-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LZR2Klw+JBd15e7DJfRcbpDQ1qryB8f+1T47JDgHCEN7Ya7nXiUsKLungzviVEy6 n1e0JsOwXgdOBa3pT5qOhw== 0000074818-08-000027.txt : 20081119 0000074818-08-000027.hdr.sgml : 20081119 20081119150137 ACCESSION NUMBER: 0000074818-08-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20081119 DATE AS OF CHANGE: 20081119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORBIT INTERNATIONAL CORP CENTRAL INDEX KEY: 0000074818 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 111826363 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-03936 FILM NUMBER: 081200760 BUSINESS ADDRESS: STREET 1: 80 CABOT COURT CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 7136675601 MAIL ADDRESS: STREET 1: 80 CABOT COURT CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: ORBIT INSTRUMENT CORP DATE OF NAME CHANGE: 19911015 10-Q 1 form10-q.txt FORM 10-Q 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 September 30, 2008 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NUMBER 0-3936 ORBIT INTERNATIONAL CORP. (Exact name of registrant as specified in its charter) DELAWARE 11-1826363 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 80 CABOT COURT, HAUPPAUGE, NEW YORK 11788 (Address of principal executive offices) (Zip Code) 631-435-8300 (Registrant's telephone number, including area code) N/A (Former name, former address and formal fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ - Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. _ Large accelerated filer _ Accelerated Filer _ Non-accelerated filer X Smaller reporting company - Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act): Yes___ No X -- The number of shares outstanding of registrant's Common Stock, par value $.10, as of November 11, 2008 was 4,684,034. ---------
INDEX Page No. ----------- Part I. Financial Information: Item 1 - Financial Statements: Condensed Consolidated Balance Sheet - September 30, 2008(unaudited) and December 31, 2007 3-4 Condensed Consolidated Statement of Operations for the Three and Nine Months Ended September 30, 2008 and 2007 (unaudited) 5 Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (unaudited) 6 Notes to Condensed Consolidated Financial Statements (unaudited) 7-16 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 17-28 Item 3. - Quantitative and Qualitative Disclosures About Market Risk 29 Item 4T. - Controls and Procedures 29 Part II. Other Information: Item 2 - Changes in Securities and Use of Proceeds 30 Item 6 - Exhibits 30 Signatures 31 Exhibits 32-37
PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET September 30, December 31, 2008 2007 ---------- -------- (unaudited) ASSETS - ------- Current assets: Cash and cash equivalents $ 1,551,000 $ 3,576,000 Investments in marketable securities 2,871,000 3,997,000 Accounts receivable (less allowance for doubtful accounts of $145,000) 5,415,000 4,561,000 Inventories 11,690,000 10,453,000 Costs and estimated earnings in excess of billings on uncompleted contracts 1,260,000 136,000 Deferred tax asset 800,000 1,025,000 Other current assets 125,000 331,000 ----------- ----------- Total current assets 23,712,000 24,079,000 Property and equipment, net 660,000 691,000 Goodwill 9,773,000 9,634,000 Intangible assets, net 2,495,000 2,969,000 Deferred tax asset 2,115,000 1,678,000 Other assets 634,000 634,000 ---------- ----------- TOTAL ASSETS $39,389,000 $39,685,000 =========== =========== See accompanying notes.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (continued) September 30, December 31, 2008 2007 --------------- ------------ (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------- Current liabilities: Current portion of long-term obligations $ 1,777,000 $ 1,777,000 Note payable - bank 993,000 699,000 Accounts payable 2,086,000 1,384,000 Income taxes payable 1,000 162,000 Accrued expenses 1,310,000 1,395,000 Customer advances 511,000 163,000 Deferred income 143,000 332,000 ------------ ---------- Total current liabilities 6,821,000 5,912,000 Deferred tax liability 773,000 595,000 Deferred income 278,000 342,000 Long-term obligations, net of current maturities 5,473,000 6,753,000 ---------- ---------- Total liabilities 13,345,000 13,602,000 ---------- ---------- STOCKHOLDERS' EQUITY Common stock - $.10 par value, 10,000,000 shares authorized, 4,772,000 and 4,724,000 shares issued at 2008 and 2007, respectively, and 4,746,000 and 4,724,000 shares outstanding at 2008 and 2007, respectively 477,000 472,000 Additional paid-in capital 20,952,000 20,766,000 Treasury Stock, at cost, 26,000 shares (109,000) - Accumulated other comprehensive loss, net of tax (74,000) (33,000) Retained earnings 4,798,000 4,878,000 ------------ ----------- Total stockholders' equity 26,044,000 26,083,000 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,389,000 $39,685,000 ============ =========== See accompanying notes.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 ----- ----- ------ ------ Net sales $6,951,000 $6,312,000 19,434,000 $18,686,000 Cost of sales 4,212,000 3,682,000 11,730,000 10,595,000 --------- ---------- ---------- ---------- Gross profit 2,739,000 2,630,000 7,704,000 8,091,000 ---------- ---------- ---------- ---------- Selling, general and administrative expenses 2,508,000 2,117,000 7,757,000 6,576,000 Interest expense 79,000 76,000 261,000 258,000 Investment and other income, net ( 71,000) ( 116,000) (249,000) (371,000) ---------- ----------- --------- ----------- Income (loss) before provision for income taxes 223,000 553,000 ( 65,000) 1,628,000 Provision for income taxes 8,000 - 15,000 25,000 -------- --------- --------- --------- NET INCOME (LOSS) $215,000 $553,000 $( 80,000) $1,603,000 ======== ======== ========= ========= Net income (loss) per common share: Basic $ .05 $ .13 $ (.02) $.37 Diluted $ .05 $ .12 $ (.02) $.34 See accompanying notes.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) Nine Months Ended September 30, 2008 2007 ------ ----- - - Cash flows from operating activities: Net (loss) income $(80,000) $1,603,000 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Share-based compensation expense 171,000 134,000 Amortization of intangible assets 474,000 326,000 Depreciation and amortization 149,000 93,000 Loss (gain) on sale of marketable securities 8,000 (15,000) Bond premium amortization 11,000 11,000 Bad Debt - 6,000 Deferred income (253,000) (64,000) Changes in operating assets and liabilities: Accounts receivable, net (854,000) (144,000) Inventories (1,237,000) (1,164,000) Costs and estimated earnings in excess of billings on uncompleted contracts (1,124,000) - Due from ICS sellers 103,000 - Other current assets 61,000 (31,000) Other assets - (16,000) Accounts payable 702,000 99,000 Accrued expenses (85,000) (39,000) Income taxes payable (161,000) - Customer advances 348,000 (722,000) --------- ---------- Net cash (used in) provided by operating activities (1,767,000) 77,000 Cash flows from investing activities: Additional ICS acquisition costs (97,000) - Purchases of property and equipment (118,000) (125,000) Sale of marketable securities 2,076,000 1,073,000 Purchase of marketable securities (1,033,000) (1,269,000) ---------- --------- Net cash provided by (used in) investing activities 828,000 (321,000) Cash flows from financing activities: Purchase of treasury stock (109,000) - Proceeds from issuance of long-term debt 1,520,000 1,050,000 Stock option exercises 9,000 29,000 Repayments of long-term debt (2,506,000) (1,964,000) ----------- ------------ Net cash used in financing activities (1,086,000) (885,000) ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (2,025,000) (1,129,000) ------------ ----------- Cash and cash equivalents - January 1 3,576,000 3,935,000 ---------- ---------- CASH AND CASH EQUIVALENTS - September 30 $1,551,000 $2,806,000 ========== ========== Supplemental cash flow information: Cash paid for interest $ 265,000 $291,000 ========== ========== See accompanying notes.