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, 2014
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)

Delaware
11-1826363
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer 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 x 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.
Large accelerated filer o
 
Accelerated Filer o
Non-accelerated filer o
 
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 ¨     No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 4,493,718   shares of common stock, par value $.10, as of May 12, 2014 .
 
INDEX

 
 
Page No.
 
 
 
Part I.Financial Information:
 
 
 
 
Item 1. - Financial Statements:
 
 
 
 
 
3-4
 
 
 
 
5
 
 
 
 
6-7
 
 
 
 
8-18
 
 
 
 19-31
 
 
 
31
 
 
 
31
 
 
 
Part II. Other Information:
 
 
 
 
32
 
 
 
32
 
 
 
32
 
 
 
32
 
 
 
32
 
 
 
Item 6. - Exhibits.
32
 
 
 
33
 
 
 
Exhibits
34-39
PART I - FINANCIAL INFORMATION

Item 1.
FINANCIAL STATEMENTS

ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
 
March 31,
   
December 31,
 
ASSETS
 
2014
   
2013
 
 
 
(unaudited)
   
 
Current assets:
 
   
 
Cash and cash equivalents
 
$
1,464,000
   
$
2,562,000
 
Investments in marketable securities
   
239,000
     
243,000
 
Accounts receivable (less allowance for doubtful accounts of $145,000)
   
3,267,000
     
2,981,000
 
Inventories
   
11,783,000
     
11,803,000
 
Other current assets
   
263,000
     
264,000
 
 
               
Total current assets
   
17,016,000
     
17,853,000
 
 
               
Property and equipment, net
   
761,000
     
975,000
 
 
               
Goodwill
   
868,000
     
868,000
 
 
               
Other assets
   
40,000
     
35,000
 
 
               
TOTAL ASSETS
 
$
18,685,000
   
$
19,731,000
 

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,
 
 
 
2014
   
2013
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
(unaudited)
   
 
 
 
   
 
Current liabilities:
 
   
 
 
 
   
 
Note payable - bank
 
$
-
   
$
2,100,000
 
Accounts payable
   
582,000
     
510,000
 
Liability associated with non-renewal of senior officer contract
   
32,000
     
36,000
 
Income taxes payable
   
34,000
     
25,000
 
Accrued expenses
   
1,004,000
     
1,149,000
 
Customer advances
   
298,000
     
17,000
 
 
               
Total current liabilities
   
1,950,000
     
3,837,000
 
 
               
Note payable – bank
   
1,970,000
     
-
 
Liability associated with non-renewal of senior officer contract, net of current portion
   
1,000
     
4,000
 
 
               
Total liabilities
   
3,921,000
     
3,841,000
 
 
               
STOCKHOLDERS’ EQUITY
               
 
               
Common stock - $.10 par value, 10,000,000 shares authorized, 5,232,000 shares issued at 2014 and 2013, respectively, and 4,494,000 and 4,521,000 shares outstanding at 2014 and 2013, respectively
   
523,000
     
523,000
 
Additional paid-in capital
   
22,850,000
     
22,824,000
 
Treasury stock, at cost, 738,000 and 711,000 shares at 2014 and 2013, respectively
   
(2,225,000
)
   
(2,133,000
)
Accumulated other comprehensive loss, net of tax
   
(3,000
)
   
(5,000
)
Accumulated deficit
   
(6,381,000
)
   
(5,319,000
)
 
               
Total stockholders’ equity
   
14,764,000
     
15,890,000
 
 
               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
18,685,000
   
$
19,731,000
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2014
   
2013
 
 
 
   
 
 
 
   
 
Net sales
 
$
5,007,000
   
$
6,447,000
 
 
               
Cost of sales
   
3,507,000
     
3,956,000
 
 
               
Gross profit
   
1,500,000
     
2,491,000
 
 
               
Selling, general and administrative expenses
   
2,543,000
     
2,531,000
 
Interest expense
   
11,000
     
17,000
 
Investment and other income, net
   
(10,000
)
   
(3,000
)
 
               
Loss before income tax provision
   
(1,044,000
)
   
(54,000
)
 
               
Income tax provision
   
18,000
     
26,000
 
 
               
NET LOSS
   
(1,062,000
)
   
(80,000
)
 
               
Change in unrealized gains on marketable securities, net of income tax
   
2,000
     
4,000
 
 
               
Comprehensive loss
 
$
(1,060,000
)
 
$
(76,000
)
 
               
Net loss per common share:
               
 
               
Basic and diluted
 
$
(0.24
)
 
$
(0.02
)
 
               
Weighted average number of common shares outstanding:
               
Basic and diluted
   
4,379,000
     
4,487,000
 

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,
 
 
 
2014
   
2013
 
 
 
