum tax credit of approximately $573,000 with no limitation on the carry-forward period and approximately $6,000,000 of both Federal and state net operating loss carry-forwards that expire from 2018 through 2032. 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 our deferred tax asset and operating results could be affected accordingly. We will evaluate the possibility of changing some or all of our valuation allowance relating to our deferred tax asset should we continue our profitability or incur losses in the future. The increase or reduction of some or all of our valuation allowance would create a deferred tax expense or benefit, resulting in a decrease or increase to net income in our condensed consolidated statements of operations.

  

As of September 30, 2013, our goodwill was $868,000, all of which was attributable to our Behlman subsidiary. After applying ASU 2011-08, we performed a qualitative assessment on Behlman’s goodwill at December 31, 2012. We concluded as of December 31, 2012 that the fair value of Behlman was more likely than not greater than its carrying amount. This assessment was based on certain factors, such as: i) Behlman’s bookings and revenue in 2012 (approximately $12.5 million and $12.4 million, respectively), ii) Behlman’s net income (approximately $2.8 million) in 2012, iii) Behlman’s backlog at December 31, 2012 of approximately $8.1 million and iv) the result of our 2010 quantitative goodwill impairment test under which Behlman’s fair value at December 31, 2010 exceeded its carrying amount by approximately 27%.

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 $84,000 and $196,000 for the nine months ended September 30, 2013 and 2012, respectively. During the nine months ended September 30, 2013, 130,000 shares of restricted stock were awarded to senior management. During the comparable period in 2012, no shares of restricted stock or stock options were granted.

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We recognize a substantial portion of our revenue upon the delivery of product. We recognize such revenue when title and risk of loss are transferred to our customer and when there is: i) persuasive evidence that an arrangement with the customer exists, which is generally a customer purchase order, ii) the selling price is fixed and determinable, iii) collection of the customer receivable is deemed probable, and iv) we do not have any continuing non-warranty obligations. However, for certain products, revenue and costs under larger, long-term contracts are reported on the percentage-of-completion method. For projects where materials have been purchased, but have not been placed in production, the costs of such materials are excluded from costs incurred for the purpose of measuring the extent of progress toward completion. The amount of earnings recognized at the financial statement date is based on an efforts-expended method, which measures the degree of completion on a contract based on the amount of labor dollars incurred compared to the total labor dollars expected to complete the contract. When an ultimate loss is indicated on a contract, the entire estimated loss is recorded in the period the loss is identified. Costs and estimated earnings in excess of billings on uncompleted contracts represent an asset that will be liquidated in the normal course of contract completion, which at times may require more than one year. The components of costs and estimated earnings in excess of billings on uncompleted contracts are the sum of the related contract’s direct material, direct labor, and manufacturing overhead and estimated earnings less accounts receivable billings.

We currently have approximately $248,000 invested in corporate bonds. We treat our investments as available-for-sale which requires us to assess our portfolio each reporting period to determine whether declines in fair value below book value are considered to be other than temporary. We must first determine that we have both the intent and ability to hold a security for a period of time sufficient to allow for an anticipated recovery in its fair value to its amortized cost. In assessing whether the entire amortized cost basis of the security will be recovered, we compare the present value of future cash flows expected to be collected from the security (determination of fair value) with the amortized cost basis of the security. If the impairment is determined to be other than temporary, the investment is written down to its fair value and the write-down is included in earnings as a realized loss, and a new cost is established for the security. Any further impairment of the security related to all other factors is recognized in other comprehensive income. Any subsequent recovery in fair value is not recognized until the security either is sold or matures.

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

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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 (which collectively comprise our “Electronics Group”). Our Behlman subsidiary is engaged in the design and manufacture of commercial power units and COTS power solutions (which comprises our “Power Group”).