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (NOTE 1) - Basis of Presentation and Summary of Significant Accounting Policies: ------ --------------------------------------------------------------------- The financial information herein is unaudited. However, in the opinion of management, such information reflects all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods being reported. Additionally, it should be noted that the accompanying consolidated financial statements do not purport to contain complete disclosures required for annual financial statements in conformity with generally accepted accounting principles. The results of operations for the nine and three months ended September 30, 2008 are not necessarily indicative of the results of operations for the full fiscal year ending December 31, 2008. These condensed consolidated statements should be read in conjunction with the Company's consolidated financial statements for the fiscal year ended December 31, 2007 contained in the Company's Form 10-K. The Company recognizes a substantial portion of its revenue upon delivery of product, however, 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. Assets related to these contracts are included in current assets as they will be liquidated in the normal course of contract completion, although this may require more than one year. At September 30, 2008, the Company has various stock-based employee compensation plans. These plans provide for the granting of nonqualified and incentive stock options as well as restricted stock awards to officers, key employees and nonemployee directors. The terms and vesting schedules of stock-based awards vary by type of grant and generally the awards vest based upon time-based conditions. Share-based compensation expense was $171,000 and $77,000 for the nine and three months ended September 30, 2008, respectively, and was $134,000 and $46,000 for the comparable 2007 periods. The Company estimated the fair value of its stock option awards on the date of grant using the Black-Scholes valuation model. The assumptions used for stock grants issued during the following periods were as follows: (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) Nine Months Ended September 30, 2008 2007 ---- ---- Expected Volatility 49.16% to 49.62% 50.05% to 51.19% Risk-free interest rate 3.70% to 4.1 5.00% Expected life of options (in years) 3.6 3.6 Dividend Yield - - Expected volatility assumptions utilized for 2008 and 2007 were based on the volatility of the Company's stock price for 3.6 years prior to grant date. The risk-free rate is derived from the 10 year U.S. treasury yield on grant date. Expected life for 2008 and 2007 was based on prior history of option activity. Dividend yield is based on prior history of cash dividends declared. The Company's stock-based employee compensation plans allow for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned stock-based compensation related to restricted stock granted is being amortized to compensation expense over the vesting period, which ranges from three 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 ending September 30, 2008, 40,000 shares of restricted stock were awarded to senior management under the 2006 Employee Stock Incentive Plan. As of September 30, 2008, the Company had unearned compensation of $1,113,000 associated with all of the Company's restricted stock awards. Stock option activity during the nine months ended September 30, 2008, 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, 2008 599,000 $3.15 4 Granted 9,000 7.51 10 Forfeited (4,000) 9.21 - Exercised (8,000) 1.26 - ------- ---- ---- Options outstanding, September 30, 2008 596,000 $3.19 3 ======= ===== = Outstanding exercisable at September 30, 2008 587,000 $3.13 3 ======= ===== = At September 30, 2008 the aggregate intrinsic value of options outstanding and exercisable was $825,000. (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) The following table summarizes the Company's nonvested stock option activity for the nine months ended September 30, 2008: Number of Weighted-Average Shares Grant-Date Fair Value ------ ----------------------- Nonvested stock options at January 1, 2008 9,000 $3.82 Granted 9,000 3.06 Vested (8,000) 3.81 Forfeited (1,000) 3.92 ------- ---- Nonvested stock options at September 30, 2008 9,000 $3.06 ===== ===== At September 30, 2008, there was approximately $17,000 of unearned compensation cost related to the above non-vested stock options. The cost is expected to be recognized over the next nine months. 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. The Company had $1,375,000 invested in Auction Rate Securities at September 30, 2008, which are included in Investments in Marketable Securities on the Company's Balance Sheet. Failed auctions have created liquidity issues for investors. However, the Company has redeemed all of its auction rate securities at par subsequent to September 30, 2008. (Note 2) - Acquisition: - --------- ------------ On December 19, 2007, the Company acquired all of the issued and outstanding stock of Integrated Consulting Services, Inc. d/b/a Integrated Combat Systems, Inc. ("ICS"). The reasons for the acquisition were the expansion of both customer and product bases, cross-marketing opportunities and the accretion to earnings. The acquisition was effective December 31, 2007. The total transaction value was approximately $6,695,000 consisting of $5,400,000 in cash, of which $4,500,000 was funded by a term loan, approximately 120,000 shares of Orbit stock valued at approximately $1,000,000 (based on the volume weighted average closing price of the Company's common stock for the twenty consecutive trading days ending December 14, 2007), and approximately $295,000 of direct costs related to the purchase of ICS. Additionally, there is a contingent earn out of $1,000,000 payable over the next three years based on ICS's ability to attain certain revenue levels over the three years. The ICS acquisition was accounted for as a purchase, and accordingly, the assets purchased and liabilities assumed are included in the consolidated balance sheet as of December 31, 2007. The results of operations for the nine and three months ended September 30, 2008 include the operations of ICS for the entire period since the acquisition was completed effective December 31, 2007. (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) In accordance with SFAS No. 141, Business Combinations, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on estimates and assumptions made by management. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized but will be reviewed at least annually for impairment. Purchased intangible assets with finite lives will be amortized on a straight-line basis over their respective estimated useful lives. Any additional goodwill relating to the $1,000,000 contingent earn out based on ICS's ability to attain certain revenue levels over the next three years will be recorded, if necessary, in future years. The total purchase price has been allocated as follows: Tangible assets and liabilities: Cash $1,942,000 Accounts receivable 579,000 Inventory 352,000 Other current assets 273,000 Property and equipment 260,000 Other long term assets 11,000 Accounts payable (111,000) Note payable (1,997,000) Accrued expenses (73,000) Income tax payable (132,000) Deferred income (247,000) ----------- Total net tangible assets and liabilities 857,000 Amortizable intangible assets: Customer relationships 2,000,000 Non-compete agreement 100,000 Contract backlog 100,000 ---------- Total amortizable intangible assets 2,200,000 Goodwill 3,638,000 --------- Total purchase price $6,695,000 ========== The following summarized pro forma financial information presents the combined results of the Company as if the ICS acquisition had occurred as of January 1, 2007. Adjustments, which reflect amortization of purchased intangible assets, interest on debt to finance the acquisition, elimination of intercompany sales and purchases, recalculation of bonuses due to adjustments to net income, adjustment to income taxes payable, and reversal of interest expense incurred by ICS have been made to the combined results of operations for the nine and three months ended September 30, 2007. The unaudited summarized pro forma financial information is presented for informational purposes only and may not be indicative of what the actual results of operations would have been had the acquisition occurred at the beginning of the periods presented nor does it purport to represent the results of operations for future periods. (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) Nine Months Ended Three Months Ended September 30,2007 September 30, 2007 (Pro forma and Unaudited) (Pro forma and Unaudited) ------------------------ ------------------------- Net Sales $22,998,000 $7,232,000 - ---------- =========== ========== Net Income 2,248,000 244,000 - ----------- ========= ======= Basic earnings per share 0.51 0.05 - --------------------------- ==== ==== Diluted earnings per share 0.47 0.05 - ----------------------------- ==== ==== During the nine months ending September 30, 2008, one of the ICS sellers terminated his employment agreement by resigning from the Company, although all restrictive covenants remain in place. The former employee forfeited his right to receive any contingent earn-out payments and all registration rights. The Company incurred no additional costs associated with the resignation other than legal fees. The former employee's responsibilities were assumed by existing personnel. (NOTE 3) - Financing Arrangements: - -------- ----------------------- In December 2007, the Company entered into an amended $3,000,000 credit facility with a commercial lender secured by accounts receivable, inventory and property and equipment ("Line of Credit"). The agreement will continue from year to year thereafter unless sooner terminated for an event of default including non-compliance