   
 
Cash flows from operating activities:
 
   
 
 
 
   
 
Net loss
 
$
(1,062,000
)
 
$
(80,000
)
 
               
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
               
 
               
Share-based compensation expense
   
26,000
     
28,000
 
Depreciation and amortization
   
246,000
     
68,000
 
(Gain) loss on sale of marketable securities
   
(3,000
)
   
2,000
 
Bond (discount) premium amortization
   
(2,000
)
   
1,000
 
 
               
Changes in operating assets and liabilities:
               
 
               
Accounts receivable
   
(286,000
)
   
1,305,000
 
Inventories
   
20,000
     
343,000
 
Costs and estimated earnings in excess of billings on uncompleted contracts
   
-
     
(9,000
)
Other current assets
   
1,000
     
18,000
 
Other assets
   
(5,000
)
   
14,000
 
Accounts payable
   
72,000
     
41,000
 
Accrued expenses
   
(145,000
)
   
(165,000
)
Income taxes payable
   
9,000
     
2,000
 
Customer advances
   
281,000
     
(71,000
)
Liability associated with non-renewal of senior officer contract
   
(7,000
)
   
(106,000
)
 
               
Net cash (used in) provided by operating activities
   
(855,000
)
   
1,391,000
 
 
               
Cash flows from investing activities:
               
 
               
Purchases of property and equipment
   
(32,000
)
   
(128,000
)
Purchase of marketable securities
   
(143,000
)
   
(156,000
)
Sale of marketable securities
   
154,000
     
150,000
 
 
               
Net cash used in investing activities
   
(21,000
)
   
(134,000
)

(continued)
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(continued)

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2014
   
2013
 
Cash flows from financing activities:
 
   
 
 
 
   
 
Purchase of treasury stock
 
$
(92,000
)
 
$
(56,000
)
Repayments of note payable - bank
   
(130,000
)
   
(624,000
)
Repayments of long-term debt
   
-
     
(8,000
)
 
               
Net cash used in financing activities
   
(222,000
)
   
(688,000
)
 
               
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
   
(1,098,000
)
   
569,000
 
 
               
Cash and cash equivalents – Beginning of period
   
2,562,000
     
610,000
 
 
               
CASH AND CASH EQUIVALENTS – End of period
 
$
1,464,000
   
$
1,179,000
 
 
               
Supplemental cash flow information:
               
 
               
Cash paid for interest
 
$
11,000
   
$
18,000
 
 
               
Cash paid for income taxes
 
$
9,000
   
$
24,000
 

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, 2014 are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 2014.

These condensed consolidated statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2013 contained in the Company’s Annual Report on Form 10-K filed on March 31, 2014.

Cash Equivalents

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.

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 accumulated 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 (loss). The cost of securities is based on the specific-identification method. Interest and dividends on such securities are included in investment income.

Allowance for Doubtful Accounts

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.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

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

Inventories

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

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.

Long-Lived Assets

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.

Goodwill

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 sooner 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.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

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

Income Taxes

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. 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 remain open to examination by such taxing authorities in accordance with their respective statutes.

Revenue and Cost Recognition

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: i) there is persuasive evidence that an arrangement with the customer exists, which is generally a customer purchase order, ii) the selling price is fixed and determinable, iii) collection of the customer receivable is deemed probable, and iv) we do not have any continuing 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.
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):

Deferred Rent

The Company’s leases have escalation clauses which are recognized on a straight line basis over the life of the lease. The amounts are recorded in accrued expenses in the accompanying condensed consolidated financial statements.

Comprehensive Income (loss)

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 as a single continuous statement.

(Note 2) - Stock Based Compensation:

The Company had stock-based employee compensation plans, which 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 plans granted options with the exercise price equal to the market value of the Company’s stock on the date of such grant and all options expire ten years after granted. The terms and vesting schedules for stock-based awards vary by type of grant and generally the awards vest based upon time-based conditions. Share-based compensation expense was $26,000 and $28,000 for the three months ended March 31, 2014 and 2013, respectively.

The Company's stock-based employee compensation plans allowed 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. As of March 31, 2014, the Company had unearned compensation of $345,000 associated with all of the Company's restricted stock awards, which will be expensed over approximately the next six years. The unvested portion of restricted stock awards at March 31, 2014 and 2013 were approximately 121,000 and 149,000 shares, respectively.

