FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended December 30, 2007
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
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For the transition period from
to
Commission file number 1-7872
BREEZE-EASTERN CORPORATION
(formerly TransTechnology Corporation)
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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95-4062211
(I.R.S. employer
identification no.)
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700 Liberty Avenue
Union, New Jersey
(Address of principal executive offices)
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07083
(Zip Code)
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Registrants telephone number, including area code: (908) 686-4000
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) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated file in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
As of
February 4, 2008, the total number of outstanding shares of registrants one class of common
stock was 9,330,992.
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited, condensed Statements of Consolidated Operations, Consolidated Balance
Sheets, and Statements of Consolidated Cash Flows are of Breeze-Eastern Corporation, formerly
TransTechnology Corporation, and its consolidated subsidiaries (collectively, the Company).
These reports reflect all adjustments of a normal recurring nature, which are, in the opinion of
management, necessary for a fair presentation of the results of operations for the interim periods
reflected therein. The results reflected in the unaudited, condensed Statement of Consolidated
Operations for the periods ended December 30, 2007, are not necessarily indicative of the results
to be expected for the entire fiscal year. The following unaudited, condensed Consolidated
Financial Statements should be read in conjunction with the notes thereto, and Managements
Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2 of
Part I of this report, as well as the audited financial statements and related notes thereto
contained in the Companys Annual Report on Form 10-K filed for the fiscal year ended March 31,
2007.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
3
BREEZE-EASTERN CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(In Thousands of Dollars, Except Share and Per Share Data)
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Three Months Ended
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Nine Months Ended
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December 30, 2007
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December 31, 2006
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December 30, 2007
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December 31, 2006
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Net sales
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$
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18,061
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$
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18,894
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$
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51,556
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$
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52,818
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Cost of sales
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9,919
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10,079
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29,763
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29,404
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Gross profit
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8,142
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8,815
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21,793
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23,414
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General, administrative and selling expenses
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4,714
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5,050
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14,069
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14,385
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Interest expense
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846
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1,000
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2,670
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3,286
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Other expense net
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38
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62
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107
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141
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Loss on extinguishment of debt
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1,331
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Income before income taxes
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2,544
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2,703
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4,947
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4,271
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Income tax provision
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1,018
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1,081
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1,979
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1,708
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Net income
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$
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1,526
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$
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1,622
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$
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2,968
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$
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2,563
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Earnings per share:
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Basic:
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Net income per share:
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$
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0.16
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$
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0.17
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$
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0.32
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$
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0.28
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Diluted:
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Net income per share:
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$
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0.16
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$
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0.17
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$
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0.32
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$
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0.27
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Weighted average basic shares outstanding
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9,327,000
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9,275,000
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9,308,000
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9,252,000
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Weighted average diluted shares outstanding
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9,404,000
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9,383,000
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9,395,000
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9,353,000
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See
notes to consolidated financial statements.
4
BREEZE-EASTERN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Data)
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(Unaudited)
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ASSETS
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December 30, 2007
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March 31, 2007
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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2,000
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$
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2,127
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Accounts receivable (net of allowance for doubtful accounts of
$77 at December 30, 2007 and $72 at March 31, 2007)
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11,881
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14,761
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Inventories
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22,261
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20,517
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Prepaid expenses and other current assets
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592
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369
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Deferred income taxes
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6,673
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7,181
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Total current assets
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43,407
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44,955
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PROPERTY:
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Property, plant and equipment
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18,052
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17,274
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Less accumulated depreciation and amortization
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13,398
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12,495
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Property , plant and equipment net
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4,654
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4,779
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OTHER ASSETS:
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Deferred income taxes
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19,447
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20,808
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Goodwill
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402
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402
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Real estate held for sale
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4,000
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4,000
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Other
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6,266
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5,527
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Total other assets
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30,115
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30,737
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TOTAL
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$
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78,176
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$
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80,471
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LIABILITIES AND STOCKHOLDERS EQUITY
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CURRENT LIABILITIES:
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Revolving credit facility
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$
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4,072
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$
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3,289
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Current portion of long-term debt
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3,057
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5,057
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Accounts payable trade
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3,728
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4,989
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Accrued compensation
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2,665
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3,486
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Accrued income taxes
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100
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447
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Accrued interest
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219
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295
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Other current liabilities
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4,267
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4,252
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Total current liabilities
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18,108
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21,815
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LONG-TERM DEBT PAYABLE TO BANKS
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30,454
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32,750
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OTHER LONG-TERM LIABILITIES
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9,475
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9,007
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COMMITMENTS AND CONTINGENCIES (Note 10)
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STOCKHOLDERS EQUITY
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Preferred stock authorized, 300,000 shares; none issued
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Common stock authorized, 14,700,000 shares of $.01 par value; issued,
9,738,982 at December 30, 2007 and 9,670,566 shares at March 31, 2007
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97
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97
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Additional paid-in capital
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92,842
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92,111
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Accumulated deficit
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(66,053
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)
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(68,772
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)
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Accumulated other comprehensive loss
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(48
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)
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(48
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)
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26,838
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23,388
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Less treasury stock, at cost - 412,323 at December 30, 2007 and 395,135 shares at
March 31, 2007
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(6,699
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)
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(6,489
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)
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Total stockholders equity
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20,139
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16,899
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TOTAL
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$
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78,176
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$
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80,471
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See notes to consolidated financial statements.
5
BREEZE-EASTERN CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(In Thousands of Dollars)
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Nine months ended
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December 30, 2007
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December 31, 2006
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Cash flows from operating activities:
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Net income
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$
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2,968
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$
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2,563
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Adjustments to reconcile net income to net cash
provided by operating activities:
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Write off of unamortized loan fees
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944
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Depreciation and amortization
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987
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1,132
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Noncash interest expense, net
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79
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75
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Stock based compensation
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463
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230
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Loss on disposal of fixed asset
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1
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Provision for losses on accounts receivable
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10
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4
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Deferred taxes-net
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1,869
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1,709
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Changes in assets and liabilities :
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Decrease in accounts receivable and other receivables
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2,870
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2,687
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Increase in inventories
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(1,744
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)
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(2,194
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)
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Increase in other assets
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(1,033
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)
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(175
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)
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Decrease in accounts payable
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(1,377
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)
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(2,668
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)
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Decrease in accrued compensation
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(821
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)
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(924
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)
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Decrease in income taxes payable
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(77
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)
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(517
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)
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(Decrease) increase in other liabilities
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(199
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)
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124
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Net cash provided by operating activities
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3,995
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2,991
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Cash flows from investing activities:
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Capital expenditures
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(672
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)
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(987
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)
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Decrease in restricted cash
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4
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499
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Net cash used in investing activities
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(668
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)
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(488
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)
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Cash flows from financing activities:
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Payments on long-term debt
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(4,296
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)
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(43,103
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)
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Proceeds from long-term debt and borrowings
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40,000
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Borrowings of other debt
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|
782
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2,599
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Payment of debt issue costs
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(419
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)
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Expenses related to the private placement of common stock
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(5
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)
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Exercise of stock options
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65
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123
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Net cash used in financing activities
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(3,454
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)
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(800
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)
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(Decrease) increase in cash
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|
(127
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)
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1,703
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Cash at beginning of period
|
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|
2,127
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|
|
|
161
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Cash at end of period
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$
|
2,000
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|
|
$
|
1,864
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|
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Supplemental information:
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Interest payments
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|
$
|
2,659
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|
|
$
|
3,515
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Income tax payments
|
|
$
|
189
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|
|
$
|
517
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Non-cash financing activity for stock option exercise
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$
|
210
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$
|
62
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Non-cash investing activity for additions to property plant and equipment
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$
|
122
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$
|
34
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|
|
See notes to consolidated financial statements.
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
Earnings Per Share
The computation of basic earnings per share is based on the weighted-average number of
common shares outstanding. The computation of diluted earnings per share assumes the
foregoing and, in addition, the exercise of all dilutive stock options using the treasury
stock method.
The components of the denominator for basic earnings per common share and diluted earnings
per common share are reconciled as follows:
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Three Months Ended
|
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Nine Months Ended
|
|
|
December 30,
|
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December 31,
|
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December 30,
|
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December 31,
|
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|
2007
|
|
2006
|
|
2007
|
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2006
|
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Basic Earnings per
Common Share:
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|
|
|
|
|
|
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|
Weighted-average common
stock outstanding for basic
earnings per share calculation
|
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|
9,327,000
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|
|
|
9,275,000
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|
|
|
9,308,000
|
|
|
|
9,252,000
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
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|
|
|
|
|
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|
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Diluted Earnings per
Common Share:
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Weighted-average common
shares outstanding
|
|
|
9,327,000
|
|
|
|
9,275,000
|
|
|
|
9,308,000
|
|
|
|
9,252,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Stock options*
|
|
|
77,000
|
|
|
|
108,000
|
|
|
|
87,000
|
|
|
|
101,000
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common
stock outstanding for diluted
earnings per share calculation
|
|
|
9,404,000
|
|
|
|
9,383,000
|
|
|
|
9,395,000
|
|
|
|
9,353,000
|
|
|
|
|
|
|
|
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*
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|
During the three and nine month periods ended December 30, 2007, options to purchase 171,000
and 99,000 shares of common stock, respectively, and during the three and nine month periods
ended December 31, 2006, options to purchase 26,000 shares of common stock were not included
in the computation of diluted earnings per share because the exercise prices of the options
were greater than the average market price of the common share.
|
7
NOTE 2.
