UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2013
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to ____
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Commission File No. 0-3936
ORBIT INTERNATIONAL CORP.
(Name of registrant as specified in its charter)
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Delaware
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11-1826363
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.)
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80 Cabot Court, Hauppauge, New York
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11788
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (631) 435-8300
Securities registered pursuant to Section 12(b) of the Exchange Act:
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Common Stock, $.10 par value per share
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Nasdaq Capital Market
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(Title of each class)
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(Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
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 preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether Registrant has submitted electronically and posted on its Corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation 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 posted such files).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.
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Large accelerated filer o
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Accelerated Filer o
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Non-accelerated filer o
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Smaller reporting company x
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).oYes x No
Aggregate market value of Registrant’s voting and non-voting common equity held by non-affiliates (based on shares held and the closing price quoted on the Nasdaq Capital Market on June 30, 2013): $13,954,010
Number of shares of common stock outstanding as of March 28, 2014: 4,493,718
Documents incorporated by reference: The Registrant’s definitive proxy statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 in connection with the Registrant’s 2014 Annual Meeting of Stockholders.
PART I
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K which are not statements of historical or current fact 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 (the “Exchange Act”). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual financial or operating results to be materially different from the historical results or from any future results express or implied by such forward-looking statements. Such forward-looking statements are based on our best estimates of future results, performance or achievements, based on current conditions and our most recent results. In addition to statements which explicitly describe any risks and uncertainties (including factors noted in Item 7 below – “Management’s Discussion and Analysis of Financial Condition and Results of Operations”), 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 our reports and registration statements filed with the Securities and Exchange Commission. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.
| Item 1. |
DESCRIPTION OF BUSINESS |
General
Orbit International Corp. (the “Company” or “Orbit”) was incorporated under the laws of the State of New York on April 4, 1957 as Orbit Instrument Corp. In December 1986, the state of incorporation was changed from New York to Delaware and in July 1991, the name was changed to Orbit International Corp. We conduct our operations through our Orbit Instrument Division (“Orbit Instrument”) and our wholly owned subsidiaries, Behlman Electronics, Inc. (“Behlman”), Tulip Development Laboratory, Inc. (“TDL”) and Integrated Consulting Services, Inc., d/b/a Integrated Combat Systems (“ICS”). Through our Orbit Instrument Division and TDL, we are engaged in the design, manufacture and sale of customized electronic components and subsystems. ICS, based in Louisville, Kentucky, performs systems integration for gun weapons systems and fire control interface, cable and harness assembly, as well as logistics support and documentation. Behlman is engaged in the design and manufacture of high quality commercial power units, AC power, frequency converters, uninterruptible power supplies and commercial-off-the-shelf (“COTS”) power solutions.
In October 2013, we decided to consolidate the operations of our Quakertown, PA based TDL facility into our Hauppauge, NY facility. This decision was based on a number of factors, among them, a difficult business environment due to the Budget Control Act of 2011 and further budget concerns related to sequestration, our broader focus on cutting costs and promoting operating efficiencies, and TDL’s expiring lease in 2014. All operations of TDL that will be moved to our Hauppauge, NY location in 2014 will be conducted by a newly formed division of Orbit International Corp.
Financial Information About Industry Segments
We currently operate in two industry segments. Our Electronics Group is comprised of our Orbit Instrument Division and our TDL and ICS subsidiaries. Orbit Instrument and TDL are engaged in the design and manufacture of electronic components and subsystems. ICS performs system integration for gun weapons systems and fire control interface, cable and harness assembly, as well as logistics support and documentation. Our Power Group is comprised of our Behlman subsidiary and is engaged in the design and manufacture of commercial power units.
The following sets forth certain selected historical financial information relating to our business segments:
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December 31,
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2013
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2012
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Net sales (1):
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Electronics Group
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Domestic
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$
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12,112,000
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$
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15,311,000
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Foreign
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1,035,000
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1,755,000
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Total Electronics Group
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$
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13,147,000
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$
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17,066,000
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Power Group
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Domestic
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$
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10,780,000
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$
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11,326,000
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Foreign
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931,000
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1,056,000
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Total Power Group
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$
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11,711,000
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$
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12,382,000
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(Loss) income before income tax provision (2):
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Electronics Group
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$
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(1,022,000
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)
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$
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(1,592,000
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)
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Power Group
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$
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1,978,000
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$
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2,717,000
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Assets:
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Electronics Group
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$
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8,859,000
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$
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12,540,000
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Power Group
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$
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7,240,000
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$
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8,504,000
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(1) |
Includes intersegment sales. |
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(2) |
Exclusive of corporate overhead expenses, interest expense, and investment and other income- net, which are not allocated to the business segments. Includes restructuring charges of $29,000 in 2013 and costs related to non-renewal of senior officer contract and goodwill impairment charges of $1,194,000 and $820,000, respectively, in 2012. |
Additional financial information relating to the business segments in which Orbit conducts its operations is set forth in Note 17 to the Consolidated Financial Statements appearing elsewhere in this report.
Description of Business
General
Our Electronics Group designs, manufactures and sells customized panels, components, and subsystems to prime contractors, governmental procurement agencies and research and development (“R&D”) laboratories, primarily in support of specific military programs. We also provide commercial, non-military “ruggedized hardware” (hardware designed to meet severe environmental conditions) to prime contractors at cost competitive prices. Products include a variety of custom displays, militarized keyboards, trackballs and data entry devices. Our Electronics Group’s products, which in some cases are designed for customer requirements on a firm, fixed-price contract basis, have been successfully incorporated into systems deployed on surveillance aircraft. Among the surveillance aircraft on which our systems have been incorporated are the E-2C, E-2D, Joint Surveillance Target Attack Radar Systems (“J/STARS”), Lookdown Surveillance Aircraft (AWACS) and P-3 (anti-submarine warfare) requirements. Among the shipboard programs on which our systems have been incorporated are the AEGIS (Guided Missile Cruisers and Destroyers), DDG’S (Guided Missile Destroyers), BFTT (Battle Force Tactical Training), LSD’S (Amphibious Warfare Ships) and LHA’S (Amphibious Warfare Ships) applications, as well as a variety of land based guidance control programs, and avionic displays. Our Electronics Group also provides keyboards to the Federal Aviation Administration (“FAA”) for use in air traffic control towers and provides displays for use in various types of Mine-Resistant Ambush Protected (“MRAP”) vehicles. Through ICS, the Electronics Group also: (i) performs analysis and evaluation of medium and major caliber Naval Gun Weapon Systems performance, including interoperability and compatibility with combat systems, interface systems, ammunition, subsystems and components and (ii) provides engineering services in support of medium and major caliber Naval Gun Weapon Systems initiatives, including the development of test plans, test equipment, test articles/units, analyses, trouble shooting, repair, maintenance and reporting.
Our Power Group manufactures and sells power supplies, AC power sources (equipment that produces power that is the same as what would be received from a public utility), “frequency converters” (equipment that converts local power to equivalent foreign power), “uninterruptible power supplies (“UPS”)” (devices that allow a computer to operate while utility power is lost), associated analytical equipment and other electronic equipment. The COTS division of our Behlman subsidiary designs and manufactures power solutions to meet customer specifications, primarily for military applications.
Products
Electronics Group (OEG)
IFF- Identification Friend or Foe
Our Orbit Instrument Division has designed and developed a remote control unit (“RCU”) that has supported the Common Transponder (“CXP”) program for both the U.S. Navy and U.S. Army. Our RCU has been fully qualified for shipboard, aircraft and ground based programs and are now functional and supporting U.S. forces in air, sea and ground battlefield conditions. Orbit’s RCU has embedded proprietary software code for Mode S, Enhanced Traffic Alert and Collision Avoidance Systems (“ETCAS”), and Mode 5 IFF combat applications.
After shipping more than 3,000 units in support of U.S. Army and U.S. Navy CXP program requirements, our Orbit Instrument Division has designed and qualified a new Integrated Remote Control Unit (“IRCU”) which has been qualified to support U.S. Air Force retrofit programs.
Intercommunication Panels
Our Orbit Instrument Division has designed and developed various types of shipboard communication terminals. These communication terminals support existing shipboard secure and non-secure voice communication switches. The panels contained within the terminals have recently been upgraded with state-of-the-art color LCD displays, including options for touch screens. In addition, Orbit Instrument has upgraded the communications terminals with “telco-based" capability. The upgraded communication terminals have been successfully embedded within combat information center (“CIC”) consoles on several U.S. Naval ship configurations.
Orbit Instrument has designed and developed the next generation color LCD flat panel technology with a touch screen based Computer Controlled Action Entry Panel for the AEGIS class ships. Our Color Programmable Entry Panel (“PEP”) is currently replacing our existing, functional yet aging Plasma Entry Panel that has now provided decades of naval service.
Displays
Our Electronics Group, through Orbit Instrument and TDL, has designed, developed, and sold its displays for several critical programs for prime contractors and government procurement agencies. Our Electronics Group has designed displays using electroluminescent (“EL”), plasma, and LCD technologies for military and rugged environments.
Displays designed by our Electronics Group allow one or more operators to monitor and control radar systems for aircraft, helicopter, shipboard, ground-based, and tracked vehicle systems. Our unique modular design technique allows our displays to provide “smart technology”, with options for CPUs, memory and high speed graphics that enable operators to perform their mission in the most severe combat conditions. TDL and Orbit Instrument displays are readable under both sunlight and night vision conditions (“NVIS”), and continues to operate in nuclear, biological and chemical (“NBC”) environments.