with financial covenants. Loans under the facility will bear interest equal to a certain percentage depending on a matrix related to a certain financial covenant, as defined, plus the one-month London Inter-bank offer rate (LIBOR) (3.93% at September 30, 2008). Outstanding borrowings under the facility were $993,000 at September 30, 2008. In April 2005, the Company entered into a five-year $5,000,000 Term Loan Agreement with the same aforementioned lender to finance the acquisition of Tulip ("The Tulip Term Loan"). The Term Loan, which requires compliance with certain financial covenants, has fifty-nine (59) monthly principal payments of approximately $60,000 and a sixtieth (60th) payment of $1,488,000 in 2010. In December 2007, the interest rate was amended and the loan currently bears interest equal to an applicable margin based on a matrix related to a certain financial covenant, as defined, plus the one-month LIBOR. The loan's unpaid balance at September 30, 2008 was approximately $2,619,000. In April 2005, the Company entered into a five year $2,000,000 Promissory Note with the selling shareholders of Tulip at an interest rate of prime (5.00% at September 30, 2008) plus 2.00% ("Tulip Shareholder Note"). Principal payments of $100,000 were made on a quarterly basis along with accrued interest. In June 2007, the Company refinanced the balance due on the Promissory Note of $1,050,000 with its primary commercial lender. Under the terms of the new loan, monthly payments of $35,000 will be made over a thirty-month period, which commenced August 2007, along with accrued interest at a rate of 1.15% plus the one-month LIBOR. The term loan requires compliance with certain financial covenants. In December 2007 the interest rate was amended to equal an applicable margin based on a matrix related to a certain financial covenant, as defined, plus the one-month LIBOR. The loan's unpaid balance at September 30, 2008 was approximately $560,000. (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) In December 2007, the Company entered into a five year $4,500,000 Term Loan Agreement with the same aforementioned lender to finance the acquisition of ICS("The ICS Term Loan"). The term loan, which requires compliance with certain financial covenant ratios, has fifty-nine (59) monthly payments of approximately $54,000 and a sixtieth (60th) payment of approximately $1,339,000. The loan bears interest equal to the one-month LIBOR rate, plus an applicable margin based on a matrix related to a certain financial covenant, as defined. The loan's unpaid balance at September 30, 2008 was approximately $4,071,000. The Company was not in compliance with two of its financial covenant ratios as of September 30, 2008. In November 2008, the Company's primary lender waived the covenant default of two of its financial ratios at September 30, 2008 and the Company renegotiated the financial covenant ratios for the quarterly reporting periods December 31, 2008 and March 31, 2009. Beginning June 30, 2009 the covenants will revert back to their original ratios with a modification to a certain financial ratio covenant definition. The lender instituted an unused line fee of .25% per annum, as the cost to the Company for the waiver and amendment to the loan agreements. In connection therewith, the interest rate on the Tulip Term Loan and Tulip Shareholder Note, increased to the sum of 2.50% plus the one month LIBOR and the interest rate on the ICS Term Loan and Line of Credit was increased to the sum of 2.25% plus the one month LIBOR. (NOTE 4) - Income (Loss) Per Share: ------ ----------------------- The following table sets forth the computation of basic and diluted weighted average common shares outstanding: Nine Months Ended Three Months Ended September 30, September 30, 2008 2007 2008 2007 ---- ---- ---- ---- Denominator: Denominator for basic Income (loss) per share - weighted-average common shares 4,529,000 4,312,000 4,547,000 4,319,000 Effect of dilutive securities: Employee and directors stock options - 228,000 158,000 229,000 Unearned portion of restricted stock awards - 115,000 1,000 116,000 --------- ------- ------- -------- Denominator for diluted Income (loss) per share - weighted-average common shares and assumed conversion 4,529,000 4,655,000 4,706,000 4,664,000 ========= ========= ========= ========= The numerator for basic and diluted income (loss) per share for the nine and three month periods ended September 30, 2008 and 2007 is net income (loss). During the nine months ended September 30, 2008, the Company had a net loss and therefore did not include 231,000 incremental common shares and options in its calculation of diluted net loss per common share since an inclusion of such securities would be anti-dilutive. (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) Options to purchase 123,000 shares of common stock were outstanding during the three months ended September 30, 2008 and 15,000 shares were outstanding during the three and nine months ended September 30, 2007, but were not included in the computation of diluted earnings per share. The inclusion of these options would have been anti-dilutive due to the options' exercise prices being greater than the average market price of the Company's common shares during the respective periods. Approximately 209,000 shares of common stock were outstanding during the nine and three months ended September 30, 2008, but were not included in the computation of basic earnings per share. These shares were excluded because they represent the unvested portion of restricted stock awards. (NOTE 5) - Cost of Sales: ------- --------------- For interim periods, the Company estimates its inventory and related gross profit. (NOTE 6) - Inventories: - ------- ----------- Inventories are comprised of the following: September 30, December 31, 2008 2007 ------------ ------------ Raw Materials $ 6,874,000 $ 6,146,000 Work-in-process 4,068,000 3,639,000 Finished goods 748,000 668,000 ----------- ----------- TOTAL $11,690,000 $10,453,000 ========== =========== (NOTE 7) - Comprehensive Income(Loss): - ------- -------------------------- For the nine and three months ended September 30, 2008, total comprehensive (loss) income, net of tax was $(121,000) and $165,000, respectively. For the comparable periods during 2007, total comprehensive income was $1,547,000 and $531,000, respectively. Comprehensive income (loss) consists of net income (loss) and unrealized gains and losses on marketable securities. (NOTE 8) - Business Segments: - -------- ----------------- The Company operates through two business segments. The Electronics Segment is comprised of the Orbit Instrument Division and Tulip and ICS Subsidiaries. The Orbit Instrument Division and Tulip 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 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 results of operations for the nine and three months ended September 30, 2008 include the operations of ICS for the entire period since the acquisition was completed effective December 31, 2007. (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) 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, 2008 and 2007: Nine Months Ended Three Months Ended September 30, September 30, 2008 2007 2008 2007 ---- ---- ---- ---- Net sales: Electronics Domestic $10,859,000 $11,639,000 $ 3,846,000 $ 3,721,000 Foreign 1,332,000 848,000 553,000 313,000 ----------- ----------- ----------- ---------- Total Electronics 12,191,000 12,487,000 4,399,000 4,034,000 Power Units Domestic 6,341,000 5,427,000 2,570,000 1,992,000 Foreign 1,188,000 772,000 238,000 286,000 ----------- ---------- --------- ---------- Total Power Units 7,529,000 6,199,000 2,808,000 2,278,000 Intersegment sales (286,000) - (256,000) - --------- -------- ------------ ---------- Total $19,434,000 $18,686,000 $ 6,951,000 $ 6,312,000 =========== ========== =========== ========== (Loss) income from operations: Electronics $ (164,000) $ 2,025,000 $ 6,000 $ 515,000 Power Units 1,162,000 571,000 616,000 371,000 Intersegment profit (50,000) - (46,000) - General corporate expenses not allocated (1,001,000) (1,081,000) (345,000) (373,000) Interest expense (261,000) (258,000) (79,000) (76,000) Investment and other income, net 249,000 371,000 71,000 116,000 ----------- ----------- ----------- ---------- (Loss) income before income taxes $ (65,000) $ 1,628,000 $ 223,000 $553,000 ============ =========== =========== ========= (NOTE 9) - Goodwill and Other Intangible Assets: - -------- ------------------------------------- The Company applies SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 142 requires that an intangible asset with a finite life be amortized over its useful life and that goodwill and other intangible assets with indefinite lives not be amortized but evaluated for impairment. At September 30, 2008, the Company's intangible assets other than goodwill consist of the following: Estimated Gross Net Useful Carrying Accumulated Carrying Life