Stock-Based Compensation
Net income for the three and nine month periods ended December 30, 2007 and December 31, 2006
includes $0.1 million net of tax, or $0.01 per diluted share, and $0.3 million net of tax, or $0.03
per diluted share, respectively, of stock based compensation expense. Stock based compensation
expense was recorded in general, administrative and selling expenses.
The Company maintains the Amended and Restated 1992 Long Term Incentive Plan (the 1992 Plan), the
Amended and Restated 1998 Non-Employee Directors Stock Option Plan (the 1998 Plan), the 1999 Long
Term Incentive Plan (the 1999 Plan), the 2004 Long Term Incentive Plan (the 2004 Plan) and the
2006 Long Term Incentive Plan (the 2006 Plan).
Under the terms of the 2006 Plan, 500,000 shares of the Companys common stock may be granted as
stock options or awarded as restricted stock to officers, non-employee directors and certain
employees of the Company through July 2016. Under the terms of the 2004 Plan, 200,000 of the
Companys common shares may be granted as stock options or awarded as restricted stock to officers,
non-employee directors and certain employees of the Company through September 2014. Under the
terms of the 1999 Plan, 300,000 of the Companys common shares may be granted as stock options or
awarded as restricted stock to officers, non-employee directors and certain employees of the
Company through July 2009. Under the terms of the 1998 Plan, 250,000 of the Companys common
shares may be granted as stock options to non-employee directors of the Company through July 2008.
The 1992 Plan expired in September 2002 and no grants or awards may be made thereafter under the
1992 Plan, however, there remain outstanding unexercised options granted in fiscal year 2000 and in
fiscal year 2002 under the 1992 Plan.
Under each of the 1992, 1998, 1999, 2004 and 2006 Plans, option exercise prices equal the fair
market value of the common shares at the respective grant dates. Options granted prior to May 1999
to officers and employees, and all options granted to non-employee directors, expire if not
exercised on or before five years after the date of the grant. Options granted beginning in May
1999 to officers and employees expire no later than 10 years after the date of the grant. Options
granted to directors, officers and employees vest ratably over three years beginning one year after
the date of the grant. In the event of the occurrence of certain circumstances, including a change
of control of the Company as defined in the various Plans, vesting of options may be accelerated.
The weighted-average Black-Scholes value per option granted in fiscal 2008 and fiscal 2007 was
$6.80 and $6.83, respectively. The following assumptions were used in the Black-Scholes option
pricing model for options granted in fiscal 2008 and fiscal 2007. Expected volatilities are based
on historical volatility of the Companys stock and other factors. The Company uses historical
data to estimate the expected term of the options granted. The risk-free rate for periods within
the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time
of the grant. The Company has assumed no forfeitures due to the limited number of employees at the
executive and senior management level who receive stock options, past employment history and
current stock price projections.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Volatility
|
|
|
48.9
|
%
|
|
|
51.0
|
%
|
Risk-free interest rate
|
|
|
4.7
|
%
|
|
|
5.1
|
%
|
Expected term of options (in years)
|
|
|
7.0
|
|
|
|
7.0
|
|
8
The following table summarizes stock option activity under all plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
Approximate
|
|
Weighted-
|
|
|
|
|
|
|
Intrinsic
|
|
Remaining
|
|
Average
|
|
|
Number
|
|
Value
|
|
Contractual
|
|
Exercise
|
|
|
of Shares
|
|
(in thousands)
|
|
Term (Years)
|
|
Price
|
|
Outstanding at March 31, 2007
|
|
|
364,996
|
|
|
$
|
814
|
|
|
|
7
|
|
|
$
|
8.91
|
|
Granted
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
$
|
12.04
|
|
Exercised
|
|
|
(44,085
|
)
|
|
$
|
265
|
|
|
|
|
|
|
$
|
6.22
|
|
Canceled or expired
|
|
|
( 2,000
|
)
|
|
|
|
|
|
|
|
|
|
$
|
10.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 30, 2007
|
|
|
393,911
|
|
|
$
|
837
|
|
|
|
6
|
|
|
$
|
9.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 30,
2007
|
|
|
257,285
|
|
|
$
|
775
|
|
|
|
5
|
|
|
$
|
8.97
|
|
Unvested options expected to become
exercisable after December 30, 2007
|
|
|
136,626
|
|
|
$
|
62
|
|
|
|
9
|
|
|
$
|
11.35
|
|
Shares available for future option
grants at December 30, 2007 (a)
|
|
|
642,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
May be decreased by restricted stock grants.
|
Cash received from stock option exercises during the first nine months of fiscal 2008 was
approximately $65,000. In lieu of a cash payment for stock option exercises, the Company received
17,188 shares of common stock, which were retired into treasury, valued at the price of the common
stock at the transaction date. There was no tax benefit generated to the Company from options
granted prior to April 1, 2006 and exercised during the first nine months of fiscal 2008.
As noted above, stock options granted to non-employee directors, officers and employees vest
ratably over three years beginning one year after the date of the grant. During the first nine
months of fiscal 2008 and fiscal 2007, compensation expense associated with stock options was
approximately $0.3 million and $0.2 million, respectively, before taxes of approximately $0.1
million, and such expense was recorded in general, administrative and selling expenses. As of
December 30, 2007 there was approximately $0.7 million of unrecognized compensation cost related to
stock options granted but not yet vested that are expected to become exercisable, which cost is
expected to be recognized over a weighted-average period of 1.9 years.
It is the policy of the Company that the stock underlying option grants consist of authorized and
unissued shares available for distribution under the applicable Plan. Under the 1992, 1999, 2004
and 2006 Plans, the Incentive and Compensation Committee of the Board of Directors (made up of
independent Directors) may at any time offer to repurchase a stock option that is exercisable and
has not expired. There is no such provision permitting the repurchase of stock options under the
1998 Plan. The Company is prohibited by its Senior Credit Facility from repurchasing shares on the
open market to satisfy option exercises.
9
A summary of restricted stock award activity under all plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
Grant Date
|
|
|
Shares
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2007
|
|
|
24,305
|
|
|
$
|
10.93
|
|
Granted
|
|
|
24,331
|
|
|
$
|
12.40
|
|
Vested
|
|
|
(21,737
|
)
|
|
$
|
11.04
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 30, 2007
|
|
|
26,899
|
|
|
$
|
12.17
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards are utilized both for director compensation and awards to officers and
employees. Restricted stock awards are distributed in a single grant of shares, which shares are
subject to forfeiture prior to vesting and have voting and dividend rights from the date of
distribution. With respect to restricted stock awards to officers and employees, forfeiture and
transfer restrictions lapse ratably over three years beginning one year after the date of the
award. With respect to restricted stock awards granted to non-employee directors, the possibility
of forfeiture lapses after one year and transfer restrictions lapse on the date which is six months
after the director ceases to be a member of the board of directors. In the event of the occurrence
of certain circumstances, including a change of control of the Company as defined in the various
Plans, the lapse of restrictions on restricted stock may be accelerated.
The fair value of restricted stock awards is based on the market price of the stock at the grant
date and compensation cost is amortized to expense on a straight line basis over the requisite
service period as stated above. The Company expects no forfeitures during the vesting period with
respect to unvested restricted stock awards granted. As of December 30, 2007, there was
approximately $0.2 million of unrecognized compensation cost related to non-vested restricted stock
awards, which is expected to be recognized over a period of approximately 1.3 years.
NOTE 3.
Inventories
Inventories are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
March 31,
|
|
|
2007
|
|
2007
|
|
|
|
Finished goods
|
|
$
|
|
|
|
$
|
|
|
Work in process
|
|
|
3,180
|
|
|
|
2,139
|
|
Purchased and manufactured parts
|
|
|
19,081
|
|
|
|
18,378
|
|
|
|
|
Total
|
|
$
|
22,261
|
|
|
$
|
20,517
|
|
|
|
|
10
NOTE 4.
Property and Related Depreciation
Property is recorded at cost. Provisions for depreciation are made on a straight-line basis over
the estimated useful lives of depreciable assets. Depreciation expense for the three and nine
month periods ended December 30, 2007 was $0.4 million and $0.9 million, respectively, and for the
three and nine month periods ended December 31, 2006, depreciation expense was $0.3 million and
$0.8 million, respectively.
Average useful lives for property, plant and equipment are as follows:
|
|
|
Buildings
|
|
10 to 33 years
|
Machinery and equipment
|
|
3 to 10 years
|
Furniture and fixtures
|
|
3 to 10 years
|
Computer hardware and software
|
|
3 to 5 years
|
NOTE 5.
Product Warranty Costs
Equipment has a one year warranty for which a reserve is established using historical averages and
specific program contingencies when considered necessary. Changes in the carrying amount of
accrued product warranty costs for the nine month period ended December 30, 2007 are summarized as
follows (in thousands):
|
|
|
|
|
Balance at March 31, 2007
|
|
$
|
475
|
|
Warranty costs incurred
|
|
|
(235
|
)
|
Change in estimates to pre-existing warranties
|
|
|
(16
|
)
|
Product warranty accrual
|
|
|
144
|
|
|
|
|
|
Balance at December 30, 2007
|
|
$
|
368
|
|
|
|
|
|
NOTE 6.