Both our Orbit Instrument Division and our TDL subsidiary provide avionic displays and keyboards for Air Force jet fighter, bomber, surveillance and tanker refueling programs. Displays vary from 4” to 45” inches diagonal and incorporate multiple inputs and outputs.
Our TDL subsidiary has developed several color LCD displays that have been qualified and currently support helicopter, jet fighter, bomber, tracked vehicle and armored vehicle programs.
TDL has designed a number of display configurations to support retrofit and upgrade programs for B-52 aircraft, V-22 Osprey Gun Mount System, as well as the latest fleet upgrade for domestic and foreign military aircraft. TDL has also designed, qualified and delivered displays, providing real-time data to the operator, for mission support in the HH-60 and CH-53 helicopters, F-16 fighter aircraft and various other military aircraft.
Orbit and TDL combined successfully to design and sell an input device assembly (“IDA”) that includes a fully integrated keyboard, trackball and display assembly that is worn (via velcro), on the co-pilot’s thigh during flight missions. This unique wearable system provides co-pilots with additional information that is easy to access, and does not require additional space within the cockpit environment.
Our Orbit Instrument Division has supported programs that include displays, keyboards and track balls to form complete operator systems on “trays.” These trays are qualified for sub-surface, shipboard, aircraft and tracked vehicle programs.
Orbit Instrument has successfully designed and qualified a display tablet in support of an ongoing Chinook Helicopter upgrade program. The initial quantity of production tablets will enhance and upgrade mission avionics and control capabilities in the Chinook helicopter.
Orbit Instrument has designed and developed a 6.5” display, as well as a sunlight readable 20.1” display for the U.S. Navy’s Carrier Machinery Control System (“MCS”) programs. These displays were manufactured for delivery and installation on the Navy’s CVN-78 aircraft carrier.
Keyboards, Keypads and Pointing Devices
Orbit Instrument and TDL have designed a number of custom backlit keyboards and keypads to meet military specifications. These keyboards and keypads have been designed for shipboard, airborne, sub-surface and land-based programs, as well as for the FAA. The keyboards include various microprocessor-based serial interfaces, such as RS-232, RS-422, PS/2, USB and SUN type interfaces. Depending on the requirement, some of the backlit keyboards are night vision goggle compatible.
Operator Control Trays
Our Orbit Instrument Division designs and manufactures a variety of “operator control trays” that help organize and process data created by interactive communications systems, making such data more manageable for operator consumption. These trays are presently used to support patrol and surveillance aircraft programs, standard shipboard display console requirements and land-based defense systems applications. The operator trays are integrated with Orbit designed/developed keyboards, flat panel technology-based computer controlled action entry panels, switch panels and pointing devices.
Command Display Units (CDU’S)
Our Orbit Instrument Division currently has orders for command display panels that are being utilized in vehicular, shipboard and sheltered platform requirements. The display panels are flat panel technology based. We have designed/developed several models of the CDU to be used by U.S. Navy, U.S. Army and U.S. Marines, and the South Korean and Canadian armies.
MK 110 Signal Data Converter
The MK 110 Signal Data Converter (“SDC”) is the “next generation” MK 119 Gun Computer System Cabinet. The SDC allows a newly modernized DDG-51 Class Combat Management System to interface with legacy Gun System hardware. ICS previously received contracts for five prototype SDC units (all delivered). As part of a five-year IDIQ contract, ICS has delivered the initial two production baseline units as well as three shipboard units and is under contract for three additional units.
Cable and Harness Assemblies
ICS is leveraging its core competencies in electronics enclosure assembly into a cable and harness assembly operation. Efforts to bring this effort to critical mass are continuing as ICS produced numerous cable and harness assemblies for several DoD tier-one firms.
Depot Overhaul Point
ICS is the OEM on a number of major Gun Weapon System (“GWS”) assemblies. ICS has been working with the Naval Supply System (NAVSUP) in Mechanicsburg, Pennsylvania to establish and certify ICS as the Depot Overhaul Point on these major GWS assemblies. This certification, originally expected to be received during 2013 is now expected to be received during 2014 and should include additional GWS related items.
Power Group
Our Behlman subsidiary’s Commercial Power Supply Division designs and manufactures AC power sources/frequency converters. These products are used for clean regulated power and for frequency and voltage conversion applications. Behlman’s AC power supplies are used for production test, in engineering labs, for oil and gas exploration, for aircraft simulators, on aircraft and ships (both manned and unmanned), and on related ground support systems.
Behlman’s frequency converters are used to convert power from one frequency to another. They are used to test products to be exported to foreign countries (e.g., in the U.S., 60 Hz is converted to 50 Hz) and to test products requiring the supply of 400 Hz for aircraft and ship power. These frequency converters are also used in rugged applications such as on airplanes to supply the 60 Hz required by standard equipment, such as computers, from the 400 Hz available on the aircraft. In addition, Behlman’s products are used for railroad signaling. Its frequency converters are manufactured for most of the passenger railroads in the United States. Behlman’s power sources have power levels from 100 VA to 120,000 VA.
Behlman’s Uninterruptible Power Supply (“UPS”) products are used for backup power when local power is lost. Behlman only competes in the “ruggedized,” industrial and military markets. Behlman is now producing its UPS units for DDG-51-class Aegis destroyers, LHD Wasp-class ships and its RUPS unit for military aircraft.
Behlman’s inverters, which convert system battery power to AC, are being used in electric, gas and water transmission systems and in utility substations.
Behlman’s COTS Division designs and manufactures power supplies that use COTS power modules to meet its customers' environmental specifications. The use of COTS power modules requires less engineering resources and produces a more reliable unit in much less time than power supplies that use discrete components. Customers include the U.S. and NATO military services and their prime contractors as well as nuclear power plant control systems manufacturers. Behlman’s VPX power supplies are also sold to the general public as standard VITA compliant VPX modules.
Behlman also performs reverse engineering of power systems for the U.S. Government and industrial and military contractors to enable them to have a new supplier when the old manufacturer cannot or will not supply the equipment.
Behlman has supplied power supplies used on a broad array of equipment including submarines, surface ships, aircraft and ground support equipment. Behlman’s experience in high voltage power supplies has enabled the military to extend the life of many of its programs.
Behlman also operates as a qualified repair depot for many United States Air Force and Navy programs.
Proposed Products
Electronics Group (OEG)
Our Electronics Group (Orbit Instrument, TDL and Integrated Combat Systems) is working diligently to identify new program opportunities that require new hardware and software designs to support prime contractors and defense procurement agency land, sea and air solutions. Our Electronics Group continues to target ongoing retrofit, re-set and re-capitalization programs, which are intended to extend the life cycle of ships, aircraft, and armored vehicles. Orbit Instrument and TDL have designed state-of-the art LED switch panels, keyboards, and communication panels that are form, fit and functional replacements for units that have exceeded their intended operational usage. In all cases, the new technological designs supporting the switch panels, keyboards, and communication panels are intended to replace units that have been operational in combat mode for decades.
Our TDL Division, has developed several new ‘smart’ full color displays for use on helicopters, for cockpit and ‘back-seat operations’. Given the critical requirements of helicopter missions, each configuration has been designed to be sunlight readable and night vision equipment compatible. These high performance devices provide the pilots and crew with real time data under extreme environmental conditions and during combat operations. TDL is working very closely with a firm that has developed a methodology and software to transform TDL Smart Cockpit Displays into Aircraft (rotary and fixed-wing) Test Instruments. The key benefit to the aircraft developers is that they do not have to re-design the dashboards in order to have the test instruments on-board during flight test operations.
Orbit Instrument and TDL continue to provide a family of state-of-the-art ‘smart’ display configurations that combine various stand-alone switch panels and data input devices onto a single ‘smart’ display. These ‘smart’ displays provide an operator with a single source of easy to access information that supports naval consoles, aircraft (rotary and fixed-wing) cockpits, armored vehicle suites and aircraft C4I Command/Control Center requirements.
Orbit Instrument is developing upgrades for GPS Control Display Unit (“CDU”) panels and Vehicle Heading Indicator Panels (“VHI”) that support U.S. Army and International Armies land navigation system requirements. A number of CDU panels with and without VHI have been designed as a total solution for customer requirements. An additional application for the CDU can be found in a system dubbed the ‘Fire-Finder'. The Fire-Finder detects where enemy firing positions are located and then targeted for response. The critical mapping and targeting code embedded within each CDU was developed by Orbit Instrument. Orbit Instrument is the leading supplier of RCU’s (Remote Control Units) for military IFF (Identification Friend or Foe) systems. We have developed two new configurations of RCU’s. One using a full color LCD to present the data to the operator and the other intended to replace an in-house RCU.
Orbit Instrument has designed and developed a voice over IP (“VOIP”) version of its Secure Audio System (“SAS”) to be utilized on LSD-class ships. The new SAS panel includes the necessary analog interfacing for the audio system as well as the digital interfacing necessary to communicate with the new CEDS Displays and VOIP system. Orbit Instrument has previously provided the plasma display version of the SAS Panel. The new SAS panel is being evaluated for use on Common Enterprise Display System (“CEDS”) and other similar systems.
Through our ICS subsidiary we are entering the VME and VPX marketplace. ICS has developed an industry-leading family of system health monitors that provide dramatically expanded graphical user interfaces that enable design teams to quickly and easily establish a broad range of operating parameters. Features include a unique, proprietary GUI, numerous communications interfaces and extensive data protection. ICS will also offer VME and VPX backplanes beginning in the second quarter of 2014. Additional VME and VPX related product releases are planned for roll-out in 2014.