Consolidated net sales for the three month period ended September 30, 2013 decreased by 22.3% to $6,109,000 from $7,864,000 for the three month period ended September 30, 2012, due primarily to lower sales from our Electronics Group and despite higher sales from our Power Group. Sales from our Electronics Group decreased by 36.3% due principally to lower sales from our Orbit Instrument Division and our ICS subsidiary and to a lesser extent lower sales from our TDL subsidiary. The decrease in sales at our Orbit Instrument Division was primarily due to a decrease in shipments pursuant to customer delivery schedules resulting from lower bookings in prior periods. The decrease in sales at our ICS subsidiary was principally due to a decrease in revenue relating to our Signal Data Converter (“SDC”) order, which is recognized under the percentage of completion method, and was completed during the current year quarter. Due to a delay in receiving the follow-on SDC production order, shipments will not commence until the 2014 calendar year. The decrease in sales at our TDL subsidiary was principally due to (i) lower bookings for the first nine months of 2013 as compared to the comparable period in 2012 and (ii) the absence of shipments in the current year period for a certain display used in the ground mobile marketplace. Sales from our Power Group increased by 3.2% due to an increase in sales from its commercial division which was partially offset by a decrease in sales at its COTS division. The increase in sales from its commercial division was principally due to increased shipments pursuant to customer delivery schedules. The decrease in sales from its COTS division was principally due to a decrease in shipments pursuant to customer delivery schedules as a result of lower bookings in prior periods.

Gross profit, as a percentage of sales, for the three months ended September 30, 2013 slightly decreased to 38.7% from 38.9% for the three month period ended September 30, 2012. The decrease was the result of lower gross margin at our Electronics Group that was partially offset by higher gross margin at our Power Group. The decrease in gross margin from our Electronics Group was principally due to lower gross margin at our ICS subsidiary which was partially offset by higher gross margin at our TDL subsidiary and slightly higher gross margin at our Orbit Instrument Division. The decrease in gross margin at our ICS subsidiary was principally due to lower sales during the current year period resulting from a decrease in revenue relating to our SDC order. The higher gross margins at both our Orbit Instrument Division and TDL subsidiary were primarily due to lower material consumption costs during the current year period as a result of a change in product mix and despite the decrease in sales. The increase in gross margin at our Power Group was principally due to higher sales during the three months ended September 30, 2013 as compared to the prior year period.

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Selling, general and administrative expenses decreased slightly to $2,233,000 for the three month period ended September 30, 2013 from $2,255,000 for the three month period ended September 30, 2012. The decrease was principally due to slightly lower corporate costs and lower selling, general and administrative expenses from our Electronics Group that was partially offset by an increase in selling, general and administrative expenses at our Power Group. The decrease in selling, general and administrative expenses at our Electronics Group was primarily due to the departure of a senior officer whose duties were assumed by other management and also to a reduction in personnel at our ICS subsidiary. The increase in selling, general and administrative expenses at our Power Group was primarily due to an increase in professional fees. Selling, general and administrative expenses, as a percentage of sales, for the three month period ended September 30, 2013 increased to 36.6% from 28.7% for the three month period ended September 30, 2012 principally due to a decrease in sales and despite the slight decrease in costs.

Interest expense for the three months ended September 30, 2013 decreased to $14,000 from $31,000 for the three months ended September 30, 2012. In November 2012, we entered into a credit agreement with a commercial lender pursuant to which we established a committed line of credit of up to $6,000,000. This line of credit was used to pay off all of our obligations (term debt and line of credit) to our former primary lender. The decrease in interest expense was principally due to the pay off of our term debt, a lower interest rate on our new line of credit and despite an increase in amounts owed under our line of credit.

Investment and other income for the three month period ended September 30, 2013 increased to $6,000 from $5,000 for the three month period ended September 30, 2012 principally due to the sale of a corporate bond during the current year period.

Income before taxes was $125,000 for the three months ended September 30, 2013 compared to $778,000 for the three months ended September 30, 2012. The decrease in income was principally due to a decrease in sales at our Electronics Group which was partially offset by an increase in sales at our Power Group, a decrease in selling, general and administrative expenses and a decrease in interest expense.

Income tax (benefit) expense for the three months ended September 30, 2013 and September 30, 2012 consist of ($2,000) and $15,000, 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 September 30, 2013 was $127,000 compared to net income of $763,000 for the three months ended September 30, 2012.