Income Taxes
The Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation
(FIN) No. 48, Accounting for Uncertainty in Income Taxes, on April 1, 2007. Previously, the
Company had accounted for tax contingencies in accordance with Statement of Financial Accounting
Standards (SFAS) No. 5, Accounting for Contingencies. As required by FIN No. 48, which
clarifies SFAS No. 109, Accounting for Income Taxes, the Company recognizes the financial
statement benefit of a tax position only after determining that the relevant tax authority would
more likely than not sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial statements is the largest
benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement
with the relevant tax authority. At the adoption date, the Company applied FIN No. 48 to all tax
positions for which the statute of limitations remained open. As a result of the implementation of
FIN No. 48, the Company recognized an increase of $250,000 in the liability for unrecognized tax
benefits, which was accounted for as a reduction to the April 1, 2007 balance of retained earnings
and an increase to the FIN No. 48 tax reserve balance.
The amount of unrecognized tax benefits as of April 1, 2007, prior to the FIN No. 48
implementation, amounted to $270,000. The total amount of unrecognized tax benefits as of the date
of adoption amounted to $520,000 which, if ultimately realized, will reduce the Companys annual
effective tax rate. The Company recognizes interest and penalties related to unrecognized tax
benefits in income tax expense. The Company had accrued approximately $110,000 for the payment of
interest and penalties through April 1, 2007, which is included in the $520,000 unrecognized tax
benefit amount. The Company anticipates that the resolution of these unrecognized tax benefits
will occur within the next twelve months.
The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation
of the related tax laws and regulations and
11
require significant judgment to apply. With few
exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income
tax examinations by tax authorities for the fiscal years prior to 2002.
At December 30, 2007, the Company had federal and state net operating loss carryforwards, or NOLs,
of approximately $44.7 million and $83.2 million, respectively, which are due to expire in fiscal
2022 through fiscal 2025 and fiscal 2008 through fiscal 2012, respectively. The state NOL due to
expire in fiscal 2009 is approximately $49.4 million against which the Company has a valuation
allowance. The NOLs may be used to offset future taxable income through their respective expiration
dates and thereby reduce or eliminate our federal and state income taxes otherwise payable. A
corresponding valuation allowance of $5.9 million has been established relating to the state NOLs,
as it is the Companys belief that it is more likely than not that a portion of the state NOLs are
not realizable. Failure to achieve sufficient taxable income to utilize the NOLs would require the
recording of an additional valuation allowance against the deferred tax assets.
The Internal Revenue Code of 1986, as amended (the Code), imposes significant limitations on the
utilization of NOLs in the event of an ownership change as defined under section 382 of the Code
(the Section 382 Limitation). The Section 382 Limitation is an annual limitation on the amount
of pre-ownership NOLs that a corporation may use to offset its post-ownership change income. The
Section 382 Limitation is calculated by multiplying the value of a corporations stock immediately
before an ownership change by the long-term tax-exempt interest rate (as published by the Internal
Revenue Service). Generally, an ownership change occurs with respect to a corporation if the
aggregate increase in the percentage of stock ownership by value of that corporation by one or more
5% shareholders (including specified groups of shareholders who in the aggregate own at least 5% of
that corporations stock) exceeds 50 percentage points over a three-year testing period. The
Company believes that it has not gone through an ownership change that would cause its NOLs to be
subject to the Section 382 Limitation.
If the Company does not generate adequate taxable earnings, some or all of the deferred tax assets
represented by its NOLs may not be realized. Additionally, changes to the federal and state income
tax laws also could impact its ability to use the NOLs. In such cases, the Company may need to
revise the valuation allowance established related to deferred tax assets for state purposes.
NOTE 7.
Debt
Debt payable to banks, including current maturities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 30, 2007
|
|
|
March 31, 2007
|
|
Senior Credit Facility
|
|
$
|
37,583
|
|
|
$
|
41,096
|
|
Less current maturities
|
|
|
7,129
|
|
|
|
8,346
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
30,454
|
|
|
$
|
32,750
|
|
|
|
|
|
|
|
|
Credit Facility
On May 1, 2006, the Company refinanced and paid in full its former senior credit
facility with a new five year $50.0 million Senior Credit Facility consisting of a $10.0 million
revolving credit facility, and two term loans of $20.0 million each, which had a blended interest
rate of 8.4% at December 30, 2007 (the Senior Credit Facility). As a result of this refinancing,
in the first quarter of fiscal 2007 the Company recorded a pre-tax charge of $1.3 million
consisting of $0.9 million for the write-off of unamortized debt issue costs and $0.4 million for
the payment of prepayment premiums. The term loans require monthly principal payments of $0.2
million, an additional quarterly principal payment of $50,000, and a mandatory prepayment for
fiscal 2007 of approximately $2.0 million, as discussed below, which was paid in July 2007. The
remaining payments under the term loans are due at maturity. Accordingly, the balance sheet
reflects $3.1 million of current maturities due under term loans of the Senior Credit Facility as
of December 30, 2007.
12
The Senior Credit Facility contains certain mandatory prepayment provisions in the event of
extraordinary income, the issuance of equity in the Company or items which are linked to cash flow.
The cash flow provision requires prepayment of the Senior Credit Facility in an amount equal to
50% of earnings before interest, taxes, depreciation and amortization (EBITDA) less principal
payments, interest payments, tax payments, capital expenditures and, with respect to our fiscal
year 2007, certain environmental remediation payments and the final payment to the U.S. Government
pursuant to a settlement with the government concluded September 8, 2005. Each such prepayment is
applied first to the outstanding principal of one of the term loans up to a certain recapture
amount, then ratably to the outstanding principal of all of the term loans until paid in full, and
then to the outstanding principal of the revolver in the credit facility. A mandatory prepayment
for fiscal 2007 of approximately $2.0 million was required under this provision and was paid in
July 2007. The current estimated mandatory prepayment for fiscal 2008 is approximately $2.4
million. The Company expects to have sufficient borrowing capacity under the revolving portion of
its Senior Credit Facility to make this payment.
The Senior Credit Facility prohibits the payment of dividends. The Senior Credit Facility is
secured by all of the assets of the Company. At December 30, 2007, the Company was in compliance
with the provisions of the Senior Credit Facility. At December 30, 2007, there was $4.1 million in
outstanding borrowings and $5.9 million in availability, under the revolving portion of the Senior
Credit Facility.
NOTE 8.
Employee Benefit Plans
The Company has a defined contribution plan covering all eligible employees. Contributions are
based on certain percentages of an employees eligible compensation. Expenses related to this plan
were $0.2 million and $0.6 million for the three and nine month periods ended December 30, 2007 and
December 31, 2006, respectively.
The Company provides postretirement benefits to certain union employees. The Company funds these
benefits on a pay-as-you-go basis. The measurement date is March 31.
In February 2002, the Companys subsidiary, Seeger-Orbis GmbH & Co. OHG, now known as
TransTechnology Germany GmbH (the Selling Company), sold its retaining ring business in Germany
to Barnes Group Inc. (Barnes). As German law prohibits the transfer of unfunded pension
obligations which have vested for retired and former employees, the legal responsibility for the
pension plan that related to the business (the Pension Plan) remained with the Selling Company.
At the time of the sale and subsequent to the sale, that pension liability was recorded based on
the projected benefit obligation since future compensation levels will not affect the level of
pension benefits. The relevant information for the Pension Plan is shown below under the caption
Pension Plan. The measurement date is December 31. Barnes has entered into an agreement with the
Company and its subsidiary, the Selling Company, whereby Barnes is obligated to administer and
discharge the pension obligation as well as indemnify and hold the Selling Company and the Company
harmless from these pension obligations. Accordingly, the Company has a recorded asset equal to the
benefit obligation for the pension plan of $4.3 million at December 30, 2007 and $3.9 million at
March 31, 2007. This asset is included in other long-term assets and is restricted in use to
satisfy the legal liability associated with the Pension Plan.
13
The net periodic pension cost is based on estimated values provided by independent actuaries. The
following tables provide the components of the net periodic benefit cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net
periodic benefit
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Cost
|
|
$
|
13
|
|
|
$
|
10
|
|
|
$
|
39
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net
(gain) loss
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic
benefit cost
|
|
$
|
13
|
|
|
$
|
|
|
|
$
|
39
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
December 30,
|
|
|
December31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net
periodic benefit
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Cost
|
|
$
|
47
|
|
|
$
|
31
|
|
|
$
|
136
|
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net
loss
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic
benefit cost
|
|
$
|
47
|
|
|
$
|
32
|
|
|
$
|
136
|
|
|
$
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9.
New Accounting Standards
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS
141R). SFAS 141R will significantly change the accounting for business combinations in a number of
areas including the treatment of contingent consideration, contingencies, acquisition costs,
research and development assets and restructuring costs. In addition, under SFAS 141R, changes in
deferred tax asset valuation allowances and acquired income tax uncertainties in a business
combination after the measurement period will impact income taxes. SFAS 141R is effective for
fiscal years beginning after December 15, 2008. The adoption of the provisions of SFAS 141R is not
expected to have a material effect on the Companys financial position, results of operations, or
cash flows.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, An Amendment of ARB No. 51. SFAS 160 amends ARB 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. It also amends certain of ARB 51s consolidation procedures for consistency with the
requirements of SFAS 141R. SFAS 160 is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The statement shall
14
be applied prospectively as of the beginning of the fiscal year in which the statement is initially
adopted. The adoption of the provisions of SFAS 160 is not expected to have a material effect on
the Companys financial position, results of operations, or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, providing companies with an option to report selected financial assets and
liabilities at fair value. This standards objective is to reduce both complexity in accounting
for financial instruments and the volatility in earnings caused by measuring related assets and
liabilities differently. Generally accepted accounting principles have required different
measurement attributes for different assets and liabilities that can create artificial volatility
in earnings. SFAS 159 helps to mitigate this type of accounting-induced volatility by enabling
companies to report related assets and liabilities at fair value, which would likely reduce the
need for companies to comply with detailed rules for hedge accounting. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons between companies that
choose different measurement attributes for similar types of assets and liabilities. The standard
requires companies to provide additional information that will help investors and other users of
financial statements to more easily understand the effect of the Companys choice to use fair value
on its earnings. It also requires entities to display the fair value of those assets and
liabilities for which the Company has chosen to use fair value on the face of the balance sheet.