Orbit Instrument has designed and developed a color 9” LCD display version of the Radio Frequency Transmission Line Test Set (“RFTLTS”). It has supported the RTFLTS with an Electro Luminescent (“EL”) display in the past. The new color LCD version will target retrofit opportunities. In addition, Orbit has developed a color 9” LCD display version of the MK-45 MOD 4 EP2 Display.
Power Group
In an effort to expand our Power Group’s product base, Behlman continues to develop new products. Behlman has recently released three new models for the Power Passport series with Power Factor Correction (PFC) front end and CE Mark. Behlman is presently working on a BLC Series of AC Power Supplies with CE Marking (a declaration that a product meets the essential requirements of applicable European health, safety and environmental protection legislation) for the International marketplace. These products will range in power from one KVA to nine KVA in both single and three-phase outputs. We are also working on a higher power, 2500 VA/ 2000W RUPS uninterruptible power source (UPS) for the high end industrial and Military marketplace. For the utility market, we are developing a higher power 2500 VA INV series inverter. In addition, we are looking into a vehicle inverter for use on Military vehicles.
The Behlman COTS Division has recently released a third VPX power supply that will be in compliance with the VITA OpenVPX architecture. Network topologies based on the OpenVPX architecture enable multiple processors and multiple network switches to communicate efficiently and reduce R&D cost and risk. VPX is also highly compatible with VMEbus and gives VMEbus users access to the high speed switch fabric. The current Behlman VPX power supplies are 6U form factor and are higher power that what is now available. We are currently working on a 3U, VITA OpenVPX power supply that will be fully compliant and with greater power than is currently available in the marketplace.
Sales and Marketing
Products of our Electronics Group are primarily marketed by the sales personnel and management of the respective operating units and also by manufacturers’ representatives. The COTS division’s products of our Power Group are marketed by Behlman’s sales and program managers and other management personnel. Commercial products of our Power Group are sold by regional sales managers, manufacturers’ representatives and non-exclusive distributors.
Competition
Many of our competitors are well established, have reputations for success in the development and sale of their products and services and have significantly greater financial, marketing, distribution, personnel and other resources than us, thereby permitting them to implement extensive advertising and promotional campaigns, both in general and in response to efforts by additional competitors to enter into new markets and introduce new products and services.
The electronics industry is characterized by frequent introduction of new products and services and is subject to changing consumer preferences and industry trends, which may adversely affect our ability to plan for future design, development and marketing of our products and services. The markets for electronic products, components and related services are also characterized by rapidly changing technology and evolving industry standards, often resulting in product obsolescence or short product life cycles. We are constantly required to expend funds for research and development of new technologies.
Our Electronics Group’s competitive position within the electronics industry is, in management’s view, predicated upon our manufacturing techniques, our ability to design and manufacture products to meet the specific needs of our customers and our long-standing relationship with our major customers. (See “Major Customers” below). There are numerous companies, many of which have greater resources than us, which are capable of producing substantially all of our products.
Competition in the markets for our Power Group’s commercial and military products depends on such factors as price, product reliability and performance, engineering and production. In particular, due primarily to budgetary restraints and program cutbacks, competition in Behlman’s U.S. Government markets has been increasingly severe and price has become the major overriding factor in contract and subcontract awards. To our knowledge, some of Behlman’s regular competitors include companies with substantially greater capital resources and larger engineering, administrative, sales and production staffs than Behlman's.
Sources and Availability of Raw Materials
We use multiple sources for our procurement of raw materials and are not dependent on any specific suppliers for such procurement. We continuously update our delivery schedules and evaluate availability of components so that they are received on a “just-in-time schedule.” Occasionally, in the production of certain military units, we will be faced with procuring certain components that are either obsolete or difficult to procure. We have access to worldwide brokers using the Internet to assure component availability. However, we are sometimes faced with engineering a new product or printed circuit board when an obsolete part cannot be procured.
Major Customers
Raytheon Company and BAE Systems accounted for approximately 13% and 11% of our consolidated net sales for the year ended December 31, 2013. BAE Systems and Raytheon Company accounted for approximately 19% and 15%, respectively, of our consolidated accounts receivable balance at December 31, 2013. The loss of either of these customers would have a material adverse effect on our net sales and earnings. We do not have any significant long-term contracts with either of the above mentioned customers.
The major customers of our Electronics Group are Raytheon Company, BAE Systems, various agencies of the U.S. Government, and Honeywell International, accounting for approximately 23%, 20%, 12% and 11%, respectively, of the net sales of such segment for the year ended December 31, 2013. BAE Systems, Raytheon Company, Honeywell International, and various agencies of the U.S. Government accounted for approximately 30%, 24%, 15%, and 8%, respectively, of our Electronics Group’s accounts receivable balance at December 31, 2013. The loss of any of these customers would have a material adverse effect on the net sales and earnings of our Electronics Group.
The major customers of our Power Group are Telephonics Corp., Northrop Grumman Corp. and Baker Hughes Inc. accounting for approximately 15%, 12% and 10%, respectively, of the net sales of such segment for the year ended December 31, 2013. Telephonics Corp., Baker Hughes Inc., and Northrop Grumman Corp. accounted for approximately 26%, 9%, and 7%, respectively, of our Power Group’s accounts receivable balance at December 31, 2013. The loss of any of these customers would have a material adverse effect on the net sales and earnings of our Power Group.
Since a significant number of all of the products we manufacture are used in military applications, any substantial reduction in overall military spending by the U.S. Government could have a materially adverse effect on our sales and earnings.
Backlog
As of December 31, 2013 and 2012 our backlog was as follows:
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2013
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2012
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|
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Electronics Group
|
|
$
|
5,900,000
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|
|
$
|
7,700,000
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|
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Power Group
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|
|
4,200,000
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|
|
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8,200,000
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|
Total
|
|
$ |
10,100,000 |
|
|
$ |
15,900,000 |
|
The entire consolidated backlog at December 31, 2013, represents backlog under contracts that are expected to be shipped during 2014.
A significant number of our contracts are subject to termination at the convenience of the U.S. Government. Our backlog is not influenced by seasonality. Please see “Effects of Budget Control Act of 2011 and Sequestration” on Page 13.
Special Features of U.S. Government Contracts
Orders under U.S Government prime contracts or subcontracts are customarily subject to termination at the convenience of the U.S. Government, in which event the contractor is normally entitled to reimbursement for allowable costs and a reasonable allowance for profits, unless the termination of a contract was due to a default on the part of the contractor.
No material terminations of contracts, at the convenience of the U.S. Government, occurred at either our Electronics or Power Group during the years ended December 31, 2013 and 2012.
A significant portion of our revenues are subject to audit under the Vinson-Trammel Act of 1934 and other federal statutes since these revenues are derived from sales under U.S. Government contracts. We believe that adjustments to such revenues, if any, will not have a material adverse effect on our financial position or results of operations.
Effects of Budget Control act of 2011 and Sequestration
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 has continued to cause federal government agencies to reduce their purchases under contracts, exercise their rights to terminate contracts in whole or in part, to 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 as well as establishing further planned reductions due to sequestration if a budget agreement cannot be reached. 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.
In addition, 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 impact our operating performance for 2014. As a result, our business, financial condition and results of operations could be materially adversely affected.
Research and Development
We incurred approximately $1,718,000 and $1,573,000 of research and development expenses during the years ended December 31, 2013 and 2012, respectively. During the years ended December 31, 2013 and 2012, we recognized revenue of approximately $689,000 and $403,000, respectively, for customer funded research and development.
Patents
We do not own any patents that we believe are of material significance to our operations.
Employees
As of March 7, 2014, we employed 122 persons, all on a full-time basis. Of these, our Electronics Group employed 70 people, consisting of 23 in engineering and drafting, 9 in sales and marketing, 12 in direct and corporate administration and the balance in production. Our Power Group employed 52 people, consisting of 16 in engineering and drafting, 5 in sales, 4 in direct and corporate administration and the balance in production.
Not applicable, as we are a smaller reporting company.
| Item 1B. |
UNRESOLVED STAFF COMMENTS |
Not applicable, as we are a smaller reporting company.
Our plant and executive offices are located at 80 Cabot Court, Hauppauge, New York. This facility, which consists of approximately 60,000 square feet (of which approximately 50,000 square feet are available for manufacturing operations) in a two-story, brick building, was completed in October 1982 and expanded in 1985. We are currently operating this facility at approximately 70% of capacity. In March 2001, we completed a sale leaseback transaction whereby we sold our land and building for $3,000,000 and entered into a twelve-year net lease with the buyer of the property. Effective January 1, 2011, we entered into an amendment to the lease. The amendment extended the lease expiration date to December 31, 2021 and modified the monthly lease payment as follows: approximately $32,500 for January 2011 through December 2013, approximately $35,400 for January 2014 through December 2016, and approximately $38,600 for January 2017 through December 2021. In connection with the lease amendment, our landlord agreed, at its sole expense, to make certain improvements to the facility.
In December 2007, our Behlman subsidiary entered into a lease for a 2,000 square foot facility at 2363 Teller Road, Unit 108, Newbury Park, California, which is used as a selling office for all of the Company’s operating units. In December 2012, the lease was amended whereby the expiration date was extended to December 31, 2017 at a monthly lease payment of approximately $2,300 for the term of the lease.
In April 2009, our TDL subsidiary entered into a five-year lease, which expires in October 2014, for a 50,000 square foot facility at 300 Commerce Boulevard, Quakertown, Pennsylvania. This facility is used for manufacturing, engineering and administration. TDL only paid certain operating expenses from April through October 2009 and lease payments commenced November 1, 2009. In December 2011 and October 2012, the lease was amended. The lease now provides for monthly lease payments of approximately $15,300 for the first four years of the lease and approximately $17,800 for the fifth year. In October 2013, we decided to consolidate our Quakertown, PA facility into our Hauppauge, NY facility. The consolidation should be completed prior to June 30, 2014.