Value Amortization Value ---- ----- ------------ -------- Customer relationships 15 Years $2,000,000 $ ( 100,000) $1,900,000 Contract backlog 1-5 Years 1,750,000 (1,230,000) 520,000 Non-Compete Agreements 3 Years 415,000 (340,000) 75,000 ------- --------- ---------- $4,165,000 $(1,670,000) $2,495,000 ========== =========== ========== (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) At December 31, 2007, the Company's intangible assets other than goodwill consist of the following: Estimated Gross Net Useful Carrying Accumulated Carrying Life Value Amortization Value ---- ----- ------------ --------- Customer relationships 15 Years $2,000,000 - $2,000,000 Contract backlog 1-5 Years 1,750,000 (907,000) 843,000 Non-Compete Agreements 3 Years 415,000 (289,000) 126,000 ---------- ---------- ---------- $4,165,000 $(1,196,000) 2,969,000 =========== ========== ========= Amortization expense for the next five years is expected to be as follows: Year ending December 31, 2008 $ 149,000 2009 497,000 2010 250,000 2011 133,000 2012 133,000 2013 133,000 ---------- Total $1,295,000 ========== The Company recognized amortization expense of $474,000 and $150,000 for the nine and three months ended September 30 2008, respectively. The Company recorded amortization expense of $326,000 and $108,000, respectively, in the comparable 2007 periods. (NOTE 10) - Income Taxes: - ---------- -------------- For the nine and three months ended September 30, 2008, the Company utilized net operating loss carryforwards to offset income taxes except for state and local income tax expense in Kentucky for $15,000 and $8,000, respectively. For the nine months ended September 30, 2007, the Company utilized net operating loss carryforwards to offset income taxes except for a $25,000 state income tax expense in Pennsylvania. There was no income tax expense for the three months ended September 30, 2007. At September 30, 2008, the Company had federal and state net operating loss carry-forwards of approximately $21,000,000 and $7,000,000, respectively, that expire through 2025. Approximately, $17,000,000 of federal net operating loss carry-forwards expire between 2010 and 2012. The Company recognized a $178,000 and $58,000 deferred tax expense for the nine and three months ended September 30, 2008, respectively. This expense was recorded since the Company's deferred tax liability relating to its goodwill is required to be separately stated on its financial statements apart from its deferred tax asset. Also, during the nine and three months ended September 30, 2008, the Company recorded a deferred tax benefit of $178,000 and $58,000, respectively, by reducing its valuation allowance on its deferred tax asset. This was due to an increase in the Company's projected future profitability as well as an increase in the probability of attaining that profitability. During the nine months ended September 30, 2008, the Company also recorded a net $34,000 increase in its deferred tax asset due to the tax benefit associated with its unrealized holding loss on marketable securities and the tax benefit associated with stock options exercised. (continued) ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) On January 1, 2007, the Company adopted Financial Accounting Standards Board("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - - an interpretation of FASB Statement No. 109"("FIN 48"). This interpretation provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is "more likely that not" that the position is sustainable based on its technical merits. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. There was no impact of FIN 48 to the Company's consolidated financial position, results of operations or cash flows for the nine and three month periods ending September 30, 2008 and 2007. (NOTE 11) - Related Party Transactions: - ---------- ----------------------------- Tulip leases its facilities from a limited partnership, the ownership of which is controlled by the former shareholders of Tulip. The five-year lease commenced April 2005 and provides for monthly payments of $9,100 and increases by 2% each year for the first two renewal periods and by 3% for the final two renewal periods. For the nine and three months ending September 30, 2008, the total amount paid under this lease was approximately $87,000 and $29,000, respectively. For the comparable periods in 2007 the amounts were $85,000 and $28,000, respectively. (NOTE 12) - Recent Accounting Pronouncements: - ---------- ----------------------------------- In April, 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3"). FSP 142-3 amends the factors that should be considered in developing assumptions about renewal or extension used in estimating the useful life of a recognized intangible asset under SFAS No. 142 and expands the disclosure requirements of SFAS 142. The provisions of FSP 142-3 are effective for the Company as of January 1, 2009. The provisions of FSP 142-3 for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The Company is currently evaluating the impact of the adoption of FSP 142-3 on its consolidated financial statements. (NOTE 13) - Equity: - ---------- ------- In August 2008, the Company's Board of Directors authorized a stock repurchase program allowing it to purchase up to $3.0 million of its outstanding shares of common stock in open market or privately negotiated transactions in compliance with applicable laws and regulations including the SEC's Rules 10b5-1 and 10b-18. The timing and amount of repurchases under the program will depend on market conditions and publicly available information and therefore, repurchase activity may be suspended or discontinued at any time. During the three month period ended September 30, 2008, the Company repurchased approximately 26,000 shares of its common stock at an average purchase price of $4.17 per share. Total cash consideration for the repurchased stock was approximately $109,000. From August 2008 through November 13, 2008, the Company purchased approximately 90,000 shares of its common stock for total cash consideration of $289,000 representing an average purchase price of $3.21 per share. Item 2. ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Overview - ------------------- The results of operations for the three months and nine months ended September 30, 2008 include the results of ICS which was acquired effective December 31, 2007. The Company recorded an increase in revenues for the three months ended September 30, 2008 due to the inclusion of ICS. Net sales increased by 10.1% for the quarter, but exclusive of ICS, net sales would have decreased by 7.7%. However, sales from the Company's Power Group increased by 23.3% for the quarter compared to the prior year. Due to lower gross margins, higher selling, general and administrative expenses and decreased investment and other income during the current period, the Company recorded a decrease in net income to $215,000 for the three months ended September 30, 2008 compared to $553,000 for the three months ended September 30, 2007. Net sales increased by 4.0% for the nine months but exclusive of ICS, net sales would have decreased by 15.4%. However, sales from the Company's Power Group increased by 21.4% for the nine months compared to the prior year. Due to lower gross margins, higher selling, general and administrative expenses and decreased investment and other income during the current period, the Company recorded a net loss of $80,000 for the nine months ended September 30, 2008, compared to net income of $1,603,000 for the nine months ended September 30, 2007. Our backlog at September 30, 2008 was approximately $14,200,000 compared to $16,000,000 at September 30, 2007 which was exclusive of ICS. Backlog was $15,300,000 at June 30, 2008. The Company's lower profitability reflects weakness in the Company's Electronics Group which is being offset by a record year of bookings and revenue from its Power Group. There is no seasonality to the Company's business. Our shipping schedules are generally determined by the shipping schedules outlined in the purchase orders received from our customers. Both of our operating segments are pursuing a significant amount of business opportunities and our confidence level remains high with respect to receiving many of the orders we are pursuing although timing is always an uncertainty. Nevertheless, we remain very encouraged by our business environment although there is growing uncertainty due to the current credit crisis, a potential slowing economy and a new administration in Washington. Our success of the past few years has significantly strengthened our balance sheet evidenced by our 3.5 to 1 current ratio at September 30, 2008. We currently have a $3,000,000 credit facility in place. As a result of lower profitability related to customer shipping delays described under "Results of Operations" below, the Company was not in compliance with two of its financial covenants at September 30, 2008. In November 2008, the Company's primary lender waived the covenant default of two of its financial ratios at September 30, 2008 and the Company renegotiated the financial covenant ratios for the quarterly reporting periods December 31, 2008 and March 31, 2009. Beginning June 30, 2009 the covenants will revert back to their original ratios with a modification to a certain financial ratio covenant definition. The lender instituted an unused line fee of .25% per annum, as the cost to the Company for the waiver and amendment to the loan agreements. Critical Accounting Policies - ------------------------------ The discussion and analysis of the Company's financial condition and the results of its operations are based on the Company's financial statements and the data used to prepare them. The Company's 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 the Company's deferred tax asset, goodwill impairment, valuation of share-based compensation and revenue and cost recognition on long-term contracts accounted for under the percentage-of-completion method. 