SFAS 159 is effective for the Company on April 1, 2008. The adoption of the provisions of SFAS 159
is not expected to have a material effect on the Companys financial position, results of
operations, or cash flows.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 106, and 132(R). SFAS 158
requires companies to recognize a net asset for a defined benefit postretirement pension or
healthcare plans over funded status or a net liability for a plans under funded status in its
balance sheet. SFAS 158 also requires companies to recognize changes in the funded status of a
defined benefit postretirement plan in accumulated other comprehensive income in the year in which
the changes occur. SFAS 158 was adopted on March 31, 2007. Additionally, SFAS 158 requires
companies to measure plan assets and benefit obligations as of the date of the Companys fiscal
year end balance sheet, which is consistent with the Companys current practice. This requirement
is effective for fiscal years ending after December 15, 2008. The adoption of the provisions of
SFAS 158 is not expected to have a material effect on the Companys financial position, results of
operations, or cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair
value, establishes a framework for measuring fair value in accordance with generally accepted
accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective
for fiscal years beginning after November 15, 2007. The
adoption of the provisions of SFAS 157 is not expected to have a
material effect on the Companys financial position, results of
operations or cash flows.
In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes An
Interpretation of SFAS 109. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with SFAS 109, Accounting for
Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are
to be applied to all tax positions upon initial adoption of this standard. Only tax positions that
meet the more-likely-than-not recognition threshold at the effective date may be recognized or
continue to be recognized as an adjustment to the opening balance of retained earnings (or other
appropriate components of equity) for that fiscal year. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006. The Company adopted FIN 48 effective April 1,
2007. See Note 6, Income Taxes, for further discussion.
15
NOTE 10.
Contingencies
Environmental Matters
. The Company evaluates the exposure to environmental liabilities using a
financial risk assessment methodology, including a system of internal environmental audits and
tests, and outside consultants. This risk assessment includes the identification of risk
events/issues, including potential environmental contamination at Company and off-site facilities;
characterizes risk issues in terms of likelihood, consequences and costs, including the year(s)
when these costs could be incurred; analyzes risks using statistical techniques; and, constructs
risk cost profiles for each site. Remediation cost estimates are prepared from this analysis and
are taken into consideration in developing project budgets from third party contractors. Although
the Company takes great care in the development of these risk assessments and future cost
estimates, the actual amount of the remediation costs may be different from those estimated as a
result of a number of factors including: changes to government regulations or laws; changes in
local construction costs and the availability of personnel and materials; unforeseen remediation
requirements that are not apparent until the work actually commences; and other similar
uncertainties. The Company does not include any unasserted claims that it might have against
others in determining the liability for such costs, and, except as noted with regard to specific
cost sharing arrangements, has no such arrangements, nor has the Company taken into consideration
any future claims against insurance carriers that it might have in determining its environmental
liabilities. In those situations where the Company is considered a de minimis participant in a
remediation claim, the failure of the larger participants to meet their obligations could result in
an increase in the Companys liability with regard to such a site.
The Company continues to participate in environmental assessments and remediation work at eleven
locations, including certain former facilities. Due to the nature of environmental remediation and
monitoring work, such activities can extend for up to 30 years, depending upon the nature of the
work, the substances involved, and the regulatory requirements associated with each site. In
calculating the net present value (where appropriate) of those costs expected to be incurred in the
future, the Company used a discount rate of 4.7%, which is the 20 year Treasury Bill rate at the
end of the fiscal third quarter and represents the risk free rate for the 20 years those costs are
expected to be paid. The Company believes that the application of this rate produces a result
which approximates the amount that would hypothetically satisfy the Companys liability in an
arms-length transaction. Based on the above, the Company estimates the current range of
undiscounted cost for remediation and monitoring to be between $5.4 million and $9.4 million with
an undiscounted amount of $6.2 million to be most probable. Current estimates for expenditures,
net of recoveries pursuant to cost sharing agreements, for each of the five succeeding fiscal years
are $0.5 million, $1.6 million, $0.9 million, $0.8 million, and $0.8 million respectively, with
$1.6 million payable thereafter. Of the total undiscounted costs, the Company estimates that
approximately 50% will relate to remediation activities and that 50% will be associated with
monitoring activities.
The Company estimates that the potential cost for implementing corrective action at nine of these
sites will not exceed $0.5 million in the aggregate, payable over the next several years, and has
provided for the estimated costs, without discounting for present value, in the Companys accrual
for environmental liabilities. In the first quarter of fiscal 2003, the Company entered into a
consent order for a former facility in New York, which is currently subject to a contract for sale,
pursuant to which the Company has developed a remediation plan for review and approval by the New
York Department of Environmental Conservation. Based upon the characterization work performed to
date, the Company has accrued estimated costs of approximately $1.7 million without discounting for
present value. The amounts and timing of such payments are subject to the approved remediation
plan.
The environmental cleanup plan the Company presented during the fourth quarter of fiscal 2000 for a
portion of a site in Pennsylvania which continues to be owned by the Company, although the related
business has been sold, was approved during the third quarter of fiscal 2004. This plan was
submitted pursuant to the Consent Order and Agreement with the Pennsylvania Department of
Environmental Protection (PaDEP) concluded in fiscal 1999. Pursuant to the Consent Order, upon
its execution the Company paid $0.2 million for past costs, future oversight expenses and in full
settlement of claims made by PaDEP related to the environmental remediation of the site with
16
an additional $0.2 million paid in fiscal 2001. A second Consent Order was concluded with PaDEP in
the third quarter of fiscal 2001 for another portion of the site, and a third Consent Order for the
remainder of the site was concluded in the third quarter of fiscal 2003 (the 2003 Consent Order).
An environmental cleanup plan for the portion of the site covered by the 2003 Consent Order was
presented during the second quarter of fiscal 2004. The Company is also administering an agreed
settlement with the Federal government, concluded in the first quarter of fiscal 2000, under which
the government pays 50% of the direct and indirect environmental response costs associated with a
portion of the site. The Company also concluded an agreement in the first quarter of fiscal 2006,
under which the Federal government paid an amount equal to 45% of the estimated environmental
response costs associated with another portion of the site. No future payments are due under this
second agreement. At December 30, 2007, the cleanup reserve was $2.3 million based on the net
present value of future expected cleanup and monitoring costs and is net of expected reimbursement
by the Federal Government of $0.5 million. The aggregate undiscounted amount associated with the
estimated environmental response costs for the site in Pennsylvania is $3.3 million. The Company
expects that remediation at this site, which is subject to the oversight of the Pennsylvania
authorities, will not be completed for several years, and that monitoring costs, although expected
to be incurred over twenty years, could extend for up to thirty years.
In addition, the Company has been named as a potentially responsible party in four environmental
proceedings pending in several states in which it is alleged that the Company is a generator of
waste that was sent to landfills and other treatment facilities. Such properties generally relate
to businesses which have been sold or discontinued. The Company estimates that expected future
costs, and the estimated proportional share of remedial work to be performed associated with these
proceedings, will not exceed $0.1 million without discounting for present value and has provided
for these estimated costs in the Companys accrual for environmental liabilities.
Litigation
. The Company is also engaged in various other legal proceedings incidental to its
business. Management is of the opinion that, after taking into consideration information furnished
by our counsel, these matters will not have a material effect on the consolidated financial
position, results of operations, or cash flows of the Company in future periods.
NOTE 11.
Segment, Geographic Location and Customer Information
The Company has three operating segments which it aggregates into one reportable segment;
sophisticated lifting equipment for specialty aerospace and defense applications. The operating
segments are Hoist and Winch, Cargo Hooks, and Weapons Handling. The nature of the production
process (assemble, inspect, and test) is similar for each operating segment, as are the customers
and the methods of distribution for the products.
Revenues from the three operating segments for the three and nine month periods ended December 30,
2007 and December 31, 2006 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hoist and Winch
|
|
$
|
12,608
|
|
|
$
|
12,511
|
|
|
$
|
36,638
|
|
|
$
|
37,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cargo Hooks
|
|
|
2,774
|
|
|
|
4,467
|
|
|
|
9,265
|
|
|
|
11,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weapons Handling
|
|
|
2,522
|
|
|
|
1,422
|
|
|
|
4,949
|
|
|
|
2,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Sales
|
|
|
157
|
|
|
|
494
|
|
|
|
704
|
|
|
|
1,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,061
|
|
|
$
|
18,894
|
|
|
$
|
51,556
|
|
|
$
|
52,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
During the three month period ended December 30, 2007, 28%, 19% and 13% of net sales were made to
three major customers, respectively. During the nine month period ended December 30, 2007, net
sales to one customer accounted for 24% of total revenues and another customer accounted for 21% of
total revenues. During the three and nine month periods ended December 31, 2006, net sales to one
customer accounted for 38% and 34%, respectively, of total revenues and another accounted for 22%
and 22%, respectively, of total revenues.