Our ICS subsidiary operates out of two facilities in Louisville, Kentucky, one of which is used for engineering, logistics and administration and the other for manufacturing. In December 2008, ICS entered into a lease for engineering, logistics and administration for approximately 14,000 square feet and provides for monthly payments of approximately $6,800 per month from April 2009 through March 2014, and includes an option to extend the lease for an additional five years at approximately $8,400 per month, which ICS has decided not to exercise. In January 2012, ICS moved most of its manufacturing into its facility used for engineering, logistics, and administration. After this move, the facility is currently operating at approximately 60% of capacity. The lease for manufacturing space is for approximately 13,000 square feet and provides for monthly payments of approximately $5,000 pursuant to an option in the lease that was exercised in April 2009 that extended the lease until March 2014. In January 2012, ICS entered into a contract to rent approximately 9,600 square feet of its manufacturing space to a third party. The rental contract provided for ICS to receive approximately $6,200 per month and expired May 2013. After the expiration of the sub-lease, the portion of the manufacturing facility that ICS is currently using is approximately 15% of capacity. ICS is currently negotiating with a different landlord to lease a new facility. The new lease is for a three year period, with a three year renewal option, for approximately 4,700 square feet. The lease payments are as follows: approximately $4,100 per month for April 2014 through March 2015, approximately $4,300 per month for April 2015 through March 2016, and approximately $4,500 per month for April 2016 through March 2017. ICS expects to complete negotiations and sign the new facility lease before March 31, 2014 or shortly thereafter.
| Item 3. |
LEGAL PROCEEDINGS |
From time to time, we may become a party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in any other legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. While we are not aware of any potential material legal proceedings involving the Company, this does not preclude our involvement in any material legal claim that may be asserted in the future.
|
Item4.
|
MINE SAFETY DISCLOSURES
|
Not applicable.
PART II
| Item 5. |
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is listed on the Nasdaq Capital Market under the symbol “ORBT”.
The following table sets forth the high and low sales prices of our common stock for each quarter from January 1, 2012 through its fiscal year ended December 31, 2013, as reported on the Nasdaq Capital Market.
|
|
|
High
|
|
|
Low
|
|
|
2012:
|
|
|
|
|
|
|
|
First Quarter:
|
|
$
|
4.66
|
|
|
$
|
3.52
|
|
|
Second Quarter:
|
|
|
4.49
|
|
|
|
3.45
|
|
|
Third Quarter:
|
|
|
3.64
|
|
|
|
3.02
|
|
|
Fourth Quarter:
|
|
|
3.40
|
|
|
|
2.88
|
|
|
2013:
|
|
|
|
|
|
|
|
|
|
First Quarter:
|
|
$
|
3.75
|
|
|
$
|
3.13
|
|
|
Second Quarter:
|
|
|
3.83
|
|
|
|
3.06
|
|
|
Third Quarter:
|
|
|
3.61
|
|
|
|
3.25
|
|
|
Fourth Quarter:
|
|
|
3.57
|
|
|
|
3.21
|
|
Holders
As of March 7, 2014, the Company had 155 stockholders of record.
Dividends
We have not paid or declared any cash dividends to date and do not anticipate paying any in the foreseeable future. We intend to retain earnings, if any, to support the growth of the business.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth, as of December 31, 2013:
|
· |
the number of shares of our common stock issuable upon exercise of outstanding options, warrants and rights, separately identified by those grantedunder equity incentive plans approved by our stockholders and those granted under plans, including individual compensation contracts, not approved by our stockholders (column a), |
|
· |
the weighted average exercise price of such options, warrants and rights, also as separately identified (column b), and |
|
· |
the number of shares remaining available for future issuance under such plans, other than those shares issuable upon exercise of outstanding options, warrants and rights (column c). |
Equity Compensation Plan Information Table
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Plan Category
|
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
|
|
|
Equity compensation plans approved by security holders
|
|
|
114,000
|
|
|
$
|
3.08
|
|
|
|
-0-
|
|
|
Equity compensation plans not approved by security holders
|
|
|
-0-
|
|
|
|
N/A
|
|
|
|
-0-
|
|
|
Total
|
|
|
114,000
|
|
|
$
|
3.08
|
|
|
|
-0-
|
|
Recent Sales of Unregistered Securities
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
|
|
|
(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
|
|
|
10/1/13 – 10/31/13
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
11/1/13 – 11/30/13
|
|
|
13,200
|
|
|
$
|
3.41
|
|
|
|
13,200
|
|
|
$
|
355,000
|
|
|
12/1/13 – 12/31/13
|
|
|
18,100
|
|
|
$
|
3.44
|
|
|
|
18,100
|
|
|
$
|
293,000
|
|
|
Total
|
|
|
31,300
|
|
|
$
|
3.43
|
|
|
|
31,300
|
|
|
$
|
293,000
|
|
In November 2012, our Board of Directors authorized management, in its discretion, to purchase up to $400,000 of our common stock. On March 6, 2013, our Board of Directors approved a 10b5-1 Plan through which we conducted our authorized stock buy back program. We repurchased all of the remaining shares available under our stock buy back program (including the related 10b5-1 Plan) during the first and second quarters of 2013. From November 8, 2012 to June 20, 2013, we purchased a total of approximately 116,000 shares of our common stock for total cash consideration of approximately $400,000 for an average price of $3.45 per share. In June 2013, our Credit Agreement was amended whereby 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 the Credit Agreement. On November 6, 2013, our Board of Directors authorized management to purchase up to $400,000 of our common stock pursuant to a buy back program. In conjunction with the buy back program, our Board of Directors authorized management to enter into a 10b5-1 Plan through which we will be permitted to repurchase up to $200,000 of our common stock. 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 the second quarter of 2014, depending on the timing of receipt of certain material contracts.
Additional information relating to the Company’s purchase of equity securities is provided in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
| Item 6. |
SELECTED FINANCIAL DATA |
Not applicable, as we are a smaller reporting company.
| Item 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this Report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this Report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions only as of the date of this Report. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.
Executive Overview
We recorded a decrease in our operating results for the year ended December 31, 2013 as compared to the prior year. Our sales decreased by 15.6% and we recorded a net loss of $2,570,000 as compared to a net loss of $135,000 in the prior year period. Our net loss during the current year was principally due to a non-cash charge of $2,252,000 of deferred tax expense related to a full valuation allowance taken on our net deferred tax asset. In addition, our net loss was also due to a decrease in sales and gross profit and a reduction in investment and other (income) as compared to the prior year. The net loss in the prior year period was principally due to the following: (i) a $1,194,000 charge taken in connection with the non-renewal of our former chief operating officer’s employment contract and (ii) an impairment charge of $820,000 relating to the goodwill associated with our TDL subsidiary. The decrease in sales during the current year period was primarily attributable to a 23.0% and 5.4% decrease in sales at our Electronics and Power Groups, respectively.
Our backlog at December 31, 2013 was approximately $10,100,000 compared to $15,900,000 at December 31, 2012 due to lower backlog at both our Electronics and Power Groups. There is no seasonality to our business. Our shipping schedules are generally determined by the shipping schedules outlined in the purchase orders received from our customers. Both of our operating segments continue to pursue a significant 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 4.7 to 1 current ratio at December 31, 2013. During November 2012, we entered into a $6,000,000 line of credit facility with a new lender. This line of credit was used to pay off, in full, all of our obligations to our former primary lender and to provide for our general working capital needs. In June 2013, our Credit Agreement was amended whereby (i) the expiration date on our credit facility was extended to July 1, 2015 and (ii) we are permitted to purchase up to $400,000 of our common stock in each year beginning July 1 and ending June 30 during the term of our Credit Agreement. We were in compliance with the financial covenants contained in our Credit Agreement at December 31, 2013. Despite being in compliance at December 31, 2013, we are uncertain whether we will be in compliance with one of the financial covenants contained in our lending agreement at March 31, 2014 due to our operating loss in 2013 and expected operating loss in the first quarter of 2014, principally due to the costs associated with consolidating our TDL, Quakertown, PA facility into our Hauppauge, NY operations. Accordingly, we have classified our line of credit as a current liability at December 31, 2013. We are currently negotiating with our primary lender to amend this covenant and based on preliminary discussions, we expect our lender to amend this covenant, although there can be no certainty that an agreement will be reached.
In November 2012, our Board of Directors authorized management, in its discretion, to purchase up to $400,000 of our common stock. On March 6, 2013, our Board of Directors approved a 10b5-1 Plan through which we conducted our authorized stock buy back program. We repurchased all of the remaining shares available under our stock buy back program (including the related 10b5-1 Plan) during the first and second quarters of 2013. From November 8, 2012 to June 20, 2013, we purchased a total of approximately 116,000 shares of our common stock for total cash consideration of approximately $400,000 for an average price of $3.45 per share. In June 2013, our Credit Agreement was amended whereby 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 the Credit Agreement. 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 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 could result 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 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
The discussion and analysis of our financial condition and the results of operations are based on our financial statements and the data used to prepare them. Our financial statements have been prepared based on accounting principles generally accepted in the United States of America (“GAAP”). On an on-going basis, we re-evaluate our judgments and estimates including those related to inventory valuation, the valuation allowance on our deferred tax asset, impairment of goodwill, valuation of share-based compensation, revenue and cost recognition on long-term contracts accounted for under the percentage-of-completion method and other than temporary impairment on marketable securities, among others. These estimates and judgments are based on historical experience and various other assumptions that are believed to be reasonable under current business conditions and circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect more significant judgments and estimates in the preparation of the consolidated financial statements.