Earnings before interest, taxes and depreciation and amortization (EBITDA) for the three months ended September 30, 2013 decreased to $217,000 from $882,000 for three months ended September 30, 2012. Listed below is the EBITDA reconciliation to net income:

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EBITDA is a Non-GAAP financial measure and should not be construed as an alternative to net income. An element of our growth strategy has been through strategic acquisitions which have been substantially funded through the issuance of debt. This has resulted in additional interest 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.

Consolidated net sales for the nine month period ended September 30, 2013 decreased by 11.6% to $19,031,000 from $21,535,000 for the nine month period ended September 30, 2012 due to lower sales from our Electronics Group that was partially offset by higher sales from our Power Group. Sales from our Electronics Group decreased by 22.0%, due to a decrease in sales from our Orbit Instrument Division and TDL and ICS subsidiaries. The decrease in sales at our Orbit Instrument Division was principally due to a decrease in shipments pursuant to customer delivery schedules resulting from lower bookings in prior periods. The decrease in sales at our ICS subsidiary was primarily due to the absence of MK 437 sales and a decrease in revenue relating to our SDC order in the current year period. The decrease in sales at our TDL subsidiary was principally due to (i) lower bookings for the first nine months of 2013 as compared to the comparable period in 2012 and (ii) the absence of shipments in the current year period for a certain display used in the ground mobile marketplace. Sales from our Power Group increased by 2.8%, due to an increase in sales from its commercial division and despite a decrease in sales from its COTS division. The increase in sales from its commercial division was principally due to an increase in shipments pursuant to customer delivery schedules. The decrease in sales at its COTS division was primarily related to a decrease in shipments pursuant to customer delivery schedules resulting from lower bookings in prior periods.

Gross profit, as a percentage of sales, for the nine months ended September 30, 2013 slightly increased to 38.6% from 38.4% for the nine month period ended September 30, 2012. This increase was primarily the result of a greater percentage of higher margin Power Group sales in the current year period; however, gross margin did decrease at both our Electronics and Power Groups in the current year period. The decrease at our Electronics Group was principally due to lower gross margins at our TDL and ICS subsidiaries primarily due to lower sales during the current year period. The increase in gross margin at our Orbit Instrument Division was principally due to lower material consumption as a result of a change in product mix in the current year period. The decrease in gross margin at our Power Group was primarily due to a change in product mix despite an increase in sales during the current year period.

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Selling, general and administrative expenses decreased to $7,119,000 for the nine month period ended September 30, 2013 from $7,427,000 for the nine month period ended September 30, 2012. The decrease was primarily due to an 8.2% decrease in selling, general and administrative expenses from our Electronics Group, as well as lower corporate costs, that was partially offset by a 2.3% increase in expenses at our Power Group. The decrease in selling, general and administrative expenses at our Electronics Group was primarily due to the departure of a senior officer whose duties were assumed by other management and also to a reduction in personnel at our ICS subsidiary. The increase in selling, general and administrative expenses at our Power Group was principally due to an increase in selling expenses and professional fees. Selling, general and administrative expenses, as a percentage of sales, for the nine month period ended September 30, 2013 increased to 37.4% from 34.5% for the nine month period ended September 30, 2012 principally due to a decrease in sales and despite the decrease in costs.

During the first quarter of 2012, we reached a decision that made it probable that the employment agreement of our former chief operating officer would not be renewed, which effectively terminated his employment as of July 31, 2012. Pursuant to the terms of his existing agreement, we recorded an expense of $1,194,000 for estimated costs associated with the contract non-renewal.

Interest expense for the nine months ended September 30, 2013 decreased to $46,000 from $101,000 for the nine months ended September 30, 2012. In November 2012, we entered into a credit agreement with a commercial lender pursuant to which we established a committed line of credit of up to $6,000,000. This line of credit was used to pay off all of our obligations (term debt and line of credit) to our former primary lender. The decrease in interest expense was principally due to the pay off of our term debt, a lower interest rate on our new line of credit and despite an increase in amounts owed under our line of credit.