Net sales below show the geographic location of customers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
9,967
|
|
|
$
|
11,955
|
|
|
$
|
27,661
|
|
|
$
|
29,817
|
|
England
|
|
|
1,410
|
|
|
|
3,121
|
|
|
|
3,110
|
|
|
|
5,644
|
|
Italy
|
|
|
2,031
|
|
|
|
1,389
|
|
|
|
6,955
|
|
|
|
7,115
|
|
Other European
Countries
|
|
|
986
|
|
|
|
880
|
|
|
|
5,237
|
|
|
|
4,371
|
|
Pacific and Far East
|
|
|
1,296
|
|
|
|
538
|
|
|
|
2,810
|
|
|
|
2,831
|
|
Other non-United
States
|
|
|
2,371
|
|
|
|
1,011
|
|
|
|
5,783
|
|
|
|
3,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,061
|
|
|
$
|
18,894
|
|
|
$
|
51,556
|
|
|
$
|
52,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 and Section 21E of
the Securities Exchange Act of 1934:
Certain of the statements contained in the body of this Quarterly Report on Form 10-Q (Report)
are forward-looking statements (rather than historical facts) that are subject to risks and
uncertainties that could cause actual results to differ materially from those described in the
forward-looking statements. In the preparation of this Report, where such forward-looking
statements appear, the Company has sought to accompany such statements with meaningful cautionary
statements identifying important factors that could cause actual results to differ materially from
those described in the forward-looking statements.
Forward Looking Statements
Certain statements in this Report constitute forward-looking statements within the meaning of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the
Acts). Any statements contained herein that are not statements of historical fact are deemed to
be forward-looking statements.
The forward-looking statements in this Report are based on current beliefs, estimates, and
assumptions concerning the operations, future results, and prospects of the Company. As actual
operations and results may materially differ from those assumed in forward-looking statements,
there is no assurance that forward-looking statements will prove to be accurate. Forward-looking
statements are subject to the safe harbors created in the Acts.
Any number of factors could affect future operations and results, including, without limitation,
closing on the contract for the sale of the Companys Union, New Jersey facility, competition from
other companies; changes in applicable laws, rules, and regulations affecting the Company in the
locations in which it conducts its business; the availability of equity and/or debt financing in
the amounts and on the terms necessary to support the Companys
18
future business; interest rate trends; order flow associated with the delay in enactment of the
2008 Federal Defense budget; determination by the Company to dispose of or acquire additional
assets; general industry and economic conditions; events impacting the U.S. and world financial
markets and economies; and those specific risks that are discussed or referenced elsewhere in this
Report.
The Company undertakes no obligation to update publicly any forward-looking statements, whether as
a result of new information or future events.
General
We design, develop, and manufacture sophisticated lifting equipment for specialty aerospace and
defense applications. With over 50% of the global market, we have long been recognized as the
worlds leading designer and supplier of performance-critical rescue hoists and cargo-hook systems.
We also manufacture weapons-handling systems, cargo winches, and tie-down equipment. Our products
are designed to be efficient and reliable in extreme operating conditions and are used to complete
rescue operations and military insertion/extraction operations, move and transport cargo, and load
weapons onto aircraft and ground-based launching systems. We have three operating segments which
we aggregate into one reportable segment; sophisticated lifting equipment for specialty aerospace
and defense applications. The operating segments are Hoist and Winch, Cargo Hooks, and Weapons
Handling. The nature of the production process (assemble, inspect, and test) is similar for each
operating segment, as are the customers and the methods of distribution for the products.
All references to years in the Managements Discussion and Analysis of Financial Condition and
Results of Operations refer to the fiscal year ended on or ending on March 31 of the indicated year
unless otherwise specified.
Results of Operations
Three Months Ended December 30, 2007 Compared with Three Months Ended December 31, 2006 (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Increase
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
(decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
New Equipment
|
|
$
|
11,026
|
|
|
$
|
8,318
|
|
|
$
|
2,708
|
|
|
|
32.6
|
|
Spare Parts
|
|
|
3,527
|
|
|
|
7,250
|
|
|
|
(3,723
|
)
|
|
|
(51.4
|
)
|
Overhaul and Repair
|
|
|
3,403
|
|
|
|
3,233
|
|
|
|
170
|
|
|
|
5.3
|
|
Engineering Services
|
|
|
105
|
|
|
|
93
|
|
|
|
12
|
|
|
|
12.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
18,061
|
|
|
|
18,894
|
|
|
|
(833
|
)
|
|
|
(4.4
|
)
|
Cost of Sales
|
|
|
9,919
|
|
|
|
10,079
|
|
|
|
(160
|
)
|
|
|
(1.6
|
)
|
Gross Profit
|
|
|
8,142
|
|
|
|
8,815
|
|
|
|
(673
|
)
|
|
|
(7.6
|
)
|
General,
administrative and
selling expenses
|
|
|
4,714
|
|
|
|
5,050
|
|
|
|
(336
|
)
|
|
|
(6.7
|
)
|
Interest expense
|
|
|
846
|
|
|
|
1,000
|
|
|
|
(154
|
)
|
|
|
(15.4
|
)
|
Net income
|
|
$
|
1,526
|
|
|
$
|
1,622
|
|
|
$
|
(96
|
)
|
|
|
(5.9
|
)
|
Net Sales
. Sales of $18.1 million for the third quarter of fiscal 2008 declined slightly from
sales of $18.9 million in the third quarter of fiscal 2007. In the third quarter of fiscal 2008,
we continued to experience a shift in product mix whereby sales of new equipment accounted for 61%
of total net sales for the quarter versus 44% for the third quarter of fiscal 2007. The overall
$2.7 million increase in sales of new equipment for the third quarter of fiscal 2008 as
compared to the same period last year was driven by $2.9 million in higher shipments in the hoist
and winch operating segment and $1.4 million in the weapons handling operating segment. This
increase was partially offset by a decline of $1.6 million of new equipment sales in the cargo hook
operating segment. Shipments in the hoist and winch operating segment of overhaul and repair
increased $0.4 million, but were partially offset by $0.2 million of decreased shipments in the
cargo hook operating segment of overhaul and repair during the third quarter of fiscal 2008 as
compared to the same period last year. Spare parts sales in the hoist and winch operating segment
decreased
19
$3.2 million for the third quarter of fiscal 2008 as compared to the same period last
year as the demand for spare parts remained weak due primarily, we believe, to the delay in passage
of the 2008 Federal Government Defense budget, formally known as the National Defense Authorization
Act for Fiscal Year 2008, which was signed into law in late January 2008. The Act authorizes
funding for the defense of the United States and its interests abroad, for military construction,
and for national security-related energy programs. The decline in hoist and winch related spare
part sales had the biggest impact on the shift in our product sales mix during the fiscal third
quarter.
Cost of Sales.
The three operating segments of hoist and winch, cargo hooks, and weapons handling
equipment have generated sales in three separate components: new equipment, overhaul and repair,
and spare parts, each of which has progressively better margins. Accordingly, the cost of sales as
a percent of sales will be affected by the weighting of these components to the total sales volume.
In the third quarter of fiscal 2008, as compared to the third quarter of fiscal 2007, the cost of
sales as a percent of sales increased approximately 1.6%, due to the higher levels of new equipment
activity in the hoist and winch and weapons handling operating segments.
Gross Profit
. As discussed in the Cost of Sales section above, the three components of sales in
each of the operating segments have margins reflective of the market. During the last four fiscal
years, the gross profit margin on new equipment was generally in the range of 31% to 35%, overhaul
and repair 27% to 37% and spare parts ranging from 64% to 68%. The relative balance, or mix, of
this activity, in turn, will have an impact on gross profit and gross profit margins. The lower
spare part sales in the third quarter of fiscal 2008, compared to the third quarter of fiscal 2007,
resulted in a decrease in the overall gross margin of approximately 2%. Legislation authorizing
appropriations under the 2008 Federal Government Defense budget became effective during the fourth
quarter of fiscal 2008. Notwithstanding this recent development, the extended delay in certain
appropriations associated with the Defense budget will present an obstacle to achieving better
operating performance in the last quarter of fiscal 2008, especially in regard to gross margins due
to spare part sales having significantly higher gross profit margins than sales of new equipment.
While the demand for spare parts was lower in the third quarter of fiscal 2008 compared to the same
period last year, our overall gross margin for the third quarter of fiscal 2008 was 45%, which was
principally the result of better performance, in both cost and pricing, in the production of new
equipment, spare parts and overhaul and repair sales.
General, administrative and selling expenses
. The $0.3 million decrease in general, administrative
and selling expenses for the third quarter of fiscal 2008, as compared to the third quarter of
fiscal 2007, was mainly due to lower costs related to compliance with Section 404 of the
Sarbanes-Oxley Act of 2002.
Interest expense
. Required principal payments and strong cash flow allowed us to reduce our Senior
Credit Facility by approximately $6.0 million during the twelve month period ended December 30,
2007. This pay down of debt is reflected in the $0.2 million decrease in interest expense for
third quarter of fiscal 2008, as compared to the third quarter of fiscal 2007.
Net Income
. We reported net income of $1.5 million in the third quarter of fiscal 2008 versus net
income of $1.6 million in the third quarter of fiscal 2007. This decrease in net income resulted
from the reasons discussed above. In view of the order patterns discussed in this report, we
continue to limit discretionary spending wherever prudent.
