Orbit International Corp.

What they do

Orbit International operates two segments: Electronics Group and Power Group, which make electronic components and power supplies primarily for military customers. The business is highly dependent on U.S. Government military spending. Manufacturing is based in Hauppauge, NY, and the company consolidated its TDL subsidiary's Quakertown, PA facility into Hauppauge during 2014.

Revenue drivers

• Electronics Group — Largest segment; sales fell 23.0% in 2013 and drove the overall revenue decline, with lower bookings also reducing backlog at June 30, 2014.
• Power Group — Sales decreased 5.4% in 2013; the segment performed well in Q3 2014 but was insufficient to offset Electronics Group weakness.
• TDL subsidiary — Legacy hardware and power conversion manufacturer whose Quakertown facility consolidation cost $1,079,000 in the first half of 2014 and continued to record operating losses.
• Military contracts and backlog — Revenue is primarily awarded through purchase orders from U.S. military programs; backlog fell to $8.2 million at June 30, 2014, from $10.1 million at year-end 2013.

Recent performance

Q3 2014 net sales were $4.8 million, down from $6.1 million a year earlier, with gross margin falling to 36.7% from 38.7%. The company reported a net loss of $115,000 ($0.03 per share) versus net income of $127,000 ($0.03 per diluted share) in Q3 2013. Nine-month 2014 net sales were $15.2 million, down from $19.0 million, and the net loss of $1.348 million included $1.087 million of Quakertown consolidation costs. Q3 2014 bookings exceeded $6.0 million and backlog rose to $9.8 million at September 30, 2014, from $8.2 million at June 30, 2014.

Strategy

Management is restructuring the business to reduce costs, including moving TDL's Quakertown operations into Hauppauge, and expects no further Quakertown costs after June 30, 2014. The company voluntarily delisted from Nasdaq and deregistered its stock to cut administrative expenses. It continues to pursue legacy defense contracts expected to ship in 2015. Share repurchases have been paused pending receipt of certain material contracts.

Risks

• Defense spending dependence — Orbit's business is highly dependent on U.S. military spending, which management says has declined under federal budget pressure.
• Backlog and contract timing — Backlog fell to $8.2 million at June 30, 2014, and management warns that timing of legacy contract awards is uncertain and may slip into 2015.
• Credit agreement covenants — The credit agreement was amended in April 2014 to require $3 million minimum liquidity and $13.5 million tangible net worth, and compliance was uncertain earlier in the year.
• TDL operating losses — TDL recorded $351,000 and $1,079,000 operating losses in the three and six months ended June 30, 2014, including Quakertown consolidation costs.

Outlook

Management expects continued challenging industry conditions in 2014, with cost savings partially offset by lower revenue from delayed legacy contracts. It says Q3 bookings strength should continue into Q4 2014 and improve 2015 delivery schedules. The company expects to benefit from roughly $8 million in federal and $7 million in state net operating loss carryforwards. Orbit remains encouraged by its bid and proposal pipeline but cautions that award timing is uncertain.