Inventories
Inventory is valued at the lower of cost (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, 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
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 two most recent 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 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 $7,000,000 and $6,000,000, 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. At December 31, 2012, in connection with the annual impairment testing of TDL’s goodwill pursuant to ASC 350, the analysis indicated that the fair value for the TDL reporting unit was less than the carrying value and therefore the goodwill was impaired. As a result, we recorded an impairment charge for $820,000 during December 31, 2012, representing the remaining carrying value of TDL’s goodwill.
Our analysis of Behlman’s and TDL’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 December 31, 2013, 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 $111,000 and $211,000 for the years ended December 31, 2013 and 2012, respectively. During 2013, 130,000 shares of restricted stock were awarded to senior management. During 2012, no shares of restricted stock or stock options were granted.
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 there is: i) persuasive evidence that an arrangement with the customer exists, which is generally a customer purchase order, ii) the selling price is fixed and determinable, iii) collection of the customer receivable is deemed probable, and iv) we do not have any continuing non-warranty obligations. However, for certain products, revenue and costs under larger, long-term contracts are reported on the percentage-of-completion method. For projects where materials have been purchased, but have not been placed in production, the costs of such materials are excluded from costs incurred for the purpose of measuring the extent of progress toward completion. The amount of earnings recognized at the financial statement date is based on an efforts-expended method, which measures the degree of completion on a contract based on the amount of labor dollars incurred compared to the total labor dollars expected to complete the contract. When an ultimate loss is indicated on a contract, the entire estimated loss is recorded in the period the loss is identified. Costs and estimated earnings in excess of billings on uncompleted contracts represent an asset that will be liquidated in the normal course of contract completion, which at times may require more than one year. The components of costs and estimated earnings in excess of billings on uncompleted contracts are the sum of the related contract’s direct material, direct labor, and manufacturing overhead and estimated earnings less accounts receivable billings.
Marketable Securities
We currently have approximately $243,000 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:
Year Ended December 31, 2013 vs. Year Ended December 31, 2012
We currently operate in two industry segments. Our Orbit Instrument Division and our TDL subsidiary are engaged in the design and manufacture of electronic components and subsystems and our ICS subsidiary performs system integration for Gun Weapons Systems and Fire Control Interface, 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 year ended December 31, 2013 decreased by 15.6% to $24,838,000 from $29,438,000 for the year ended December 31, 2012 due to lower sales from both our Power and Electronics Groups. Sales from our Electronics Group decreased by 23.0% due to a decrease in sales from our Orbit Instrument Division and TDL and ICS subsidiaries. The decrease in sales at our Orbit Instrument Division was principally due to a decrease in shipments pursuant to customer delivery schedules resulting from lower bookings during the current year period. The decrease in sales at our ICS subsidiary was primarily due to the absence of MK 437 sales and a decrease in revenue relating to our SDC order in the current year. The decrease in sales at our TDL subsidiary was principally due to (i) lower bookings in the current year as compared to the prior year and (ii) the absence of shipments in the current year for a certain display used in the ground mobile marketplace. Sales from our Power Group decreased by 5.4% due to a decrease in sales from our COTS division which was partially offset by an increase in sales at our commercial division. The increase in sales from our commercial division was principally due to an increase in shipments pursuant to customer delivery schedules. The decrease in sales at our COTS division was primarily related to a decrease in shipments pursuant to customer delivery schedules resulting from lower current year bookings.
Gross profit, as a percentage of sales decreased to 37.6% from 39.6% from the prior year. The decrease was primarily the result of lower gross margin from both our Electronics and Power Groups. The decrease in gross margin at our Electronics Group was principally due to lower gross margin at our ICS and TDL subsidiaries primarily due to lower sales. The decrease in gross margin at our Power Group was primarily due to a decrease in sales and a change in product mix during the current year.
Selling, general and administrative expenses decreased by 2.0% to $9,540,000 for the year ended December 31, 2013 from $9,732,000 for the year ended December 31, 2012. The decrease was primarily due to a 4.1% decrease in selling, general and administrative expenses at our Electronics Group. The decrease in selling, general and administrative expenses at our Electronics Group was principally due to the departure of a senior officer whose duties were assumed by other management and also to a reduction in personnel at our ICS subsidiary.
During the first quarter of 2012, we reached a decision that made it probable that the employment agreement of our former chief operating officer would not be renewed, which effectively terminated his employment as of July 31, 2012. Pursuant to the terms of his existing agreement, we recorded an expense of $1,194,000 for estimated costs associated with the contract non-renewal.
During the fourth quarter of 2013, we recorded $29,000 of restructuring charges relating to our decision in October 2013 to consolidate the operations of our Quakertown, PA based TDL facility into our Hauppauge, NY facility.
During the fourth quarter of 2012, in connection with the annual impairment testing of TDL’s goodwill pursuant to ASC 350, the analysis indicated that the fair value for the TDL reporting unit was less than the carrying value and therefore the goodwill was impaired. As a result, we recorded an impairment charge for $820,000, representing the remaining carrying value of TDL’s goodwill.
Interest expense for the year ended December 31, 2013 decreased to $59,000 from $124,000 for the year ended December 31, 2012. In November 2012, we entered into a credit agreement with a commercial lender pursuant to which we established a committed line of credit of up to $6,000,000. This line of credit was used to pay off all of our obligations (term debt and line of credit) to our former primary lender. The decrease in interest expense was principally due to the payoff of our term debt, a lower interest rate on our new line of credit and a decrease in amounts owed under our line of credit during the year.
Investment and other income for the year ended December 31, 2013 decreased to $22,000 from $144,000 from the prior year. The decrease was principally due to an $85,000 gain recognized during the prior year period relating to the remaining unamortized deferred gain on the sale of our building in 2001, a gain of $31,000 on insurance proceeds relating to a business interruption insurance claim in the prior year and to higher bond premium amortization expense in the current year.
Loss before income tax provision was $263,000 for the year ended December 31, 2013 compared to a loss before income tax provision of $65,000 for the year ended December 31, 2012. The decrease in profitability was principally due to a decrease in sales and investment and other (income) and an increase in restructuring costs during the current year period which was partially offset by the following: (i) a decrease in selling, general and administrative expenses and interest expense during the current year, (ii) a $1,194,000 charge taken in connection with the non-renewal of our former chief operating officer’s contract during the prior year and (iii) an impairment charge of $820,000 relating to TDL’s goodwill in the prior year.
Income taxes for the year ended December 31, 2013 and 2012 were $2,307,000 and $70,000, respectively. The increase was principally due to a $2,252,000 deferred tax expense relating to the full valuation allowance taken on our net deferred tax asset in the current year. The remaining income tax expense in both the current and prior year periods consists of state income and Federal minimum taxes that cannot be offset by any state or Federal net operating loss carry-forwards.
As a result of the foregoing, the net loss for the year ended December 31, 2013 was $2,570,000 compared to a net loss of $135,000 for the year ended December 31, 2012.
Earnings before interest, taxes, goodwill impairment, depreciation and amortization (Adjusted EBITDA) for the year ended December 31, 2013 decreased to $259,000 compared to $1,167,000 for the year ended December 31, 2012. Listed below is the Adjusted EBITDA reconciliation to net loss:
Adjusted EBITDA is a non-GAAP financial measure and should not be construed as an alternative to net income. An element of our growth strategy has been through strategic acquisitions which have been substantially funded through the issuance of debt. This has resulted in significant interest expense and amortization expense. Adjusted EBITDA is presented as additional information because we believe 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.
|
|
|
Year ended
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Net loss
|
|
$
|
(2,570,000
|
)
|
|
$
|
(135,000
|
)
|
|
Interest expense
|
|
|
59,000
|
|
|
|
124,000
|
|
|
Income tax expense
|
|
|
2,307,000
|
|
|
|
70,000
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
820,000
|
|
|
Depreciation and amortization
|
|
|
463,000
|
|
|
|
288,000
|
|
|
EBITDA, as adjusted
|
|
$
|
259,000
|
|
|
$
|
1,167,000
|
|
Liquidity, Capital Resources and Inflation
Working capital decreased to $14,016,000 at December 31, 2013 as compared to $14,935,000 at December 31, 2012. The ratio of current assets to current liabilities was 4.7 to 1 at December 31, 2013 compared to 3.4 to 1 at December 31, 2012. The decrease in working capital was primarily attributable to the pre-tax loss for the period and the purchase of treasury stock and property and equipment.
Net cash provided by operating activities for the year ended December 31, 2013 was $3,985,000, primarily attributable to the non-cash deferred tax expense, depreciation and amortization, and stock based compensation, the decrease in accounts receivable, inventory and costs and estimated earnings in excess of billings on uncompleted contracts which was partially offset by the net loss for the current year, a decrease in the liability associated with non-renewal of a senior officer contract, accounts payable and accrued expenses. Net cash used in operating activities for the year ended December 31, 2012 was $954,000, primarily attributable to the net loss for the year, an increase in costs and estimated earnings in excess of billings on uncompleted contracts, inventories and accounts receivable, a decrease in accrued expenses and accounts payable and despite an increase in the liability associated with non-renewal of senior officers’ contracts and customer advances and the non-cash depreciation and amortization, goodwill impairment and stock based compensation.
Cash flows used in investing activities for the year ended December 31, 2013 was $335,000, primarily 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 investing activities for the year ended December 31, 2012 was $370,000 attributable to the purchase of property and equipment and marketable securities which was partially offset by the sale of marketable securities.