New orders
. New orders received during the third quarter of fiscal 2008 totaled $19.1 million, as
compared with $9.8 million in the third quarter of fiscal 2007. Orders for new equipment increased
$1.3 million in the hoist and winch operating segment and remained essentially unchanged in the
cargo hook and weapons handling operating segments in the third quarter of fiscal 2008 as compared
to the same period in the prior fiscal year. New orders for overhaul and repair in the hoist and
winch and cargo hook operating segments increased $0.6 million and $0.4 million, respectively,
during the third quarter of fiscal 2008 as compared to the third quarter of fiscal 2007. Orders
for spare parts in the hoist and winch and weapons handling operating segments increased $2.4
million and $0.6 million, respectively, but were partially offset by a $0.3 million decrease in
orders for spare parts in the cargo hook operating segment during the third quarter of fiscal 2008
compared to the third quarter of fiscal 2007. The increase in new orders in the spare parts
operating segment during the third quarter as compared to the same period last year was the result
of a $4.2 million multi year spare parts support contract from Westland Helicopter for a support
contract for the UK Ministry of Defense. Excluding the $4.2 million order from Westland
Helicopter, the demand
20
for spare parts remained weak during the third quarter of fiscal 2008 as
reflected in the booking of new orders that totaled approximately $1.4 million which was $1.5
million less than new orders received in the third quarter of fiscal 2007. While we remain
confident that the unrealized portion of the anticipated spare part sales will eventually be
ordered, it is clear that much of the delayed order flow previously expected in fiscal 2008 will
fall into fiscal 2009. The recovery of the shipping pattern to more historical trends has not yet
occurred due, we believe, to the delayed approval of appropriations under the 2008 Federal
Government Defense budget, which was authorized by legislation that became effective in late
January 2008.
Backlog
. Backlog at December 30, 2007 was $122.5 million, an increase of $3.3 million from the
$119.2 million at March 31, 2007. The backlog at December 30, 2007 includes approximately $66.4
million relating to the Airbus A400M Military Transport Program which is scheduled to commence
shipping in late calendar 2009 and continue through 2020. The product backlog varies substantially
from time to time due to the size and timing of orders. We measure backlog by the amount of
products or services that our customers have committed by contract to purchase from us as of a
given date. Approximately $37.3 million of backlog at December 30, 2007 is scheduled for shipment
during the next twelve months. The book-to-bill ratio is computed by dividing the new orders
received during the period by the sales for the period. A book-to-bill ratio in excess of 1.0 is
potentially indicative of continued overall growth in our sales. Our book to bill ratio for the
third quarter of fiscal 2008 was 1.1 as compared to 0.5 for the third quarter of fiscal 2007. The
increase in the book to bill ratio was directly related to the 94% higher order intake during the
third quarter of fiscal 2008, as compared to the third quarter of fiscal 2007. Cancellations of
purchase orders or reductions of product quantities in existing contracts, although seldom
occurring, could substantially and materially reduce our backlog. Therefore, our backlog may not
represent the actual amount of shipments or sales for any future period.
Nine Months Ended December 30, 2007 Compared with Nine Months Ended December 31, 2006 (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Increase
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
(decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
New Equipment
|
|
$
|
29,037
|
|
|
$
|
24,021
|
|
|
$
|
5,016
|
|
|
|
20.9
|
|
Spare Parts
|
|
|
11,613
|
|
|
|
17,529
|
|
|
|
(5,916
|
)
|
|
|
(33.7
|
)
|
Overhaul and Repair
|
|
|
10,507
|
|
|
|
10,953
|
|
|
|
(446
|
)
|
|
|
(4.1
|
)
|
Engineering Services
|
|
|
399
|
|
|
|
315
|
|
|
|
84
|
|
|
|
26.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
51,556
|
|
|
|
52,818
|
|
|
|
(1,262
|
)
|
|
|
(2.4
|
)
|
Cost of Sales
|
|
|
29,763
|
|
|
|
29,404
|
|
|
|
359
|
|
|
|
1.2
|
|
Gross Profit
|
|
|
21,793
|
|
|
|
23,414
|
|
|
|
(1,621
|
)
|
|
|
(6.9
|
)
|
General,
administrative and
selling expenses
|
|
|
14,069
|
|
|
|
14,385
|
|
|
|
(316
|
)
|
|
|
(2.2
|
)
|
Interest expense
|
|
|
2,670
|
|
|
|
3,286
|
|
|
|
(616
|
)
|
|
|
(18.7
|
)
|
Loss on
extinguishment of
debt
|
|
|
|
|
|
|
1,331
|
|
|
|
(1,331
|
)
|
|
|
(100.0
|
)
|
Net income
|
|
$
|
2,968
|
|
|
$
|
2,563
|
|
|
$
|
405
|
|
|
|
15.8
|
|
Net Sales
. Sales of $51.6 million for the first nine months of fiscal 2008 declined slightly from
sales of $52.8 million in the first nine months of fiscal 2007. In the first nine months of fiscal
2008, we continued to experience a shift in product mix whereby sales of new equipment accounted
for 56% of total net sales versus 45% for the first
nine months of fiscal 2007. The $5.0 million increase in sales of new equipment for the nine month
period ended December 30, 2007 as compared to the same period last year was driven by $3.9 million
in higher shipments in the hoist and winch operating segment and a $3.3 million increase in the
weapons handling operating segment. This increase was partially offset by a decline of $2.2 million
of new equipment sales in the cargo hook operating segment. A decrease in overhaul and repair sales
in the cargo hook operating segment of $0.7 million, which was offset slightly by an increase in
sales in the hoist and winch operating segment of $0.2 million, accounted for the
21
overall $0.5
million decline in overhaul and repair sales during the first nine months of fiscal 2008 as
compared to the same period last year. During the first nine months of fiscal 2008 as compared to
the first nine months of fiscal 2007, spare parts sales decreased approximately $5.9 million with
shipments in the hoist and winch operating segment accounting for approximately $4.8 million of the
decrease and lower shipments of spare parts in the weapons handling and cargo hook operating
segments accounting for $0.7 million and $0.4 million, respectively. The demand for spare parts
remained weak due primarily, we believe, to the delay in passage of the 2008 Federal Government
Defense budget, which was authorized by legislation that became effective in late January 2008. The
decline in hoist and winch-related spare part sales had the biggest impact on the shift in our
product sales mix during the period.
Cost of Sales.
The three operating segments of hoist and winch, cargo hooks, and weapons handling
equipment have generated sales in three separate components: new equipment, overhaul and repair,
and spare parts, each of which has progressively better margins. Accordingly, the cost of sales as
a percent of sales will be affected by the weighting of these components to the total sales volume.
In the first nine months of fiscal 2008, as compared to the first nine months of fiscal 2007, the
cost of sales as a percent of sales increased approximately 2%, due to the higher level of new
equipment activity in the hoist and winch and weapons handling operating segments.
Gross Profit
. As discussed in the Cost of Sales section above, the three components of sales in
each of the operating segments have margins reflective of the market. During the last four fiscal
years, the gross profit margin on new equipment was generally in the range of 31% to 35%, overhaul
and repair 27% to 37% and spare parts ranging from 64% to 68%. The balance or mix of this
activity, in turn, will have an impact on gross profit and gross profit margins. The gross margin
of 42% for the first nine months of fiscal 2008, as compared to 44% for the first nine months of
fiscal 2007, reflects the shift in sales more heavily weighted toward new equipment. While we have
had better performance, both in cost and pricing, in the production of new equipment, spare parts
and overhaul and repair sales in the first nine months of fiscal 2008, the extended delay in
certain appropriations associated with the 2008 Federal Government Defense budget, which was
authorized by legislation that became effective in late January 2008, will present an obstacle to
achieving better operating performance in the last quarter of fiscal 2008, especially in regard to
gross margins due to spare part sales having significantly higher gross profit margins than sales
of new equipment.
General, administrative and selling expenses
. General, administrative and selling expenses for the
first nine months of fiscal 2008 decreased approximately $0.3 million as compared to the first nine
months of fiscal 2007, and were approximately $0.5 million less than our plan, reflecting measures
we have taken to contain or reduce costs as discussed in the net income section below. General,
administrative and selling expenses for the first nine months of fiscal 2008 include costs of
approximately $0.3 million associated with a threatened proxy contest which was settled during
second quarter of fiscal 2008.
Interest expense
. Required principal payments and strong cash flow allowed us to reduce our Senior
Credit Facility by approximately $6.0 million during the twelve month period ended December 30,
2007. This pay down of debt is reflected in the $0.6 million decrease in interest expense for the
first nine months of fiscal 2008, as compared to the first nine months of fiscal 2007.
Loss on Extinguishment of Debt.
In the first quarter of fiscal 2007, we refinanced and paid in
full the former senior credit facility with a new five year, $50.0 million Senior Credit Facility
consisting of a $10.0 million revolving credit facility, and two term loans of $20.0 million. As a
result of this refinancing, we recorded a pretax charge of $1.3 million in the first quarter of
fiscal 2007, consisting of $0.9 million for the write-off of unamortized debt issue costs and $0.4
million for the payment of prepayment premiums.
Net Income
. We reported net income of $3.0 million for the first nine months of fiscal 2008 versus
net income of $2.6 million for the first nine months of fiscal 2007 which included a pretax charge
of $1.3 million related to the refinancing of the Companys debt. This increase in net income
resulted from the reasons discussed above. In response to the order patterns mentioned below, in
the beginning of the second quarter of fiscal 2008, we initiated certain cost cutting measures in
an effort to improve operating results for the remainder of fiscal 2008. These measures involved a
net reduction in our headcount of 14 people or about 7% of our work force. The personnel
22
reductions
were carefully considered and we feel that such a move will not inhibit our ability to meet the
expected volume in the remainder of the fiscal year. We are also limiting discretionary spending
wherever prudent.