The following table summarizes the Company's nonvested restricted stock activity for the three months ended March 31, 2014:
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

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

 
 
Number of
Shares
   
Weighted-Average
Grant-Date Fair Value
 
 
 
   
 
Nonvested restricted stock at January 1, 2014
   
139,000
   
$
3.37
 
 
               
Granted
   
-
     
-
 
 
               
Vested
   
(18,000
)
   
3.23
 
 
               
Forfeited
   
-
     
-
 
 
               
Nonvested restricted stock at March 31,
   
121,000
   
$
3.39
 

Stock option activity during the three months ended March 31, 2014, 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, 2014
   
114,000
   
$
3.08
     
1
 
 
                       
Granted
   
-
     
-
     
-
 
 
                       
Forfeited
   
-
     
-
     
-
 
 
                       
Exercised
   
-
     
-
     
-
 
 
                       
Options outstanding, March 31, 2014
   
114,000
   
$
3.08
     
1
 
 
                       
Outstanding exercisable at March 31, 2014
   
114,000
   
$
3.08
     
1
 

At March 31, 2014, the aggregate intrinsic value of options outstanding and exercisable was $78,000, respectively. At the comparable 2013 period, the aggregate intrinsic value of options outstanding and exercisable was $137,000 and $113,000, respectively.

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 stock option activity for the three months ended March 31, 2014:
 
 
 
Number of
Shares
   
Weighted-Average
Grant-Date Fair Value
 
Nonvested stock options at January 1, 2014
   
14,000
   
$
1.02
 
 
               
Granted
   
-
     
-
 
 
               
Vested
   
(14,000
)
 
$
1.02
 
 
               
Forfeited
   
-
     
-
 
 
               
Nonvested stock options at March 31, 2014
   
-
     
-
 

(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.   In April 2014, the Company’s Credit Agreement was further amended whereby (i) the Company is required, for a certain defined period of time, to have cash, marketable securities and excess availability under its borrowing base, in the aggregate, of no less than $3,000,000 (ii) the definition of the Company’s consolidated fixed charge coverage ratio was amended and compliance with such ratio was waived for the quarter ended March 31, 2014 and the Company is not required to comply with this ratio until the year ending December 31, 2014 and each fiscal quarter and year thereafter, and (iii) the Company is required to maintain consolidated tangible net worth of no less than $13,500,000 for the quarters ending June 30, 2014 and September 30, 2014. Payment of interest on the line of credit is due at a rate per annum as follows: either (i) variable at the lender’s prime lending rate (3.25% at March 31, 2014) and/or (ii) 2% over LIBOR for 30, 60 and 90 day LIBOR maturities, at the Company’s sole discretion. The line of credit is collateralized by a first priority security interest in all of the Company’s tangible and intangible assets. Outstanding borrowings under the line of credit were $1,970,000 at March 31, 2014 at an interest rate of 2.16% representing 2% plus the 30 day LIBOR rate.

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 its Credit Agreement at March 31, 2014, except for the fixed charge coverage ratio which was waived by the Company’s bank.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

( NOTE 4 ) – Net Loss Per Common Share :

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

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2014
   
2013
 
Denominator:
 
   
 
Denominator for basic net loss per share - weighted-average common shares
   
4,379,000
     
4,487,000
 
Effect of dilutive securities:
               
Employee and directors stock options
   
-
     
-
 
Unearned portion of restricted stock awards
   
-
     
-
 
Denominator for diluted net loss per share - weighted-average common shares and assumed conversion
   
4,379,000
     
4,487,000
 

The numerator for basic and diluted net loss per share for the three month periods ended March 31, 2014 and 2013 is the net loss for each period.

Stock options to purchase 114,000 and 178,000 shares of common stock were outstanding at March 31, 2014 and 2013, respectively, but were not included in the computation of diluted loss share because inclusion of these options would have been anti-dilutive as the Company incurred net losses during the relevant periods.

Approximately 121,000 and 149,000 shares of common stock were outstanding at March 31, 2014 and 2013, respectively, but were not included in the computation of basic loss per share. These shares were excluded because they represent the unvested 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.

(NOTE 6 ) - Inventories :

Inventories are comprised of the following:

 
 
March 31,
   
December 31,
 
 
 
2014
   
2013
 
 
 
   
 
Raw Materials
 
$
7,080,000
   
$
7,200,000
 
Work-in-process
   
4,374,000
     
4,313,000
 
Finished goods
   
329,000
     
290,000
 
 
               
TOTAL
 
$
11,783,000
   
$
11,803,000
 

ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

(NOTE 7 ) – Marketable Securities :

The following is a summary of the Company’s available-for-sale marketable securities at March 31, 2014 and December 31, 2013:

 
   
   
Unrealized
 
 
Adjusted
   
Fair
   
Holding
 
March 31, 2014
 
Cost
   
Value
   
Loss
 
 
   
   
 
Corporate Bonds
 
$
243,000
   
$
239,000
   
$
(4,000
)
 
                       
December 31, 2013
                       
                         
Corporate Bonds
 
$
250,000
   
$
243,000
   
$
(7,000
)

(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.