Cash flows used in financing activities for the year ended December 31, 2013 was $1,698,000, attributable to the repayments of note payable-bank, the purchase of treasury stock and the repayment of long-term debt. Cash flows provided by financing activities for the year ended December 31, 2012 was $225,000, attributable to the issuance of note payable-bank and long-term debt and a decrease in restricted cash that was partially offset by the repayment of long-term debt and 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. 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 December 31, 2013) 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 $2,100,000 at December 31, 2013 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 were in compliance with the financial covenants contained in the Credit Agreement at December 31, 2013. Despite being in compliance at December 31, 2013, we are uncertain whether we will be in compliance with one of the financial covenants contained in our lending agreement as of March 31, 2014. Accordingly, we have classified our line of credit as a current liability at December 31, 2013. We are currently negotiating with our primary lender to amend this covenant and based on preliminary discussions, we expect our lender to amend this covenant, although there can be no certainty that an agreement will be reached.
Our existing capital resources, including our bank credit facility and our cash flow from operations, are expected to be adequate to cover our cash requirements for the foreseeable future.
In November 2012, our Board of Directors authorized management, in its discretion, to purchase up to $400,000 of our common stock. On March 6, 2013, our Board of Directors approved a 10b5-1 Plan through which we conducted our authorized stock buy back program. We repurchased all of the remaining shares available under our stock buy back program (including the related 10b5-1 Plan) during the first and second quarters of 2013. From November 8, 2012 to June 20, 2013, we purchased a total of approximately 116,000 shares of our common stock for total cash consideration of approximately $400,000 for an average price of $3.45 per share. In June 2013, our Credit Agreement was amended whereby 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 the Credit Agreement. On November 6, 2013, our Board of Directors authorized management to purchase up to $400,000 of our common stock pursuant to a buy back program. In conjunction with the buy back program, our Board of Directors authorized management to enter into a 10b5-1 Plan through which we will be permitted to repurchase up to $200,000 of our common stock 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 the second quarter of 2014, depending on the timing of receipt of certain material contracts.
Inflation has not materially impacted the operations of our Company.
Off-Balance Sheet Arrangements
None.
Certain Material Trends
Backlog at December 31, 2013 was $10.1 million compared to $12.7 million at September 30, 2013 and $15.9 million at December 31, 2012. The decrease in backlog at December 31, 2013 from December 31, 2012 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 the lower backlog at our TDL subsidiary. Backlog at our ICS subsidiary was slightly higher at December 31, 2013 as compared to the prior year. The decrease in year-end backlog was primarily attributable to a difficult business environment resulting from general budget uncertainty and funding reductions related to 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. There has been a significant amount of bid and proposal activity for our Orbit Instrument Division on both legacy products and new opportunities. Several of these new opportunities are now in the qualification and pre-production stage. In addition, information from our customers related to all legacy opportunities is that the timing of the receipt of these awards is uncertain but the business remains intact. Despite a reduction in sales during the current year, gross margins at our Orbit Instrument Division remained the same as compared to 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 is expected to be 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 has taken certain cost cutting initiatives in 2012 including a reduction in personnel beginning in November 2012 and the consolidation of its two operating facilities into one. ICS entered into a contract to rent the unoccupied facility for the period January 2012 through May 2013. We are relocating ICS’s operations into a smaller, more suitable facility when its lease expires in March 2014, thereby creating 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 expect to incur approximately $600,000 in expenses and charges, inclusive of approximately $300,000 of non-cash accelerated amortization and depreciation expense on TDL’s leasehold improvements and certain other fixed assets in connection with the consolidation. In addition, all employees were guaranteed employment through March 2014 in order to complete the shipment of remaining backlog from December 31, 2013. Certain other employees were guaranteed employment through April 30, 2014 in order to satisfy outstanding engineering tasks and to complete the consolidation. Beginning January 1, 2014, although most of the costs incurred at TDL will be associated with the consolidation of its operation into our Hauppauge facility, these costs are not considered incremental in nature and therefore will be included in regular operating costs until the facility is closed in April 2014.
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, our Hauppauge facility will have sufficient capacity to support future growth without any significant facility investment.
For the year ended December 31, 2013, operating results for our Power Group decreased from the strong results of the prior year. Annual 2013 bookings for our Power Group, particularly from our COTS division which relies on military spending, has decreased from the prior year. Despite the decrease in bookings, revenue and profitability for 2013 only slightly decreased principally due to customer delivery schedules. However, due to reduced bookings during 2013, primarily due to the same macro-economic environment facing our Electronics Group, 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 the year 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 has adversely impacted our results for 2013. Nevertheless, it appears that aside from the timing of the receipt of certain pending orders, all of our legacy business with our customers remains intact.
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 not engaged in any discussions, beyond preliminary, related to any specific acquisition target, and 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 our financial covenants at December 31, 2013. However, due to the costs associated with closing our Quakertown facility, we are uncertain whether we would be in compliance with one financial covenant as of March 31, 2014. Consequently, we have commenced discussions with our primary lender to amend this one covenant in our lending agreement. Based on preliminary discussions, we expect our lender to amend this covenant, although there can be no certainty that an agreement will be reached.
We continue to use the cash generated by our operations to pay down our debt and when appropriate, repurchase our shares in the marketplace. Since January 1, 2012, we have repurchased in excess of 368,000 shares at an average price of $3.55. Due to our continued confidence that our legacy business remains intact and the expected positive impact of our cost cutting measures, particularly the consolidation of our Hauppauge and Quakertown operations, we believe we will continue to generate cash from our operations in 2014 which should enable us to further strengthen our balance sheet. On November 6, 2013, our Board of Directors authorized management to purchase up to $400,000 of our common stock pursuant to a buy back program. In conjunction with the buy back program, our Board of Directors authorized management to enter into a 10b5-1 Plan through which we 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.
| Item 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable, as we are a smaller reporting company.
|
Item 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
The information required under this Item appears in Item 15 of this report.
| Item 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| Item 9A. |
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design of our disclosure controls and procedures, as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures, as of December 31, 2013, are effective.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a–15(f) or 15d-15(f) under the Exchange Act.
Our management conducted an evaluation of the effectiveness of its internal control over financial reporting, as of December 31, 2013, based on the framework and criteria established in the 1992 Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2013.
There have been no changes in our internal control over financial reporting during the three months ended December 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We believe that a controls system, no matter how well designed and operated, can not provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
| Item 9B. |
OTHER INFORMATION |
There have not been any other material changes in our affairs which have not been described in a report on Form 8-K during the fourth quarter ended December 31, 2013.
PART III
|
Item 10.
|
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
|
Incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A promulgated under the Exchange Act in connection with our 2014 Annual Meeting of Stockholders.
|
Item 11.
|
EXECUTIVE COMPENSATION
|
Incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A promulgated under the Exchange Act in connection with our 2014 Annual Meeting of Stockholders.
| Item 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A promulgated under the Exchange Act in connection with our 2014 Annual Meeting of Stockholders.
|
Item 13.
|
CERTAIN RELATIONSHIPS, AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
|
Incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A promulgated under the Exchange Act in connection with our 2014 Annual Meeting of Stockholders.
|
Item 14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
Incorporated by reference to our definitive proxy statement to be filed pursuant to Regulation 14A promulgated under the Exchange Act in connection with our 2014 Annual Meeting of Stockholders.
| Item 15. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) The following documents are filed as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
None.
|
Exhibit No.
|
Description of Exhibit
|
|
|
|
|
2.1
|
Stock Purchase Agreement, dated December 13, 2004, by and among Orbit International Corp., TDL Development Laboratory, TDL Manufacturing, Inc. and the respective Shareholders of TDL Development Laboratory, Inc. and TDL Manufacturing, Inc. Incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K for December 13, 2004.
|
|
|
|
|
2.2
|
Stock Purchase Agreement, dated December 19, 2007, by and among Orbit International Corp., Integrated Consulting Services, Inc. and the respective shareholders of Integrated Consulting Services, Inc. Incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K for December 19, 2007.
|
|
|
|
|
3.1
|
Certification of Incorporation, as amended. Incorporated by reference to Exhibit 3(a) to Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1991.
|
|
|
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3.2
|
By-Laws, as amended. Incorporated by reference to Exhibit 3(b) to Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1988.
|
|
|
|
|
4.1
|
Orbit International Corp. 2003 Stock Incentive Plan. Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002.
|
|
|
|
|
10.1
|
Employment Agreement, dated as of August 22, 2011, between Registrant and Mitchell Binder. Incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011.
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|
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|
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10.2
|
Employment Agreement, dated as of December 14, 2007, between Registrant and Bruce Reissman. Incorporated by reference to Registrant’s Current Report on Form 8-K for December 11, 2007.
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|
10.3
|
First Amendment to Employment Agreement, dated February 25, 2011 between Registrant and Bruce Reissman. Incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly report on Form 10-Q for the quarterly period ended March 31, 2011.
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|
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|
Second Amendment to Employment Agreement, dated May 26, 2011, between Registrant and Bruce Reissman. Incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011.
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Third Amendment to Employment Agreement, dated June 29, 2011, between Registrant and Bruce Reissman. Incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011.
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|
|
Fourth Amendment to Employment Agreement, effective as of August 1, 2011, between Registrant and Bruce Reissman. Incorporated by reference to Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011.
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Employment Agreement, dated as of January 23, 2012, between Registrant and David Goldman. Incorporated by reference to Registrant’s Current Report on Form 8-K for January 23, 2012.
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|
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|
10.8
|
Form of Indemnification Agreement between the Company and each of its Directors dated as of September 10, 2001. Incorporated by reference to Exhibit 10(d) to Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2001.