New orders
. New orders received during the first nine months of fiscal 2008 totaled $54.8 million
compared to $83.1 million for the same period in fiscal 2007. New orders in the prior period
included $21.5 million of orders for new equipment in the hoist and winch operating segment related
to the Airbus A400M Military Transport Program, which is scheduled to commence shipping in late
calendar year 2009 and continue through 2020. Excluding the new orders from Airbus, orders for new
equipment in the hoist and winch operating segment increased approximately $5.4 million in the
first nine months of fiscal 2008 as compared to the first nine months of fiscal 2007. This increase
was offset by a decline in orders for new equipment in the cargo hook and weapons handling
operating segments of approximately $3.8 million and $1.7 million, respectively. New orders for
overhaul and repair decreased approximately $5.5 million in the first nine months of fiscal 2008 as
compared to the same period last year with $4.5 million due to decreased orders in the hoist and
winch operating segment and $1.0 million due to decreased orders in the cargo hook operating
segment. During the first nine months of fiscal 2008 as compared to the same prior year period,
orders for spare parts in the hoist and winch operating segment declined approximately $3.9 million
and orders for spare parts in the cargo hook operating segment declined by approximately $1.2
million. The demand for spare parts remained weak during the first nine months of fiscal 2008 as
reflected in the booking of new orders totaling approximately $12.5 million which was $4.6 million
less than our plan of $17.2 million. While we remain confident that the unrealized portion of the
spare part sales will eventually be ordered, it is clear that much of the delayed order flow
previously expected in fiscal 2008 will fall into fiscal 2009. The recovery of the shipping
pattern to more historical trends has not yet occurred due, we believe, to a delay associated with
the approval of the 2008 Federal Government Defense budget, which was authorized by legislation
that became effective in late January 2008.
Backlog
. Backlog at December 30, 2007 was $122.5 million, an increase of $3.3 million from the
$119.2 million at March 31, 2007. The backlog at December 30, 2007 includes approximately $66.4
million relating to the Airbus A400M Military Transport Program which is scheduled to commence
shipping in late calendar 2009 and continue through 2020. The product backlog varies substantially
from time to time due to the size and timing of orders. We measure backlog by the amount of
products or services that our customers have committed by contract to purchase from us as of a
given date. Approximately $37.3 million of backlog at December 30, 2007 is scheduled for shipment
during the next twelve months. The book-to-bill ratio is computed by dividing the new orders
received during the period by the sales for the period. A book-to-bill ratio in excess of 1.0 is
potentially indicative of continued overall growth in our sales. Our book to bill ratio for the
first nine months of fiscal 2008 was 1.1 as compared to 1.6 for the first nine months of fiscal
2007. The decrease in the book to bill ratio was directly related to the lower order intake during
the first nine months of fiscal 2008, as compared to the first nine months of fiscal 2007, which
included a new order received for the Airbus program for $21.5 million. Cancellations of purchase
orders or reductions of product quantities in existing contracts, although seldom occurring, could
substantially and materially reduce our backlog. Therefore, our backlog may not represent the
actual amount of shipments or sales for any future period.
Liquidity and Capital Resources
Our principal sources of liquidity are cash on hand, cash generated from operations, and our Senior
Credit Facility. Our liquidity requirements depend on a number of factors, many of which are
beyond our control, including the timing of production under our contracts with the U.S.
Government. Our working capital needs fluctuate between periods as a result of changes in program
status and the timing of payments by program. Additionally, as our sales are generally made on the
basis of individual purchase orders, our liquidity requirements vary based on the timing
and volume of orders. Based on cash on hand, future cash expected to be generated from operations
and the Senior Credit Facility, we expect to have sufficient cash to meet our requirements for at
least the next twelve months.
Borrowings and availability under the revolving portion of our Senior Credit Facility (as defined
below) at December 30, 2007 were $4.1 million and $5.9 million, respectively. The Senior Credit
Facility prohibits the payment of dividends. We were in compliance with all of the covenants in the
Senior Credit Facility at December 30, 2007.
23
We have entered into an agreement of sale with an unaffiliated third-party to sell our headquarters
facility and plant in Union, New Jersey. The sale is contingent upon the fulfillment of several
conditions, including the completion of due diligence by the third-party and certain environmental
requirements. If these contingencies are timely satisfied, it is anticipated that the transaction
will close in our fiscal fourth quarter ending March 31, 2008. The agreement of sale contains no
financing contingency. The contracted sales price for the facility is $10,500,000 and the
agreement of sale includes a provision that we can lease the facility for up to two years after
closing, pending our relocation to a new site, yet to be selected, that will be better suited to
our current and expected needs. The lenders under the Senior Credit Facility have consented to the
sale transaction.
Our common stock is listed on the American Stock Exchange (AMEX) under the trading symbol BZC.
Working Capital
Our working capital at December 30, 2007 was $25.3 million, as compared to $23.1 million at March
31, 2007. The ratio of current assets to current liabilities was 2.4 to 1 at December 30, 2007 and
2.1 to 1 at March 31, 2007.
Working capital changes during the first nine months of fiscal 2008 resulted from a decrease in
accounts receivable of $2.9 million, an increase in inventory of $1.7 million, a decrease in
accounts payable of $1.3 million, and a decrease in accrued compensation of $0.8 million. In
addition, the revolving portion of our Senior Credit Facility increased $0.8 million, and the
current portion of the term loans under the Senior Credit Facility decreased $2.0 million.
The decrease in accounts receivable reflects collection of amounts due from customers related to
the heavy shipments that occurred in the fourth quarter of fiscal 2007 as well as the improved
timing of collections from our customers. The increase in inventory is due to parts being
purchased in advance during the first half of fiscal 2008, as we transitioned to a product mix more
heavily weighted to new equipment sales which require longer lead time. The decrease in accounts
payable is reflective of our current shipment pattern , as we begin to work down the inventory
levels that were previously built up to accommodate the product sales mix as discussed above.
The decrease in accrued compensation was primarily due to incentive payments made in the first
quarter of fiscal 2008. The increase in the revolving portion of the Senior Credit Facility
reflects the working capital demands of the Company. The decrease in the current portion of our
Senior Credit Facility is due to the mandatory prepayment for fiscal 2007 of approximately $2.0
million, as discussed below, which was paid in July 2007.
The number of days that sales were outstanding in accounts receivable decreased to 42.7 days at
December 30, 2007 from 52.2 days at March 31, 2007. The decrease in days was attributable to
higher shipments made in March of fiscal 2007 as compared to December of fiscal 2008, as well as
improved timing of collections from our customers. Inventory turnover decreased to 1.8 turns
at December 30, 2007 versus 2.0 turns at December 31, 2006. The
decrease in inventory turns is reflective of the higher inventory levels due to the shift in
product mix discussed above.
Capital Expenditures
Cash paid for our additions to property, plant and equipment were approximately $0.7 million for
the first nine months of fiscal 2008, compared to $1.0 million for the first nine months of fiscal
2007. Projects budgeted in fiscal 2008 total approximately $1.4 million.
Senior Credit Facility
Senior Credit Facility
On May 1, 2006, we refinanced and paid in full our former senior credit
facility with a new five year $50.0 million Senior Credit Facility consisting of a $10.0 million
revolving credit facility, and two term loans of $20.0 million each, which had a blended interest
rate of 8.4% at December 30, 2007. As a result of this
24
refinancing, in the first quarter of fiscal
2007, the Company recorded a pre-tax charge of $1.3 million consisting of $0.9 million for the
write-off of unamortized debt issue costs and $0.4 million for the payment of pre-payment premiums.
The term loans require monthly principal payments of $0.2 million, an additional quarterly
principal payment of $50,000, and a mandatory prepayment for fiscal 2007, of approximately $2.0
million, as discussed below, which was paid in July 2007. The remaining payments under the term
loans are due at maturity. Accordingly, the balance sheet reflects $3.1 million of current
maturities due under term loans of the Senior Credit Facility as of December 30, 2007.
The Senior Credit Facility contains certain mandatory prepayment provisions in the event of
extraordinary income, the issuance of equity in the Company or items which are linked to cash flow.
The cash flow provision requires prepayment of the Senior Credit Facility in an amount equal to
50% of earnings before interest, taxes, depreciation and amortization (EBITDA) less principal
payments, interest payments, tax payments, capital expenditures and, with respect to our fiscal
year 2007, certain environmental remediation payments and the final payment to the U.S. Government
pursuant to a settlement with the government concluded September 8, 2005. Each such prepayment is
applied first to the outstanding principal of one of the term loans up to a certain recapture
amount, then ratably to the outstanding principal of all of the term loans until paid in full, and
then to the outstanding principal of the revolver in the credit facility. A mandatory prepayment
for fiscal 2007 of approximately $2.0 million was required under this provision and was paid in
July 2007. The current estimated mandatory prepayment for fiscal 2008 is approximately $2.4
million. We expect to have sufficient borrowing capacity under the revolving portion of our Senior
Credit Facility to make this payment.
The Senior Credit Facility prohibits the payment of dividends. The Senior Credit Facility is
secured by all of our assets. At December 30, 2007 we were in compliance with the provisions of the
Senior Credit Facility. At December 30, 2007, there was $4.1 million in outstanding borrowings and
$5.9 million in availability, under the revolving portion of the Senior Credit Facility.