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. The Company believes the following critical accounting policies affect more significant judgments and estimates in the preparation of the consolidated financial statements. Inventories - ----------- Inventory is valued at the lower of cost (specific, average and first-in, first-out basis) or market. Inventory items are reviewed regularly for excess and obsolete inventory based on an estimated forecast of product demand. Demand for the Company's 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 the Company makes every effort to insure the accuracy of its 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 its inventory and operating results could be affected, accordingly. However, world events have forced our country into various situations of conflict whereby equipment is used and parts may be needed for repair. This could lead to increased product demand as well as the use of some older inventory items that the Company had previously determined obsolete. Deferred tax asset - -------------------- At September 30, 2008, the Company had an alternative minimum tax credit of approximately $573,000 with no limitation on the carry-forward period and federal and state net operating loss carry-forwards of approximately $21,000,000 and $7,000,000, respectively, that expire through 2025. Approximately, $17,000,000 of federal net operating loss carry-forwards expire between 2010 and 2012. In addition, the Company receives a tax deduction when their employees exercise their non-qualified stock options thereby increasing the Company's deferred tax asset. The Company records a valuation allowance to reduce its deferred tax asset when it is more likely than not that a portion of the amount may not be realized. The Company estimates its valuation allowance based on an estimated forecast of its future profitability. Any significant changes in future profitability resulting from variations in future revenues or expenses could affect the valuation allowance on its deferred tax asset and operating results could be affected, accordingly. Due to the Company's record of profitability, the acquisition of ICS, and the unprecedented amount of new opportunities in the prototype and preproduction stage, the Company increased its projection for profitability for future periods and increased its estimate of probability that it will attain those profit levels; thereby reducing its valuation allowance on its deferred tax asset. Impairment of Goodwill - ------------------------ The Company has significant intangible assets including goodwill and other acquired intangibles. In determining the recoverability of goodwill and other intangibles, assumptions must be made regarding estimated future cash flows and other factors to determine the fair value of the assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for those assets not previously recorded. The Company applies Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under the provisions of SFAS 142, the costs of certain intangible assets are no longer subject to amortization. These costs are reviewed for potential impairment on an annual basis, which occurred during the first quarter of 2008. The Company determined that there was no impairment to its goodwill and other intangible assets. Share-Based Compensation - ------------------------- Effective January 1, 2006, the Company began recognizing share-based compensation under SFAS No. 123(R), which requires the measurement at fair value and recognition of compensation expense for all share-based awards. Total share-based compensation expense was $171,000 and $77,000 for the nine and three months ended September 30, 2008, respectively, compared to $134,000 and $46,000 for the respective prior year periods. The estimated fair value of stock options granted was calculated using the Black-Scholes model. This model requires the use of input assumptions. These assumptions include expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. Revenue and Cost Recognition - ------------------------------- Revenue and costs under larger, long-term contracts are reported on the percentage-of-completion method. For projects where materials have been purchased but have not been placed in production, the costs of such materials are excluded from costs incurred for the purpose of measuring the extent of progress toward completion. The amount of earnings recognized at the financial statement date is based on an efforts-expended method, which measures the degree of completion on a contract based on the amount of labor dollars incurred compared to the total labor dollars expected to complete the contract. When an ultimate loss is indicated on a contract, the entire estimated loss is recorded in the period. Assets related to these contracts are included in current assets as they will be liquidated in the normal course of contract completion, although this may require more than one year. Results of Operations - --------------------- Three month period endedSeptember 30, 2008 v.September 30, 2007 - --------------------------------------------------------------- The Company currently operates in two industry segments. Its Orbit Instrument Division and its Tulip subsidiary are engaged in the design and manufacture of electronic components and subsystems and its ICS subsidiary performs system integration for Gun Weapons Systems and Fire Control Interface as well as logistics support and documentation (the "Electronics Group"). Its Behlman subsidiary is engaged in the design and manufacture of commercial power units (the "Power Group"). The results of operations for the three months ended September 30, 2008 include the operations of ICS for the entire period since the acquisition was completed effective, December 31, 2007. Consolidated net sales for the three month period ended September 30, 2008 increased by 10.1% to $6,951,000 from $6,312,000 for the three month period ended September 30, 2007 due to the inclusion of ICS in the current period and increased sales from the Power Group. Exclusive of ICS, net sales would have decreased by 7.7%. Sales from the Electronics Group increased by 9.0%, due to the inclusion of ICS in the current period and despite lower sales from the Company's Orbit Instrument Division and Tulip subsidiary. During the second quarter, the Company's Orbit Instrument Division was verbally advised by one of its customers to provide support for several modifications to a product that was under a substantial contract with many of the units scheduled for shipment during 2008. As a result of this request, deliveries have been delayed and have resulted in significantly lower than expected revenues for the operating unit. This loss of sales, along with decreased sales from the Company's Tulip subsidiary resulted in the significant decrease in sales for the Electronics Group despite the inclusion of ICS. Sales from the Power Group increased by 23.3% for the quarter as compared to the prior year and is currently on track for a record year in bookings and revenue. Gross profit, as a percentage of sales, for the three months ended September 30, 2008 decreased to 39.4% from 41.7% for the three month period ended September 30, 2007. This decrease resulted from a lower gross profit from the Company's Electronics Group due to a decrease in sales from both the Orbit Instrument Division and Tulip and despite a higher gross profit from the Power Group principally due to increased sales and to product mix. Selling, general and administrative expenses increased by 18.5% to $2,508,000 for the three month period ended September 30, 2008 from $2,117,000 for the three month period ended September 30, 2007 principally due to the inclusion of ICS's selling, general and administrative costs of $403,000 in the current period. Selling, general and administrative expenses, as a percentage of sales, for