The table below presents the balances, as of March 31, 2014 and December 31, 2013, of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy.

March 31, 2014
 
Total
   
Level 1
   
Level 2
   
Level 3
 
 
 
   
   
   
 
Corporate Bonds
 
$
239,000
   
$
239,000
   
$
-
   
$
-
 
 
                               
December 31, 2013
 
Total
   
Level 1
   
Level 2
   
Level 3
 
 
                               
Corporate Bonds
 
$
243,000
   
$
243,000
   
$
-
   
$
-
 

ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

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

The Company’s only asset or liability that is measured at fair value on a recurring basis is marketable securities, based on quoted market prices in active markets and therefore classified as level 1 within the fair value hierarchy. The carrying value of cash and cash equivalents, accounts receivable, and accounts payable 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 Group is comprised of the Orbit Instrument Division and the Company’s Tulip Development Laboratory, Inc. (“TDL”) and Integrated Combat Systems (“ICS”) subsidiaries. The Orbit Instrument Division, TDL subsidiary, and beginning January 1, 2014, our TDL Division which conducts all operations of TDL that were moved to the Company’s Hauppauge, NY facility, 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, cable and harness assemblies, as well as logistics support and documentation. The Company's Power Group, 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, 2014 and 2013:

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2014
   
2013
 
Net sales:
 
   
 
Electronics
 
   
 
Domestic
 
$
2,767,000
   
$
2,837,000
 
Foreign
   
137,000
     
351,000
 
Total Electronics
   
2,904,000
     
3,188,000
 
Power Units
               
Domestic
   
2,053,000
     
3,072,000
 
Foreign
   
50,000
     
200,000
 
Total Power Units
   
2,103,000
     
3,272,000
 
 
               
Intersegment Sales
   
-
     
(13,000
)
 
               
Total
 
$
5,007,000
   
$
6,447,000
 

ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

(NOTE 9) - Business Segments (continued) :

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2014
   
2013
 
 
 
   
 
Income (loss) before income tax provision:
 
   
 
Electronics Group
 
$
(743,000
)
 
$
(467,000
)
Power Group
   
(1,000
)
   
734,000
 
General corporate expenses not allocated
   
(299,000
)
   
(307,000
)
Interest expense
   
(11,000
)
   
(17,000
)
Investment and other income, net
   
10,000
     
3,000
 
 
               
Loss before income tax provision
 
$
(1,044,000
)
 
$
(54,000
)

(NOTE 10) - Goodwill:

As of March 31, 2014 and December 31, 2013, the Company's goodwill consists of the following:

Gross
   
   
   
Net
 
Carrying
   
Accumulated
   
Accumulated
   
Carrying
 
Value
   
Amortization
   
Impairment
   
Value
 
   
   
   
 
$
9,798,000
     
-
   
$
(8,930,000
)
 
$
868,000
 

(NOTE 11) – Income Taxes:

For the three months ended March 31, 2014 and 2013, the Company recorded $18,000 and $26,000, respectively, of state income and minimum tax expense. As of March 31, 2014, the Company has no material uncertain tax positions. At March 31, 2014, the Company continued to record a full valuation allowance on its net deferred tax asset.

(NOTE 12) – Equity:

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 was permitted to purchase 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 buy back program outside of the 10b5-1 Plan. From November 6, 2013 to February 27, 2014, the Company purchased a total of approximately 58,000 shares of common stock for total cash consideration of approximately $200,000 for an average price of $3.46 per share.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

(NOTE 13) – Consolidation:

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 (“TDL Consolidation”). This decision was based on a number of factors, among them, TDL’s expiring lease in October 2014, the uneven revenue stream at TDL, the uncertainty surrounding defense spending related to budget discussions in Washington DC and the Company’s broader focus on cutting costs and promoting operating efficiencies. During the three months ended March 31, 2014, The Company incurred a $728,000 operating loss from its TDL subsidiary which included costs associated with the consolidation of its Quakertown facility including approximately $161,000 of accelerated non-cash amortization and depreciation expense. The Company expects to incur additional costs related to the TDL consolidation during the second quarter of 2014, albeit less than the first quarter.