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|
|
|
|
10.9
|
Purchase and Sale Agreement between the Company and 80 Cabot Realty LLC dated February 26, 2001. Incorporated by reference to Exhibit 4(b) to Registrant’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000.
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|
|
|
|
10.10
|
First Amendment to Lease between the Company and 80 Cabot Realty, LLC dated as of January 1, 2011. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K for February 22, 2011.
|
|
|
|
|
10.11
|
Credit Agreement dated as of March 10, 2010 between Registrant and its subsidiaries Behlman Electronics, Inc, Tulip Development Laboratory Inc. and Integrated Consulting Services, Inc. and Capital One, N.A. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K for March 16, 2010.
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|
|
Amendment to Credit Agreement, dated August 10, 2011, by and among Registrant, Behlman Electronics, Inc., Tulip Development Laboratory, Inc., Integrated Consulting Services, Inc. and Capital One, N.A. Incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011.
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|
|
|
|
|
Second Amendment to Credit Agreement, dated October 1, 2011, by and among Registrant, Behlman Electronics, Inc., Tulip Development Laboratory, Inc., Integrated Consulting Services, Inc. and Capital One, N.A. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K for October 1, 2011.
|
|
|
|
|
|
Amendment to Credit Agreement, dated February 6, 2012, by and among Registrant, Behlman Electronics, Inc., Tulip Development Laboratory, Inc., Integrated Consulting Services, Inc. and Capital One, N.A. Incorporated by reference to Exhibit 10.15 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2011.
|
|
10.15
|
Security Agreement dated as of March 10, 2010 between Registrant and its subsidiaries Behlman Electronics, Inc, Tulip Development Laboratory Inc. and Integrated Consulting Services, Inc. and Capital One, N.A. Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K for March 16, 2010.
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|
|
|
|
10.16
|
Employment Agreement, dated December 19, 2007, between Integrated Consulting Services, Inc. and Kenneth J. Ice. Incorporated by reference to Registrant’s Current Report on Form 8-K for December 19, 2007.
|
|
|
|
|
10.17
|
Employment Agreement, dated December 19, 2007, between Integrated Consulting Services, Inc. and Julie A. McDearman. Incorporated by reference to Registrant’s Current Report on Form 8-K for December 19, 2007.
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|
|
|
|
10.18
|
Custody, Pledge and Security Agreement, dated as of December 19, 2007, by and among Orbit International Corp. (“Pledgor”), Kenneth J. Ice, Michael R. Rhudy and Julie A. McDearman (“Pledgees”), and Phillips Nizer LLP (“Custodian”). Incorporated by reference to Registrant’s Current Report on Form 8-K for December 19, 2007.
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|
|
|
|
10.19
|
Form of Code of Ethics between the Company and its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. Incorporated by reference to Registrant’s Annual Report on Form 10K-SB for the fiscal year ended December 31, 2003.
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|
|
|
|
10.20
|
Credit Agreement dated as of November 8, 2012 between Registrant and its subsidiaries Behlman Electronics, Inc, Tulip Development Laboratory Inc. and Integrated Consulting Services, Inc. and People’s United Bank. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K for November 13, 2012.
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10.21
|
Line of Credit Note dated as of November 8, 2012 between Registrant and its subsidiaries Behlman Electronics, Inc, Tulip Development Laboratory Inc. and Integrated Consulting Services, Inc. and People’s United Bank. Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K for November 13, 2012.
|
|
|
|
|
10.22
|
Security Agreement dated as of November 8, 2012 between Registrant and its subsidiaries Behlman Electronics, Inc, Tulip Development Laboratory Inc. and Integrated Consulting Services, Inc. and People’s United Bank. Incorporated by reference to Exhibit 10.3 to Registrant’s Current Report on Form 8-K for November 13, 2012.
|
|
|
Subsidiaries of Registrant.
|
|
|
|
|
|
Consent of EisnerAmper LLP.
|
|
|
|
|
|
Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) and 18 U.S.C. 1350.
|
|
|
|
|
|
Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) and 18 U.S.C. 1350.
|
|
|
|
|
|
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.
|
* Filed herewith.
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Report of Independent Registered Public Accounting Firm
|
F-1
|
|
|
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
Balance Sheets as of December 31, 2013 and 2012
|
F-2
|
|
Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2013 and 2012
|
F-3
|
|
Statements of Stockholders' Equity for the Years Ended December 31, 2013 and 2012
|
F-4
|
|
Statements of Cash Flows for the Years Ended December 31, 2013 and 2012
|
F-5 - F-6
|
|
Notes to Consolidated Financial Statements
|
F-7 - F-21
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Orbit International Corp.
We have audited the accompanying consolidated balance sheets of Orbit International Corp. and Subsidiaries (the “Company”) as of December 31, 2013 and 2012 and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2013. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Orbit International Corp. and Subsidiaries as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
/s/ EisnerAmper LLP
New York, New York
March 31, 2014
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,562,000
|
|
|
$
|
610,000
|
|
|
Investments in marketable securities
|
|
|
243,000
|
|
|
|
251,000
|
|
|
Accounts receivable, less allowance for doubtful accounts of $145,000
|
|
|
2,981,000
|
|
|
|
5,372,000
|
|
|
Inventories
|
|
|
11,803,000
|
|
|
|
13,271,000
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
-
|
|
|
|
875,000
|
|
|
Deferred tax asset
|
|
|
-
|
|
|
|
447,000
|
|
|
Other current assets
|
|
|
264,000
|
|
|
|
252,000
|
|
|
Total current assets
|
|
|
17,853,000
|
|
|
|
21,078,000
|
|
|
Property and equipment, net
|
|
|
975,000
|
|
|
|
1,099,000
|
|
|
Goodwill
|
|
|
868,000
|
|
|
|
868,000
|
|
|
Deferred tax asset
|
|
|
-
|
|
|
|
1,806,000
|
|
|
Other assets
|
|
|
35,000
|
|
|
|
125,000
|
|
|
Total Assets
|
|
$
|
19,731,000
|
|
|
$
|
24,976,000
|
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Note payable - bank
|
|
$
|
2,100,000
|
|
|
$
|
3,324,000
|
|
|
Current portion of long-term debt
|
|
|
-
|
|
|
|
33,000
|
|
|
Accounts payable
|
|
|
510,000
|
|
|
|
741,000
|
|
|
Liability associated with non-renewal of senior officer contract
|
|
|
36,000
|
|
|
|
661,000
|
|
|
Income taxes payable
|
|
|
25,000
|
|
|
|
2,000
|
|
|
Accrued expenses
|
|
|
1,149,000
|
|
|
|
1,294,000
|
|
|
Customer advances
|
|
|
17,000
|
|
|
|
88,000
|
|
|
Total current liabilities
|
|
|
3,837,000
|
|
|
|
6,143,000
|
|
|
Liability associated with non-renewal of senior officer contract, net of current portion
|
|
|
4,000
|
|
|
|
41,000
|
|
|
Long-term debt, net of current portion
|
|
|
-
|
|
|
|
8,000
|
|
|
Total liabilities
|
|
|
3,841,000
|
|
|
|
6,192,000
|
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
Common stock, $.10 par value, 10,000,000 shares authorized, 5,232,000 and 5,102,000 shares issued at 2013 and 2012, respectively, and 4,521,000 and 4,515,000 shares outstanding at 2013 and 2012, respectively
|
|
|
523,000
|
|
|
|
510,000
|
|
|
Additional paid-in capital
|
|
|
22,824,000
|
|
|
|
22,726,000
|
|
|
Treasury stock, at cost, 711,000 and 587,000 shares at 2013 and 2012, respectively
|
|
|
(2,133,000
|
)
|
|
|
(1,700,000
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(5,000
|
)
|
|
|
(3,000
|
)
|
|
Accumulated deficit
|
|
|
(5,319,000
|
)
|
|
|
(2,749,000
|
)
|
|
Stockholders' equity
|
|
|
15,890,000
|
|
|
|
18,784,000
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
19,731,000
|
|
|
$
|
24,976,000
|
|
See Notes to Consolidated Financial Statements
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
Years ended December 31,
|
|
2013 |
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
24,838,000
|
|
|
$
|
29,438,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
15,495,000
|
|
|
|
17,777,000
|
|
|
Gross profit
|
|
|
9,343,000
|
|
|
|
11,661,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
9,540,000
|
|
|
|
9,732,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs related to non-renewal of senior officer contract
|
|
|
-
|
|
|
|
1,194,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs
|
|
|
29,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
820,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
59,000
|
|
|
|
124,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other income, net
|
|
|
(22,000
|
)
|
|
|
(144,000
|
)
|
|
Total expenses, net
|
|
|
9,606,000
|
|
|
|
11,726,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax provision
|
|
|
(263,000
|
)
|
|
|
(65,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
2,307,000
|
|
|
|
70,000
|
|
|
Net loss
|
|
|
(2,570,000
|
)
|
|
|
(135,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains and (losses) on marketable securities, net of income tax
|
|
|
(2,000
|
)
|
|
|
15,000
|
|
|
Comprehensive loss
|
|
$
|
(2,572,000
|
)
|
|
$
|
(120,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.58
|
)
|
|
$
|
(0.03
|
)
|
|
Diluted
|
|
$
|
(0.58
|
)
|
|
$
|
(0.03
|
)
|
See Notes to Consolidated Financial Statements
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended December 31, 2013 and 2012
| |
|
Common Stock
10,000,000 Shares
Authorized
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Treasury Stock |
|
|
Accumulated other
Comprehensive
Income (loss), net
of income tax
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Shares Issued
|
|
|
Amount
|
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
|
|
Total
|
|
|
Balance at January 1, 2012
|
|
|
5,102,000
|
|
|
$
|
510,000
|
|
|
$
|
22,515,000
|
|
|
$
|
(2,614,000
|
) |
|
|
369,000
|
|
|
$
|
(915,000
|
) |
|
$
|
(18,000
|
) |
|
$
|
19,478,000
|
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
211,000