the three month period ended September 30, 2008 increased to 36.1% from 33.5% for the three month period ended September 30, 2007 principally due to the aforementioned increase in costs along with the reduction in sales from the Electronics Segment. Interest expense for the three months ended September 30, 2008 slightly increased to $79,000 from $76,000 for the three months ended September 30, 2007 due to an increase in the amounts owed to lenders in the current period due to the acquisition of ICS and despite a decrease in interest rates. Investment and other income for the three month period ended September 30, 2008 decreased to $71,000 from $116,000 for the three-month period ended September 30, 2007 principally due to a decrease in the amounts invested during the current period and to a decrease in interest rates. Net income before income tax provision decreased to $223,000 for the three months ended September 30, 2008 compared to $553,000 for the three months ended September 30, 2007. The decrease in income was principally due to the decrease in sales from both the Orbit Instrument Division and Tulip, a decrease in gross profit, an increase in selling, general and administrative expenses, a decrease in investment and other income and despite increased revenues and profitability from the Power Group. The income tax provision for the three months ended September 30, 2008 was $8,000 consisting of state income taxes that cannot be offset by any state net operating loss carry-forwards. As a result of the foregoing, net income for the three months ended September 30, 2008 was $215,000 compared to net income of $553,000 for the three months ended September 30, 2007. Earnings before interest, taxes and depreciation and amortization (EBITDA) for the three months ended September 30, 2008 decreased to $501,000 for the three months ended September 30, 2008 compared to $770,000 for the three months ended September 30, 2007. Listed below is the EBITDA reconciliation to net income: Three months ended September 30, 2008 2007 ---- ---- Net income $ 215,000 $553,000 Interest expense 79,000 76,000 Income tax expense 8,000 0 Depreciation and amortization 199,000 141,000 ------- ------- EBITDA $501,000 $770,000 ======== ======== EBITDA is a Non-GAAP financial measure and should not be construed as an alternative to net income. An element of the Company's growth strategy has been through strategic acquisitions which have been substantially funded through the issuance of debt. This has resulted in significant interest expense and amortization expense. EBITDA is presented as additional information because the Company believes it is useful to our investors and management as a measure of cash generated by our business operations that will be used to service our debt and fund future acquisitions as well as provide an additional element of operating performance. Nine month period endedSeptember 30, 2008 v.September 30, 2007 - -------------------------------------------------------------- Consolidated net sales for the nine month period ended September 30, 2008 increased by 4.0% to $19,434,000 from $18,686,000 for the nine month period ended September 30, 2007 due to the inclusion of ICS in the current period and increased sales from the Power Group and despite lower sales from the Company's Orbit Instrument Division and Tulip subsidiary. Exclusive of ICS, net sales would have decreased by 15.4%. Sales from the Electronics Group decreased by 2.4% despite the inclusion of ICS in the current nine month period. During the current period, the Company's Orbit Instrument Division was verbally advised by one of its customers to provide support for several modifications to a product that was under a substantial contract with many of the units scheduled for shipment during 2008. As a result of this request, deliveries have been delayed and have resulted in significantly lower than expected revenues for the operating unit. In addition, the Orbit Instrument Division also experienced an unrelated customer delivery issue in the first quarter of 2008 that resulted in a shipment shortfall for that period, which has still not been resolved at September 30, 2008. The Company still expects this issue to be resolved by either year-end or the first quarter of 2009. This loss of sales, along with decreased sales from the Company's Tulip subsidiary resulted in the decrease in sales for the Electronics Group despite the inclusion of ICS in the current period. Sales from the Power Group increased by 21.5% for the current nine month period compared to the prior year as the segment is currently on track for a record year of revenue and profitability. Gross profit, as a percentage of sales, for the nine months ended September 30, 2008 decreased to 39.6% from 43.3% for the nine month period ended September 30, 2007. This decrease resulted from a lower gross profit from the Company's Electronics Group due to a decrease in sales from both the Orbit Instrument Division and Tulip and despite a higher gross profit from the Power Group principally due to increased sales and to a less favorable product mix. Selling, general and administrative expenses increased by 18.0% to $7,757,000 for the nine month period ended September 30, 2008 from $6,576,000 for the nine month period ended September 30, 2007 principally due to the inclusion of ICS's selling, general and administrative costs of $1,245,000 in the current period. Selling, general and administrative expenses, as a percentage of sales, for the nine month period ended September 30, 2008 increased to 39.9% from 35.2% for the nine month period ended September 30, 2007 principally due to the aforementioned increase in costs along with the reduction in sales from the Electronics Segment. Interest expense for the nine months ended September 30, 2008 slightly increased to $261,000 from $258,000 for the nine months ended September 30, 2007 due to an increase in the amounts owed to lenders in the current period due to the acquisition of ICS that was offset by a decrease in interest rates. Investment and other income for the nine month period ended September 30, 2008 decreased to $249,000 from $371,000 for the nine-month period ended September 30, 2007 principally due to a decrease in the amounts invested during the current period and to a decrease in interest rates. Loss before income tax provision was $65,000 for the nine months ended September 30, 2008 compared to income before tax provision of $1,628,000 for the nine months ended September 30, 2007. The decrease in income was principally due to the decrease in sales from both the Orbit Instrument Division and Tulip, a decrease in gross profit, an increase in selling, general and administrative expenses, a decrease in investment and other income and despite increased revenues and profitability from the Power Group. The income tax provision for the nine months ended September 30, 2008 was $15,000 compared to $25,000 for the nine months ended September 30, 2007 consisting of state income taxes that cannot be offset by any state net operating loss carry-forwards. As a result of the foregoing, net loss for the nine months ended September 30, 2008 was $80,000 compared to net income of $1,603,000 for the nine months ended September 30, 2007. Earnings before interest, taxes and depreciation and amortization (EBITDA) for the nine months ended September 30, 2008 decreased to $819,000 for the nine months ended September 30, 2008 compared to $2,305,000 for the nine months ended September 30, 2007. Listed below is the EBITDA reconciliation to net income: Nine months ended September 30, 2008 2007 ---- ---- Net (loss) income $ (80,000) $1,603,000 Interest expense 261,000 258,000 Income tax expense 15,000 25,000 Depreciation and amortization 623,000 419,000 ------- ------- EBITDA $819,000 $2,305,000 ======= ========== Material Change in Financial Condition - ------------------------------------------ Working capital decreased to $16,891,000 at September 30, 2008 compared to $18,167,000 at December 31, 2007. The ratio of current assets to current liabilities was 3.5 to 1 at September 30, 2008 compared to 4.1 to 1 at December 31, 2007. Net cash used in operations for the nine month period ended September 30, 2008 was $1,767,000, primarily attributable to the net loss for the period, the non cash deferred income, an increase in accounts receivable, inventory and costs and estimated earnings in excess of billings, a decrease in income taxes payable and despite the non cash amortization of intangible assets and depreciation and the increase in accounts payable and customer advances. Net cash provided by operations for the nine-month period ended September 30, 2007 was $77,000, primarily attributable to the net income for the period, the non-cash amortization of intangible assets and stock based compensation and deferred tax expense that was partially offset by the increase in accounts receivable and inventory, the decrease in