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

Forward Looking Statements

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

Executive Overview

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

Our backlog at March 31, 2014 was approximately $9,600,000 compared to $10,100,000 at December 31, 2013 and $14,700,000 at March 31, 2013. The decrease in backlog at March 31, 2014 from March 31, 2013 was attributable to lower backlogs at both our Electronics and Power Groups.  There is no seasonality to our business.  Our shipping schedules are generally determined by the shipping schedules outlined in the purchase orders received from our customers.  Both of our operating segments are pursuing a significant number of business opportunities and while we are confident that we will receive many of the orders we are pursuing, there can be no assurance as to the ultimate receipt and timing of these orders.
Our financial condition remains strong as evidenced by our 8.7 to 1 current ratio at March 31, 2014. During November 2012, we entered into a $6,000,000 line of credit facility with a new lender. This line of credit was used to pay off, in full, all of our obligations to our former primary lender and to provide for our general working capital needs. In June 2013, our Credit Agreement was amended whereby (i) the expiration date on our credit facility was extended to July 1, 2015 and (ii) we are permitted to purchase up to $400,000 of our common stock in each year beginning July 1 and ending June 30 during the term of our Credit Agreement. In April 2014, our Credit Agreement was further amended whereby (i) we are required, for  a certain defined period of time, to have cash, marketable securities and excess availability under our borrowing base, in the aggregate, of no less than $3,000,000 (ii) the definition of our consolidated fixed charge coverage ratio was amended and compliance with such ratio was waived for the quarter ended March 31, 2014 and we are not required to comply with this ratio until the year ending December 31, 2014 and each fiscal quarter and year thereafter, and (iii) we are required to maintain consolidated tangible net worth of no less than $13,500,000 for the quarters ending June 30, 2014 and September 30, 2014. We anticipated the operating loss for the current quarter when we negotiated the amendment to our banking agreement with our primary lender. We were in compliance with the financial covenants contained in our Credit Agreement at March 31, 2014, except for the fixed charge coverage ratio which was waived by our bank. On November 6, 2013, our Board of Directors authorized management to purchase up to $400,000 of our common stock pursuant to a buy back program. In conjunction with the buy back program, our Board of Directors authorized management to enter into a 10b5-1 Plan through which we were permitted to repurchase up to $200,000 of our common stock under the $400,000 buy back program. We are authorized to repurchase up to the remaining $200,000 of common stock under the $400,000 buyback program outside of the 10b5-1 Plan. From November 6, 2013 to February 27, 2014, we purchased a total of approximately 58,000 shares of our common stock for total cash consideration of approximately $200,000 for an average price of $3.46 per share. We will most likely not make any further repurchases of our common stock until later in the second quarter of 2014, depending on the timing of receipt of certain material contracts.

Our business is highly dependent on the level of military spending authorized by the U.S. Government. The current administration and Congress are under increasing pressure to reduce the federal budget deficit. This has resulted in a general decline in U.S. defense spending and could cause federal government agencies to reduce their purchases under contracts, exercise their rights to terminate contracts in whole or in part, issue temporary stop work orders or decline to exercise options to renew contracts, all of which could harm our operations and significantly reduce our future revenues. In particular, the Budget Control Act of 2011 commits the U.S. Government to significantly reduce the federal deficit over ten years through caps on discretionary spending and other measures. This had a dramatic effect on the defense budget, cutting $487 billion over a 10 year period. In addition, despite a bipartisan budget agreement in Washington reached in December 2013, there are further reductions to defense spending planned for 2014. A reduction in defense spending as a result of present and future sequestration cuts could have a profound negative impact on the entire defense industry.
At the present time, it appears that consolidation resulting from budget pressure has created a resource issue with respect to the workloads on civilian government employees and the industry in general. Program contract delays have always been a factor on our business and our industry and these resource issues will more than likely exacerbate this problem for our industry. Consequently, significant delays in contract awards could adversely affect planned delivery schedules which could continue to impact our operating performance for 2014. As a result, our business, financial condition and results of operations could be materially adversely affected.

Critical Accounting Policies

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

Inventories

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

Deferred Tax Asset

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

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

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

Share-Based Compensation

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

Revenue and Cost Recognition

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

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

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

Results of Operations

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

We currently operate in two industry segments.  Our Orbit Instrument Division, TDL subsidiary, and beginning January 1, 2014, our TDL Division which conducts all operations of TDL that were moved to our Hauppauge, NY facility, are engaged in the design and manufacture of electronic components and subsystems and our ICS subsidiary performs system integration for Gun Weapons Systems and Fire Control Interface, cable and harness assemblies, as well as logistics support and documentation (which collectively comprise our “Electronics Group”).  Our Behlman subsidiary is engaged in the design and manufacture of commercial power units and COTS power solutions (which comprises our “Power Group”).
Consolidated net sales for the three month period ended March 31, 2014 decreased by 22.3% to $5,007,000 from $6,447,000 for the three month period ended March 31, 2013. The decrease was principally due to decreases of 8.9% and 35.7% from both our Electronics and Power Groups, respectively. The decrease in sales from our Electronics Group was primarily attributable to a decrease in sales from our Orbit Instrument Division and our TDL subsidiary that was partially offset by an increase in sales at our ICS subsidiary. The decrease in sales at our Orbit Instrument Division and TDL subsidiary was primarily due to a decrease in shipments pursuant to customer delivery schedules resulting from lower bookings in prior periods. The increase in sales at our ICS subsidiary was primarily attributable to the shipment of Signal Data Converter units during the current year period. The decrease in sales at our Power Group was principally due to a decrease in shipments at both our commercial and COTS divisions primarily due to a decrease in customer delivery schedules relating to lower bookings in prior periods.