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
211,000
|
|
|
Purchase of treasury stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
218,000
|
|
|
|
(785,000
|
)
|
|
|
-
|
|
|
|
(785,000
|
)
|
|
Change in unrealized gains and losses on marketable securities, net of income tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,000
|
|
|
|
15,000
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(135,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(135,000
|
)
|
|
Balance at December 31, 2012
|
|
|
5,102,000
|
|
|
|
510,000
|
|
|
|
22,726,000
|
|
|
|
(2,749,000
|
)
|
|
|
587,000
|
|
|
|
(1,700,000
|
)
|
|
|
(3,000
|
)
|
|
|
18,784,000
|
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
111,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
111,000
|
|
|
Issuance of restricted stock
|
|
|
130,000
|
|
|
|
13,000
|
|
|
|
(13,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Purchase of treasury stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
124,000
|
|
|
|
(433,000
|
)
|
|
|
-
|
|
|
|
(433,000
|
)
|
|
Change in unrealized gains and losses on marketable securities, net of income tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,000
|
)
|
|
|
(2,000
|
)
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,570,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,570,000
|
)
|
|
Balance at December 31, 2013
|
|
|
5,232,000
|
|
|
$
|
523,000
|
|
|
$
|
22,824,000
|
|
|
$
|
(5,319,000
|
)
|
|
|
711,000
|
|
|
$
|
(2,133,000
|
)
|
|
$
|
(5,000
|
)
|
|
$
|
15,890,000
|
|
See Notes to Consolidated Financial Statements
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Years ended December 31,
|
|
2013
|
|
|
2012
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,570,000
|
)
|
|
$
|
(135,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
820,000
|
|
|
Share-based compensation expense
|
|
|
111,000
|
|
|
|
211,000
|
|
|
Depreciation and amortization
|
|
|
463,000
|
|
|
|
288,000
|
|
|
Bond premium amortization
|
|
|
10,000
|
|
|
|
2,000
|
|
|
Deferred tax expense
|
|
|
2,252,000
|
|
|
|
-
|
|
|
Gain on sale of marketable securities
|
|
|
(7,000
|
)
|
|
|
(5,000
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
2,391,000
|
|
|
|
(431,000
|
)
|
|
Decrease (increase) in inventories
|
|
|
1,468,000
|
|
|
|
(721,000
|
)
|
|
Decrease (increase) in costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
875,000
|
|
|
|
(875,000
|
)
|
|
Increase in other current assets
|
|
|
(12,000
|
)
|
|
|
(2,000
|
)
|
|
Decrease (increase) in other assets
|
|
|
90,000
|
|
|
|
(26,000
|
)
|
|
(Decrease) increase in liability associated with non-renewal of senior officer contract
|
|
|
(662,000
|
)
|
|
|
79,000
|
|
|
Decrease in accounts payable
|
|
|
(231,000
|
)
|
|
|
(63,000
|
)
|
|
(Decrease) increase in customer advances
|
|
|
(71,000
|
)
|
|
|
73,000
|
|
|
Increase (decrease) in taxes payable
|
|
|
23,000
|
|
|
|
(28,000
|
)
|
|
Decrease in accrued expenses
|
|
|
(145,000
|
)
|
|
|
(141,000
|
)
|
|
Net cash provided by (used in) operating activities
|
|
|
3,985,000
|
|
|
|
(954,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(553,000
|
)
|
|
|
(110,000
|
)
|
|
Proceeds from sale of marketable securities
|
|
|
557,000
|
|
|
|
113,000
|
|
|
Purchase of property and equipment
|
|
|
(339,000
|
)
|
|
|
(373,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(335,000
|
)
|
|
|
(370,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
-
|
|
|
|
671,000
|
|
|
Purchase of treasury stock
|
|
|
(433,000
|
)
|
|
|
(785,000
|
)
|
|
Repayments of long-term debt
|
|
|
(41,000
|
)
|
|
|
(3,050,000
|
)
|
|
(Repayments) proceeds of note payable-bank
|
|
|
(1,224,000
|
)
|
|
|
3,324,000
|
|
|
Proceeds from issuance of long-term debt
|
|
|
-
|
|
|
|
65,000
|
|
| |
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,698,000
|
)
|
|
|
225,000
|
|
(continued)
See Notes to Consolidated Financial Statements
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
|
Years ended December 31,
|
|
2013 |
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
1,952,000
|
|
|
$
|
(1,099,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
610,000
|
|
|
|
1,709,000
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
2,562,000
|
|
|
$
|
610,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
61,000
|
|
|
$
|
130,000
|
|
| |
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes
|
|
$
|
32,000
|
|
|
$
|
98,000
|
|
See Notes to Consolidated Financial Statements
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
ORGANIZATION AND BUSINESS:
|
|
The consolidated financial statements include the accounts of Orbit International Corp. and its wholly owned subsidiaries (collectively, the "Company"). All significant intercompany transactions have been eliminated in consolidation.
The Company currently operates in two reporting segments, the Electronics Group and the Power Group. The Electronics Group is comprised of the Company's Orbit Instrument Division ("Orbit") and its TDL and ICS subsidiaries. Orbit and TDL are engaged in the design and manufacture of electronic components and subsystems. ICS performs system integration for gun weapons systems and fire control interface as well as logistics support and documentation. The Power Group is comprised of the Company's Behlman subsidiary and is engaged in the design and manufacture of commercial and custom power units. The Electronics Group and the Power Group both conduct their operations in the United States. The majority of the Company’s customers are comprised of various agencies and prime and lower tier subcontractors of the U.S government.
|
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
|
|
General
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. On an on-going basis, we re-evaluate our judgments and estimates including those related to inventory valuation, the valuation allowance on our deferred tax asset, goodwill impairment, valuation of share-based compensation, revenue and cost recognition on long-term contracts accounted for under the percentage-of-completion method and other-than-temporary impairment on marketable securities, among others.
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 CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
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.
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 are established to reduce deferred tax assets to the amount expected that will more likely than not be realized. Management considers all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income, tax planning strategies, and recent financial operations. Interest and penalties related to any tax matters are recognized as income tax expense.
|
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
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 there is: i) persuasive evidence that an arrangement with the customer exists, which is generally a customer purchase order, ii) the selling price is fixed and determinable, iii) collection of the customer receivable is deemed probable, and iv) we do not have any continuing 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.
All contracts are for products made to specific customer specifications with no right of return. All units are shipped with a one-year warranty. There were no material warranty claims during the years ending December 31, 2013 and 2012.
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 (loss) and total comprehensive income (loss) as a single continuous statement.
Stock Based Compensation
The Company accounts for stock-based compensation awards based on the fair value of the awards on the date of grant and expensing such compensation over the vesting periods of the awards.
Earnings (loss) Per Share
Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net earnings (loss) by the sum of the weighted average number of shares of common stock and the dilutive effect of unexercised stock options and the unearned portion of restricted stock awards.
|
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
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 financial statements.
Freight and Delivery Costs
The Company's freight out and delivery costs were $106,000 and $180,000 for the years ended December 31, 2013 and 2012, respectively. These costs are included in selling, general and administrative expenses.
Research and Development Expenses
Research and development costs are expensed when incurred. The Company expensed approximately $1,718,000 and $1,573,000 for research and development during the years ended December 31, 2013 and 2012, respectively, which is included in selling, general and administrative expenses.
|
| |
|
|
|
|
3.
|
ACCRUED EXPENSES:
|
|
Accrued Expenses consist of the following:
|
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Vacation
|
|
$
|
313,000
|
|
|
$
|
298,000
|
|
|
Payroll and payroll taxes
|
|
|
331,000
|
|
|
|
468,000
|
|
|
Deferred rent
|
|
|
149,000
|
|
|
|
105,000
|
|
|
Professional fees
|
|
|
190,000
|
|
|
|
231,000
|
|
|
Other
|
|
|
166,000
|
|
|
|
192,000 -
|
|
|
|
|
$
|
1,149,000
|
|
|
$
|
1,294,000
|
|
| 4. |
INVENTORIES:
|
|
Inventories consist of the following:
|
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
7,200,000
|
|
|
$
|
8,199,000
|
|
|
Work-in-process
|
|
|
4,313,000
|
|
|
|
4,742,000
|
|
|
Finished goods
|
|
|
290,000
|
|
|
|
330,000
|
|
|
|
|
$
|
11,803,000
|
|
|
$
|
13,271,000
|
|
| 5. |
MARKETABLE SECURITIES:
|
|
The following is a summary of the Company’s available-for-sale marketable securities at December 31, 2013 and 2012:
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds
|
|
$
|
250,000
|
|
|
$
|
243,000
|
|
|
$
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds
|
|
$
|
257,000
|
|
|
$
|
251,000
|
|
|
$
|
(6,000
|
)
|
ORBIT INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of marketable securities classified as available-for-sale at December 31, 2013 are as follows:
The reconciliation of income tax computed at the U.S. federal statutory tax rates to income tax expense is as follows:
As of December 31, 2013 and 2012, the Company has no material uncertain tax positions. The Company is subject to routine income tax audits in various jurisdictions and tax returns from December 31, 2010 remain open to examination by such taxing authorities. The Company did not record any tax related interest or penalties.