customer advances and deferred tax income. Cash flows provided by investing activities for the nine month period ended September 30, 2008 was $828,000, primarily attributable to the sale of marketable securities that was partially offset by the purchase of marketable securities, the purchase of property and equipment and additional costs associated with the ICS acquisition. Cash flows used in investing activities for the nine-month period ended September 30, 2007 was $321,000, attributable to the purchase of marketable securities and property and equipment that was partially offset by the sale of marketable securities. Cash flows used in financing activities for the nine month period ended September 30, 2008 was $1,086,000, primarily attributable to the repayment of long term debt and the Company's line of credit and purchases of treasury stock that was partially offset from loan proceeds from the line of credit. Cash flows used in financing activities for the nine-month period ended September 30, 2007 was $885,000, attributable to the repayments of long term debt that was partially offset by the issuance of long term debt and stock option exercises. In December 2007, the Company entered into an amended $3,000,000 credit facility with a commercial lender secured by accounts receivable, inventory and property and equipment. In April 2005, the Company entered into a five-year $5,000,000 Term Loan Agreement to finance the acquisition of Tulip and its manufacturing affiliate("The Tulip Term Loan"). In December 2007, the Company entered into a five-year $4,500,000 Term Loan Agreement to finance the acquisition of ICS("The ICS Term Loan"). In connection with the new Term Loan entered into in December 2007, the interest rates on both Term Loan Agreements and the credit facility were amended to equal a certain percentage plus the one month LIBOR depending on a matrix related to a certain financial covenant. At September 30, 2008, the interest rate was equal to the sum of 1.50% plus the one-month LIBOR (3.93% at September 30, 2008). The credit facility will continue from year to year unless sooner terminated for an event of default including non-compliance with certain financial covenants. Principal payments under the two term loan facilities are approximately $113,000 per month. As a result of lower profitability related to customer shipping delays described above, the Company was not in compliance with two of its financial covenant ratios at September 30, 2008. In November 2008, the Company's primary lender waived the covenant default of two of its financial ratios at September 30, 2008 and the Company renegotiated the financial covenant ratios for the quarterly reporting periods December 31, 2008 and March 31, 2009. Beginning June 30, 2009 the covenants will revert back to their original ratios with a modification to a certain financial ratio covenant definition. The lender instituted an unused line fee of .25% per annum, as the cost to the Company for the waiver and amendment to the loan agreements. In connection therewith, the interest rate on the Tulip Term Loan and Tulip Shareholder Note, increased to the sum of 2.50% plus the one month LIBOR and the interest rate on the ICS Term Loan and Line of Credit was increased to the sum of 2.25% plus the one month LIBOR. During the third quarter and into October 2008, due to the worldwide credit crisis, there was a significant increase in LIBOR and the Company incurred increased interest expense near the end of the third quarter and in October, 2008. However, LIBOR rates have begun to decrease and are currently below rates in effect prior to when the credit crisis began. As a result, the interest rate increase referenced above may be mitigated somewhat by the decrease in LIBOR rates. In April 2005, the Company entered into a five year $2,000,000 Promissory Note with the selling shareholders of Tulip at an interest rate of prime plus 2.00% (5.00% at September 30, 2008). Principal payments of $100,000 were made on a quarterly basis along with accrued interest. In June 2007, the Company refinanced the balance due on the Promissory Note of $1,050,000 with its primary commercial lender("Tulip Shareholder Note"). Under the terms of a new Term Loan, monthly payments of $35,000 will be made over a thirty-month period along with accrued interest at a rate of 1.50% plus the one-month LIBOR. The Company's contractual obligations and commitments as of September 30, 2008, are summarized as follows: Less than 1-2 3-5 Total One Year Years Years ----- ---------- ------ ------ Long-term debt $7,250,000 $1,777,000 $3,330,000 $2,143,000 Note Payable-bank 993,000 993,000 - - Employment Contracts 4,227,000 1,962,000 2,265,000 - Operating leases 3,285,000 769,000 1,402,000 1,114,000 --------- ------- --------- --------- Total contractual Obligations $15,755,000 $5,501,000 $6,997,000 $3,257,000 =========== ========== ========== ========== In August 2008, the Company's Board of Directors authorized a stock repurchase program allowing it to purchase up to $3.0 million of its outstanding shares of common stock in open market or privately negotiated transactions. During the three month period ended September 30, 2008, the Company repurchased approximately 26,000 shares of its common stock at an average purchase price of $4.17 per share. Total cash consideration for the repurchased stock was approximately $109,000. From August 2008 through November 13, 2008, the Company purchased approximately 90,000 shares of its common stock for total cash consideration of $289,000 representing an average purchase price of $3.21 per share. The Company's existing capital resources, including its bank credit facilities and its cash flow from operations are expected to be adequate to cover the Company's cash requirements for the foreseeable future. Inflation has not materially impacted the operations of the Company. Certain Material Trends - ------------------------- During the second quarter, the Company's Orbit Instrument Division was verbally advised by one of its customers to provide support for the immediate development of certain modifications to a product for the Division. This "out of scope" support has caused a delay in a significant amount of shipments scheduled throughout 2008 which resulted in a decrease in revenue and profitability for the nine month period ended September 30, 2008 and will have an adverse effect on annual revenues and profitability for 2008. The Division is working closely with this customer and shipment of some of the units commenced in the third quarter. However, a significant number of units scheduled for shipment by December 31, 2008 will not be shipped until 2009. This includes certain purchase orders for this product that were expected in the third quarter but have not yet been received. The Company still expects this purchase order and these orders are covered under a Long Term Agreement with the customer. In addition, the Orbit Instrument Division also experienced an unrelated customer delivery issue in the first quarter of 2008 that resulted in a shipment shortfall for that period, which was not resolved by September 30, 2008. The Company expects this issue to be resolved either by year-end or the first quarter of 2009. These shipment delays, along with reduced revenue from the Company's Tulip subsidiary have had an adverse effect on the Company's Electronics Group which may carry into 2009. In November 2008, the Company's primary lender waived the covenant default of two of its financial ratios at September 30, 2008 and the Company renegotiated the financial covenant ratios for the quarterly reporting periods December 31, 2008 and March 31, 2009. Beginning June 2009 the covenants will revert back to their original ratios with a modification to a certain financial ratio covenant definition. The Company expects to be in compliance with its revised financial covenant ratios although there is no assurance that it will be in compliance for these future periods. The Power Group is currently on track for a record year of bookings and revenue. The commercial division of the Power Group has historically been vulnerable to a weak economy. However, bookings in the commercial division are being sustained and bookings from the custom division remain fairly strong. However, due to the current credit crisis and the possible effect on capital spending, it is uncertain that this trend will continue into 2009. In April 2005, the Company completed the acquisition of Tulip and its operations became part of the Company's Electronics Group. In December 2007, the Company completed the acquisition of ICS which also became part of the Electronics Group. The Company's Electronics Group and the Custom Division of its Power Group are heavily dependent on military spending. The events of September 11, 2001 have put a tremendous emphasis on defense and homeland security spending and the Company has benefited from an increased defense budget. Although