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

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

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

Investment and other income for the three month period ended March 31, 2014 increased to $10,000 from $3,000 for the three month period ended March 31, 2013 principally due to $3,000 gain on the sale of a corporate bond during the current year period and also due to a $2,000 loss on the sale of a corporate bond during the prior year period.
Net loss before income tax provision was $1,044,000 for the three months ended March 31, 2014 compared to a net loss before income tax provision of $54,000 for the three months ended March 31, 2013. The increase in net loss was principally due to lower sales and gross margin, the operating loss at our TDL subsidiary and slightly higher selling, general and administrative expenses which was partially offset by lower interest expense and higher investment and other income.

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

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

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

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

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

Material Change in Financial Condition

Working capital increased to $15,066,000 at March 31, 2014 compared to $14,016,000 at December 31, 2013.  The ratio of current assets to current liabilities was 8.7 to 1 at March 31, 2014 compared to 4.7 to 1 at December 31, 2013. The increase in working capital was primarily attributable to the reclassification of our line of credit as a non-current liability at March 31, 2014 which was partially offset by the net loss for the current period and by the purchase of treasury stock and property and equipment.
Net cash used in operating activities for the three month period ended March 31, 2014 was $855,000, which was primarily attributable to the net loss for the period, an increase in accounts receivable and a decrease in accrued expenses and despite the increase in customer advances and accounts payable and the non-cash depreciation and stock based compensation. Net cash provided by operating activities for the three month period ended March 31, 2013 was $1,391,000, primarily attributable to a decrease in accounts receivable and inventory, an increase in accounts payable and the non-cash depreciation and stock based compensation that was partially offset by the net loss for the period, a decrease in customer advances, accrued expenses and the liability associated with the non-renewal of a senior officer contract.

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

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

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

Payment of interest on the line of credit is due at a rate per annum as follows: either (i) variable at the lender’s prime lending rate (3.25% at March 31, 2014) and/or (ii) 2% over LIBOR for 30, 60, or 90 day LIBOR maturities, at our sole discretion. The line of credit is collateralized by a first priority security interest in all of our tangible and intangible assets. Outstanding borrowings under the line of credit were $1,970,000 at March 31, 2014 at an interest rate of 2.16% representing 2% plus the 30 day LIBOR rate.
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 anticipated the operating loss for the current quarter when we negotiated the amendment to our banking agreement with our primary lender. Consequently, we were in compliance with the financial covenants contained in our Credit Agreement at March 31, 2014, except for the fixed charge coverage ratio which was waived by our bank. On November 6, 2013, our Board of Directors authorized management to purchase up to $400,000 of our common stock pursuant to a buy back program. In conjunction with the buy back program, our Board of Directors authorized management to enter into a 10b5-1 Plan through which we were permitted to repurchase up to $200,000 of our common stock under the $400,000 buy back program. We are authorized to repurchase up to the remaining $200,000 of common stock under the $400,000 buyback program outside of the 10b5-1 Plan. From November 6, 2013 to February 27, 2014, we purchased a total of approximately 58,000 shares of our common stock for total cash consideration of approximately $200,000 for an average price of $3.46 per share. We will most likely not make any further repurchases of our common stock until later in the second quarter of 2014, depending on the timing of receipt of certain material contracts.

Our existing capital resources, including our bank credit facility and our expected cash flow from operations for the remainder of 2014, are expected to be adequate to cover our cash requirements for the foreseeable future.

Inflation has not materially impacted the operations of our Company.

Certain Material Trends

Backlog at March 31, 2014 was $9.6 million compared to $10.1 million at December 31, 2013 and $14.7 million at March 31, 2013.  The decrease in backlog at March 31, 2014 from March 31, 2013 was attributable to lower backlogs at both our Electronics and Power Groups. The decrease in the backlog at the Electronics Group was primarily attributable to lower backlogs at each of our operating units.  The decrease in backlog at March 31, 2014 from December 31, 2013 was due principally to a lower backlog at our ICS subsidiary due to the shipment of its Signal Data Converter during the quarter. Backlogs from the remaining operating units remained approximately the same. The general decrease in backlog for the respective periods is primarily attributable to a difficult business environment resulting from general budget uncertainty and defense budget reductions related to the Budget Control Act of 2011 and sequestration.