Investment and other income for the nine month period ended September 30, 2013 decreased to $11,000 from $102,000 for the nine month period ended September 30, 2012. The decrease was principally due to an $85,000 gain recognized during the prior period relating to the remaining unamortized deferred gain on the sale of our building in 2001 and higher bond premium amortization expense during the current period.

Income before taxes was $200,000 for the nine months ended September 30, 2013 compared to a loss before taxes of $340,000 for the nine months ended September 30, 2012. The increase in profitability was principally due to a $1,194,000 charge taken in connection with the non-renewal of our former chief operating officer’s contract in the prior year period, a decrease in selling, general and administrative expenses and interest expense, an increase in sales at our Power Group that was partially offset by a decrease in sales at our Electronics Group and a decrease in investment and other income.

Income taxes for the nine months ended September 30, 2013 and September 30, 2012 consist of $44,000 and $73,000, respectively, in state income and Federal minimum taxes that cannot be offset by any state or Federal net operating loss carry-forwards.

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As a result of the foregoing, the net income for the nine months ended September 30, 2013 was $156,000 compared to a net loss of $413,000 for the nine months ended September 30, 2012.

Earnings (loss) before interest, taxes and depreciation and amortization (EBITDA) for the nine months ended September 30, 2013 increased to $464,000 from a loss of $25,000 for the nine months ended September 30, 2012. Listed below is the EBITDA reconciliation to net income:

Working capital increased to $16,987,000 at September 30, 2013 compared to $14,935,000 at December 31, 2012. The ratio of current assets to current liabilities increased to 9.8 to 1 at September 30, 2013 compared to 3.4 to 1 at December 31, 2012. The increase in working capital was primarily attributable to the reclassification of our line of credit as a non-current liability and the net income for the period which was partially offset by the purchase of treasury stock and property and equipment and the repayment of our line of credit.

Net cash provided by operating activities for the nine month period ended September 30, 2013 was $2,637,000, primarily attributable to the net income for the period, the non-cash depreciation and stock based compensation, a decrease in inventory, costs and estimated earnings in excess of billings on uncompleted contracts and accounts receivable that was partially offset by a decrease in accrued expenses, accounts payable and the liability associated with the non-renewal of senior officers’ contracts. Net cash used in operating activities for the nine month period ended September 30, 2012 was $837,000, primarily attributable to the net loss for the period, an increase in inventory and costs and estimated earnings in excess of billings on uncompleted contracts, the decrease in accrued expenses, taxes payable and accounts payable and despite the decrease in accounts receivable, other current assets and other non-current assets, the increase in liabilities associated with the non-renewal of senior officers’ contracts and customer advances and the non-cash depreciation and stock based compensation.

Cash flows used in investing activities for the nine month period ended September 30, 2013 was $231,000, primarily attributable to the purchase of fixed assets. Cash flows used in investing activities for the nine month period ended September 30, 2012 was $354,000, primarily attributable to the purchase of fixed assets.

Cash flows used in financing activities for the nine month period ended September 30, 2013 was $1,423,000, primarily attributable to the repayment of note payable-bank and long term debt and the purchase of treasury stock. Cash flows from financing activities for the nine month period ended September 30, 2012 was $311,000, primarily attributable to the proceeds from issuance of note payable-bank and long-term debt and the decrease in restricted cash which was partially offset by the repayment of long term debt and purchase of treasury stock.