the Electronics Group and the Custom Division of the Power Group are pursuing several opportunities for reorders, as well as new contract awards, the Company has normally found it difficult to predict the timing of such awards. In addition, the Company has an unprecedented amount of new opportunities that are in the prototype or pre-production stage. These opportunities generally move to a production stage at a later date but the timing of such is also uncertain. There is no seasonality to the Company's business. The Company's revenues are generally determined by the shipping schedules outlined in the purchase orders received from its customers. The Company stratifies all the opportunities it is pursuing by various confidence levels. The Company generally realizes a very high success rate with those opportunities to which it applies a high confidence level. The Company currently has a significant amount of potential contract awards to which it has applied a high confidence level. However, because it is difficult to predict the timing of awards for most of the opportunities the Company is pursuing, it is also difficult to predict when the Company will commence shipping under these contracts. A delay in the receipt of any contract from its customer ultimately causes a corresponding delay in shipments under that contract. Despite the increase in military spending, the Company still faces a challenging environment. The government is emphasizing the engineering of new and improved weaponry and it continues to be our challenge to work with each of our prime contractors so that we can participate on these new programs. In addition, these new contracts require incurring up-front design, engineering, prototype and pre-production costs. While the Company attempts to negotiate contract awards for reimbursement of product development, there is no assurance that sufficient monies will be set aside by its customers, including the United States Government, for such effort. In addition, even if the United States Government agrees to reimburse development costs, there is still a significant risk of cost overrun that may not be reimbursable. Furthermore, once the Company has completed the design and pre-production stage, there is no assurance that funding will be provided for future production. In such event, even if the Company is reimbursed its development costs it will not generate any significant profits. The Company is heavily dependent upon military spending as a source of revenues and income. However, even increased military spending does not necessarily guarantee the Company increased revenues, particularly, when the allocation of budget dollars may vary depending on what may be needed for specific military conflicts Any future reductions in the level of military spending by the United States Government due to budget constraints or for any other reason, could have a negative impact on the Company's future revenues and earnings. In addition, due to major consolidations in the defense industry, it has become more difficult to avoid dependence on certain customers for revenue and income. Behlman's line of commercial products gives the Company some diversity and the addition of Tulip gives the Electronics Segment a more diversified customer base. The Company's business strategy is to expand its operations through strategic, accretive acquisitions. Through the past several years, the Company reviewed various potential acquisitions and believes there are numerous opportunities presently available. In April 2005, it completed the acquisition of Tulip and in December 2007, it completed the acquisition of ICS. The Company had received offers from several financial institutions that have expressed an interest in helping the Company with acquisition financing. However, due to the recent credit crisis and other reasons, there can be no assurance it will obtain the necessary financing to complete additional acquisitions and even if it does, there can be no assurance that we will have sufficient income from operations of such acquired companies to satisfy the interest payments, in which case, we will be required to pay them out of Orbit's operations which may be adversely affected. The Company continues to review acquisition candidates but there is no assurance that an acquisition will be completed over the next twelve months. During the second quarter of 2007, the Company expanded the activities of its investment banker to include the pursuit of alternative strategies, including the potential sale of the Company as a means of enhancing shareholder value. In June 2008, the Company terminated such activities with the investment banker but continues to pursue strategic alternatives to enhance shareholder value. However, there is no assurance that a sale or any of the other strategic alternatives will be accomplished. 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. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Part II, Item 6A "Quantitative and Qualitative Disclosures About Market Risk", of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007 for a discussion of the Company's exposure to market risk. There have been no material changes to the Company's market risk exposures since December 31, 2007. Item 4T. CONTROLS AND PROCEDURES Disclosure Controls and Procedures The Company's management, with the participation of the Company's chief executive officer and chief financial officer, has evaluated the effectiveness of the Company's 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, the Company's chief executive officer and chief financial officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective (i) to ensure that information required to be disclosed by the Company in the reports that it files or submits 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 the Company in the reports that it submits 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 September 30, 2008 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. CHANGES IN SECURITIES AND USE OF PROCEEDS ISSUER'S PURCHASE OF EQUITY SECURITIES: (a) (b) (c) (d) Period Total Average Price Total Number Maximum Number Number of Paid per of Shares(or (or Approximate Shares(or Share Units) Purchased Dollar Value) Units) (or Unit) as part of of Shares(or Purchased Publicly Units) that May Announced Plans Yet be Purchased or Programs Under the Plans or Programs - -------- --------- ----------- ---------------- --------------- July 1-31, 2008 0 0 0 0 August 1-31, 2008 25 $4.83 25 $3,000,000 September 1-30, 2008 26,087 $4.17 26,087 $2,891,000 ------ ------- ------- ------------ Total 26,112 $4.17 26,112 $2,891,000 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. 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. _________________ *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: November 19, 2008 /s/ Dennis Sunshine ------------------- Dennis Sunshine, President, Chief Executive Officer and Director Dated: November 19, 2008 /s/Mitchell Binder ------------------ Mitchell Binder, Executive Vice President, Chief Financial Officer and Director EX-31.1 2 ceocertification.txt CEO CERTIFICATION EXHIBIT 31.1 I, Dennis Sunshine, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Orbit International Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 19, 2008 /s/ Dennis Sunshine ------------------- Dennis Sunshine Chief Executive Officer EX-31.2 3 cfocertification.txt CFO CERTIFICATION EXHIBIT 31.2 I, Mitchell Binder, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Orbit International Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 19, 2008 /s/ Mitchell Binder ------------------- Mitchell Binder Chief Financial Officer EX-32.1 4 ceo906certification.txt CEO 906 CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Dennis Sunshine, Chief Executive Officer of Orbit International Corp., certify, pursuant to 18 U.S.C. 1350, as enacted by 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008 (the "Periodic Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Orbit International Corp. Dated: November 19, 2008 /s/ Dennis Sunshine ------------------- Dennis Sunshine Chief Executive Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Orbit International Corp. and will be retained by Orbit International Corp. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 5 cfo906certification.txt CFO 906 CERTIFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Mitchell Binder, Chief Financial Officer of Orbit International Corp., certify, pursuant to 18 U.S.C. 1350, as enacted by 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008 (the "Periodic Report") which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Orbit International Corp. Dated: November 19, 2008 /s/ Mitchell Binder ------------------- Mitchell Binder Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Orbit International Corp. and will be retained by Orbit International Corp. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----