Bookings at our Orbit Instrument Division exceeded $8,500,000 in 2013 which was lower than the prior year due to certain orders for legacy hardware that has been delayed. Our FAA keyboard order was substantially less than the amount initially indicated by our customer and this shortfall was attributable to funding issues caused by sequestration.  However, the effort to upgrade air traffic control towers should continue for several years and we expect the shortfall from this current year to be layered into future awards. Based on information from the customer, we expect a new order in the third quarter of 2014 although timing is an uncertainty. There has been a significant amount of bid and proposal activity for our Orbit Instrument Division on both legacy products and new opportunities. Three of these new opportunities are now in the qualification stage. In addition, information from our customers related to all legacy opportunities is that the timing of the receipt of these awards and their expected value is uncertain but the business remains intact. Despite a reduction in sales during the current quarter, gross margins at our Orbit Instrument Division only slightly decreased from the prior year principally due to product mix and cost containment.

In April 2012, ICS received a follow-on base contract award for its SDC for approximately $5,758,000. ICS received initial orders of $1,597,000 against this contract and in September 2013, received its first production order valued at approximately $626,000 that was shipped in the first quarter of 2014.  The remainder of this contact is expected to be awarded over a four year period that could total approximately $3,000,000. ICS is currently working on other business opportunities and took certain cost cutting initiatives starting in 2012 including a reduction in personnel beginning in November 2012 and the consolidation of its two operating facilities into one during 2013.  ICS’s lease expired on March 31, 2014 and moved its operation from an underutilized 23,000 square foot facility to 4,500 square feet that will create additional savings.

TDL’s operating lease is due to expire in October 2014.  Due to the uneven revenue stream at TDL, its expiring lease, the uncertainty surrounding defense spending related to budget discussions in Washington DC and our focus on cost containment and increasing operating efficiencies, we decided to consolidate our operations in Quakertown, PA with our operation in Hauppauge, NY.  We incurred a considerable amount of costs during the current first quarter as a result of this consolidation.  We kept a majority of our workforce in Quakertown through the end of March 2014 to complete the manufacturing of certain WIP inventory and to assist in the transfer of assets to our Hauppauge facility. Certain other employees were guaranteed employment through April 30, 2014 in order to satisfy outstanding engineering tasks and to complete the consolidation. Although most of the costs incurred at TDL were associated with the consolidation of its operation into our Hauppauge facility, these costs were not considered incremental in nature and therefore were included in regular operating costs at March 31, 2014 and until the facility is closed in April 2014.  Beginning in June 2014, we do not expect to incur any additional costs associated with our Quakertown facility with the exception of some minor occupancy related costs.

All new orders received by TDL after December 31, 2013 are being manufactured in our Hauppauge facility.  We expect to realize annual savings of approximately $2,000,000 due to the consolidation but will not begin to fully realize these savings until the second half of 2014. Following the consolidation, we believe our Hauppauge facility will have sufficient capacity to support future growth without any significant facility investment.

For the year ended December 31, 2013, bookings and year-end backlog for our Power Group, particularly from our COTS division which relies on military spending, decreased from the prior year. Bookings for the three months ended March 31, 2014 are also down from the comparable prior year period. Due to the decrease in bookings, revenue and profitability for the first quarter of 2014 was adversely affected. The reduced bookings during 2013 have carried over into the first quarter of 2014 primarily due to the same macro-economic environment facing our Electronics Group.  Consequently, we expect our Power Group’s 2014 revenue and profitability to be down from 2013 levels.

Our Company has historically been dependent on a strong defense budget as a source of its revenues.  Over 90% of our revenues are related to programs procured by the Department of Defense.  The challenges now facing defense contractors are two-fold.  The Budget Control Act of 2011, requiring the Pentagon to reduce spending by $487 billion over a ten year period and the adverse consequences of the budget impasse from earlier in 2013 that led to sequestration cuts.  These cuts have had a profound effect on the budget for the Department of Defense and their implementation has created great uncertainty for our Company and the defense industry as a whole. In December 2013, a new budget plan was agreed to in Washington which did provide some relief from sequestration; however, this still has left the defense budget well below historical levels.

Program contract delays, such as what we are experiencing now, particularly at our Orbit Instrument Division, TDL subsidiary and the COTS division of our Power Group, have always been a factor in our business. However, we are experiencing greater time delays between contract proposal and actual award. Continued delays in contract awards have adversely impacted our delivery schedules and compromised our operating leverage, which adversely impacted our results for 2013 and the first quarter of 2014. Nevertheless, it appears that aside from the timing of the receipt of certain pending orders and the value of such orders, all of our legacy business with our customers remains intact.