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On November 8, 2012, we entered into a credit agreement (“Credit Agreement”) with a commercial lender pursuant to which we established a committed line of credit of up to $6,000,000. This line of credit was used to pay off, in full, all of our obligations to our former primary lender and to provide for our general working capital needs. In June 2013, our Credit Agreement was amended whereby (i) the expiration date on our credit facility was extended to July 1, 2015 and (ii) we are permitted to purchase up to $400,000 of our common stock in each year beginning July 1 and ending June 30 during the term of our Credit Agreement. Payment of interest on the line of credit is due at a rate per annum as follows: either (i) variable at the lender’s prime lending rate (3.25% at September 30, 2013) and/or (ii) 2% over LIBOR for 30, 60, or 90 day LIBOR maturities, at our sole discretion. The line of credit is secured by a first priority security interest in all of our tangible and intangible assets. Outstanding borrowings under the line of credit were $2,250,000 at September 30, 2013. Outstanding borrowings under the line of credit were $2,250,000 at September 30, 2013 at an interest rate of 2.18% representing 2% plus the 30 day LIBOR rate.

The Credit Agreement contains customary affirmative and negative covenants and certain financial covenants. Additionally, available borrowings under the line of credit are subject to a borrowing base of eligible accounts receivable and inventory. All outstanding borrowings under the line of credit are accelerated and become immediately due and payable (and the Line of Credit terminates) in the event of a default, as defined, under the Credit Agreement. We were in compliance with the financial covenants contained in the Credit Agreement at September 30, 2013.

Our existing capital resources, including our bank credit facility and our cash flow from operations, are expected to be adequate to cover our cash requirements for the foreseeable future.

In November 2012, our Board of Directors authorized management, in its discretion, to purchase up to $400,000 of common stock. From November 8, 2012 to June 20, 2013, we purchased a total of approximately 116,000 of our common shares for total cash consideration of approximately $400,000 for an average price of $3.45 per share. Under the terms of our Credit Agreement, as amended, we are permitted to purchase up to an additional $400,000 of our common stock in each year beginning July 1 and ending June 30 during the term of the Credit Agreement.

We completed the repurchase of all of the shares under our 10b5-1 Plan that we put in place in March 2013. On November 6, 2013, our Board of Directors authorized management to purchase up to $400,000 of our common stock pursuant to a buy back program. In conjunction with the buy back program, our Board of Directors authorized management to enter into a 10b5-1 Plan through which we will be permitted to repurchase up to $200,000 of our common stock. Management is authorized to repurchase up to the remaining $200,000 of common stock under the $400,000 buy back program outside of the 10b5-1 Plan.

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Inflation has not materially impacted the operations of our Company.

Backlog at September 30, 2013 was $12.7 million compared to $17.1 million at September 30, 2012 and $13.6 million at June 30, 2013. The decrease in backlog at September 30, 2013 from September 30, 2012 was attributable to lower backlogs at both our Electronics and Power Groups. This decrease was attributable to several significant orders for legacy hardware which were expected in the current year but have not yet been received to date. The delay of these orders in the current year is attributable to a difficult business environment resulting from general budget uncertainty and funding reductions related to sequestration.

We continue to use the cash generated by our operations to pay down our debt and when appropriate, repurchase our shares in the marketplace. Since January 1, 2012, we have repurchased in excess of 311,000 shares at an average price of $3.57. Our tangible book value at September 30, 2013 was $3.92 per share and we expect our 2014 operating performance to improve when compared to comparable prior year periods. Due to our continued confidence that our legacy business remains intact and the expected positive impact of our cost cutting measures, particularly the consolidation of our Hauppauge and Quakertown operations, we believe we will continue to generate cash from our operations in 2014 which should enable us to further strengthen our balance sheet. On November 6, 2013, our Board of Directors authorized management to purchase up to $400,000 of our common stock pursuant to a buy back program. In conjunction with the buy back program, our Board of Directors authorized management to enter into a 10b5-1 Plan through which we will be permitted to repurchase up to $200,000 of our common stock. Management is authorized to repurchase up to the remaining $200,000 of common stock under the $400,000 buy back program outside of the 10b5-1 Plan.

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We presently do not have any off-balance sheet arrangements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.

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.

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 period ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II- OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

(a) Exhibits

Exhibit Number

Description

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.

101.1*

Financial statements from the Quarterly Report on Form 10-Q of Orbit International Corp. for the quarter ended September 30, 2013, filed on November 14, 2013, formatted in XBRL.

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*Filed with this report.

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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.

 

 

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