Aside from our legacy business, both our Electronics Group and Power Group have made great advancement in providing a number of new VME and VPX-related products to the marketplace.  Our Power Group has two 6U VPX power supplies in the marketplace and recently introduced a third 6U power supply.  A new smaller 3U version of the VPX power supply will be introduced in the second quarter of 2014.  Our Electronics Group will be introducing its own new VPX technology including backplanes and other related products which can be found on its newly launched web portal.

As previously mentioned, reduced military spending, as a result of the Budget Control Act of 2011 and sequestration has had a profound effect on our annual bookings, revenues and backlog.  However, we continue to believe that the need for refurbishment and modernization, as opposed to the building of new equipment, could become a defense spending priority and our legacy business appears to be intact although there is no guarantee that the quantity of units that will be ordered for these legacy products will be comparable to historical levels.  Therefore, we believe there could be opportunities for us as military efforts are curtailed and defense spending priorities are refocused.  However, future business for our Company resulting from these opportunities will also be dependent upon the make/buy decisions made by our prime contractors who have also been significantly affected by cutbacks in defense spending. Like many other companies in the defense sector, we are attempting to reduce the impact of reduced revenues by reducing costs.

Although our Electronics Group and the 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 several new opportunities that are in the prototype, pre-production stage or qualification stage. These opportunities generally move to a production stage at a later date, although the timing 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 number 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.

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. Again, due to sequestration, the merger and acquisition process has become more difficult. Because of the uncertainty surrounding the DoD budget, there is elevated risk to revenue and profitability projections from potential targets. Currently, we are engaged in discussions, albeit preliminary, related to certain acquisition targets. However, there is no assurance that any future acquisition will be accomplished.  However, we believe our strong balance sheet will allow us to take advantage of opportunities in the marketplace as other weaker companies struggle with current industry conditions.

Although we have had several positive discussions with investment bankers looking to support our M&A initiatives, there can be no assurance that we will obtain the necessary financing to complete additional acquisitions. Moreover, even if we are able to obtain financing, there can be no assurance that we will have sufficient income from operations from any acquired companies to satisfy scheduled debt payments, in which case, we will be required to make the payments out of our existing operations.

We are in compliance with the financial covenants contained in our Credit Agreement at March 31, 2014, except for the fixed charge coverage ratio which was waived by our bank . We anticipated the operating loss for the current quarter when we recently negotiated the amendment to our banking agreement with our primary lender.

We continue to pay down our debt and when appropriate, repurchase our shares in the marketplace.  Since January 1, 2012, we have repurchased in excess of 368,000 shares at an average price of $3.55. On November 6, 2013, our Board of Directors authorized management to purchase up to $400,000 of our common stock pursuant to a buy back program. In conjunction with the buy back program, our Board of Directors authorized management to enter into a 10b5-1 Plan through which we were permitted to repurchase up to $200,000 of our common stock. Purchases under this 10b5-1 Plan were completed in the first quarter of 2014. 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.  However, we will most likely not make any further purchases under our current program until later in the second quarter of 2014, depending on the receipt of certain material contracts.
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, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II- OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS
None.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
 
Issuer's Purchase of Equity Securities:
 
 
(a)
 
(b)
(c)
(d)
Period
Total Number of Shares(or Units) Purchased
Average Price Paid per Share(or Unit)
Total Number of Shares(or Units) Purchased as part of Publicly Announced Plans or Programs
Maximum Number(or Approximate Dollar Value) of Shares(or Units) that May Yet Be Purchased Under the Plans or Programs
January  1- 31, 2014
6,900
$3.49
6,900
$269,000
February  1-28, 2014
19,680
$3.49
19,680
$200,000
March 1-31, 2014
-
-
-
-
Total
26,580
$3.49
26,580
$200,000
 
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.

Item 4. MINE SAFETY DISCLOSURE
Not applicable.

Item 5. OTHER INFORMATION
None.

Item 6. EXHIBITS

(a) Exhibits

Exhibit Number
Description
Certification of the Chief Executive Officer. Required by Rule 13a-14 (a) or Rule 15d-14(a).
Certification of the Chief Financial Officer. Required by Rule 13a-14 (a) or Rule 15d-14(a).
Certification of the Chief Executive Officer. Required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
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 March 31, 2014, filed on May 15, 2014, formatted in XBRL.
 
*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 15, 2014
/s/ Mitchell Binder
 
 
Mitchell Binder, President,
 
 
Chief Executive Officer and
 
 
Director (Principal Executive Officer)
 
 
 
Dated:
May 15, 2014
/s/   David Goldman
 
 
David Goldman, Chief
 
 
Financial Officer (Principal Accounting Officer)
 
 
33
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