Tax Benefits from Net Operating Losses
At December 30, 2007, we had federal and state net operating loss carryforwards, or NOLs, of
approximately $44.7 million and $83.2 million, respectively, which are due to expire in fiscal 2022
through fiscal 2025 and fiscal 2008 through fiscal 2012, respectively. The state NOL due to expire
in fiscal 2009 is approximately $49.4 million against which we have a valuation allowance. The
NOLs may be used to offset future taxable income through their respective expiration dates and
thereby reduce or eliminate our federal and state income taxes otherwise payable. A corresponding
valuation allowance of $5.9 million has been established relating to the state NOLs, as it is
managements belief that it is more likely than not that a portion of the state NOLs are not
realizable. Failure to achieve sufficient taxable income to utilize the NOLs would require the
recording of an additional valuation allowance against the deferred tax assets.
The Internal Revenue Code of 1986, as amended (the Code) imposes significant limitations on the
utilization of NOLs in the event of an ownership change as defined under section 382 of the Code
(the Section 382 Limitation). The Section 382 Limitation is an annual limitation on the amount
of pre-ownership NOLs that a corporation may use to offset its post-ownership change income. The
Section 382 Limitation is calculated by multiplying the value of a corporations stock immediately
before an ownership change by the long-term tax-exempt interest rate (as published by the Internal
Revenue Service). Generally, an ownership change occurs with respect to
a corporation if the aggregate increase in the percentage of stock ownership by value of that
corporation by one or more 5% shareholders (including specified groups of shareholders who in the
aggregate own at least 5% of that corporations stock) exceeds 50 percentage points over a
three-year testing period. We believe that we have not gone through an ownership change that would
cause our NOLs to be subject to the Section 382 Limitation.
If we do not generate adequate taxable earnings, some or all of the deferred tax assets represented
by our NOLs may not be realized. Additionally, changes to the federal and state income tax laws
also could impact our ability to use the NOLs. In such cases, we may need to revise the valuation
allowance established related to deferred tax assets for state purposes.
25
Summary Disclosure About Contractual Obligations and Commercial Commitments
The following table reflects a summary of our contractual cash obligations for the next several
fiscal years as of December 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
More Than
|
|
|
Total
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
Debt principal
repayments (a)
|
|
$
|
33,511
|
|
|
$
|
3,057
|
|
|
$
|
6,114
|
|
|
$
|
24,340
|
|
|
$
|
|
|
Estimated interest
payments on
long-term debt (b)
|
|
|
7,252
|
|
|
|
2,453
|
|
|
|
4,199
|
|
|
|
600
|
|
|
|
|
|
Operating leases
|
|
|
425
|
|
|
|
146
|
|
|
|
242
|
|
|
|
37
|
|
|
|
|
|
Total
|
|
$
|
41,188
|
|
|
$
|
5,656
|
|
|
$
|
10,555
|
|
|
$
|
24,977
|
|
|
$
|
|
|
|
|
|
(a)
|
|
Obligations for long-term debt reflect the requirements of the Term Loans under the Senior
Credit Facility See Note 7 of Notes to Unaudited Consolidated Financial Statements included
elsewhere in this Report.
|
|
(b)
|
|
Estimated interest payments on long-term debt reflect the scheduled interest payments of the
Term Loans under the Senior Credit Facility and assume an effective weighted average interest
rate of 7.6%, the Companys estimated blended interest rate.
|
Inflation
While neither inflation nor deflation has had, and we do not expect it to have, a material impact
upon operating results, we cannot be certain that our business will not be affected by inflation or
deflation in the future.
Environmental Matters
We evaluate the exposure to environmental liabilities using a financial risk assessment
methodology, including a system of internal environmental audits and tests, and outside
consultants. This risk assessment includes the identification of risk events/issues, including
potential environmental contamination at Company and off-site facilities; characterizes risk issues
in terms of likelihood, consequences and costs, including the year(s) when these costs could be
incurred; analyzes risks using statistical techniques; and, constructs risk cost profiles for each
site. Remediation cost estimates are prepared from this analysis and are taken into consideration
in developing project budgets from third party contractors. Although we take great care in the
development of these risk assessments and future cost estimates, the actual amount of the
remediation costs may be different from those estimated as a result of a number of factors
including: changes to government regulations or laws; changes in local construction costs and the
availability of personnel and materials; unforeseen remediation requirements that are not apparent
until the work actually commences; and other similar uncertainties. We do not include any
unasserted claims that we might have against others in determining the liability for such costs,
and, except as noted with regard to specific cost sharing arrangements, have no such arrangements,
nor have we taken into consideration any future claims against insurance carriers that we might
have in determining our environmental liabilities. In those situations where we are considered a
de minimis participant in a remediation claim, the failure of the larger participants to meet their
obligations could result in an increase in our liability with regard to such a site.
We continue to participate in environmental assessments and remediation work at eleven locations,
including certain former facilities. Due to the nature of environmental remediation and monitoring
work, such activities can extend for up to thirty years, depending upon the nature of the work, the
substances involved, and the regulatory requirements associated with each site. In calculating the
net present value (where appropriate) of those costs expected to be incurred in the future, we used
a discount rate of 4.7%, which is the 20 year Treasury Bill rate at the end of the fiscal third
quarter and represents the risk free rate for the 20 years those costs are expected to be paid. We
believe that the application of this rate produces a result which approximates the amount that
would hypothetically satisfy our liability in an arms-length transaction. Based on the above, we
estimate the current range
26
of undiscounted cost for remediation and monitoring to be between $5.4
million and $9.4 million with an undiscounted amount of $6.2 million to be most probable. Current
estimates for expenditures, net of recoveries pursuant to cost sharing agreements, for each of the
five succeeding fiscal years are $0.5 million, $1.6 million, $0.9 million, $0.8 million, and $0.8
million respectively, with $1.6 million payable thereafter. Of the total undiscounted costs, we
estimate that approximately 50% will relate to remediation activities and that 50% will be
associated with monitoring activities.
We estimate that the potential cost for implementing corrective action at nine of these sites will
not exceed $0.5 million in the aggregate, payable over the next several years, and have provided
for the estimated costs, without discounting for present value, in our accrual for environmental
liabilities. In the first quarter of fiscal 2003, we entered into a consent order for a former
facility in New York, which is currently subject to a contract for sale, pursuant to which we have
developed a remediation plan for review and approval by the New York Department of Environmental
Conservation. Based upon the characterization work performed to date, we have accrued estimated
costs of approximately $1.7 million without discounting for present value. The amounts and timing
of such payments are subject to the approved remediation plan.
The environmental cleanup plan we presented during the fourth quarter of fiscal 2000 for a portion
of a site in Pennsylvania which continues to be owned, although the related business has been sold,
was approved during the third quarter of fiscal 2004. This plan was submitted pursuant to the
Consent Order and Agreement with the Pennsylvania Department of Environmental Protection (PaDEP)
concluded in fiscal 1999. Pursuant to the Consent Order, upon its execution we paid $0.2 million
for past costs, future oversight expenses and in full settlement of claims made by PaDEP related to
the environmental remediation of the site with an additional $0.2 million paid in fiscal 2001. A
second Consent Order was concluded with PaDEP in the third quarter of fiscal 2001 for another
portion of the site, and a third Consent Order for the remainder of the site was concluded in the
third quarter of fiscal 2003 (the 2003 Consent Order). An environmental cleanup plan for the
portion of the site covered by the 2003 Consent Order was presented during the second quarter of
fiscal 2004. We are also administering an agreed settlement with the Federal government, concluded
in the first quarter of fiscal 2000, under which the government pays 50% of the direct and indirect
environmental response costs associated with a portion of the site. We also concluded an agreement
in the first quarter of fiscal 2006, under which the Federal government paid an amount equal to 45%
of the estimated environmental response costs associated with another portion of the site. No
future payments are due under this second agreement. At December 30, 2007, the cleanup reserve was
$2.3 million based on the net present value of future expected cleanup and monitoring costs and is
net of expected reimbursement by the Federal Government of $0.5 million. The aggregate
undiscounted amount associated with the estimated environmental response costs for the site in
Pennsylvania is $3.3 million. We expect that remediation at this site, which is subject to the
oversight of the Pennsylvania authorities, will not be completed for several years, and that
monitoring costs, although expected to be incurred over twenty years, could extend for up to thirty
years.
In addition, we have been named as a potentially responsible party in four environmental
proceedings pending in several states in which it is alleged that we are a generator of waste that
was sent to landfills and other treatment facilities. Such properties generally relate to
businesses which have been sold or discontinued. We estimate that expected future costs, and the
estimated proportional share of remedial work to be performed associated with these proceedings,
will not exceed $0.1 million without discounting for present value and we have provided for these
estimated costs in our accrual for environmental liabilities.
Litigation
We are also engaged in various other legal proceedings incidental to our business. It is our
opinion that, after taking into consideration information furnished by our counsel, these matters
will not have a material effect on our consolidated financial position, results of operations, or
cash flows in future periods.
27
Recently Issued Accounting Standards
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS
141R). SFAS 141R will significantly change the accounting for business combinations in a number of
areas including the treatment of contingent consideration, contingencies, acquisition costs,
research and development assets and restructuring costs. In addition, under SFAS 141R, changes in
deferred tax asset valuation allowances and acquired income tax uncertainties in a business
combination after the measurement period will impact income taxes. SFAS 141R is effective for
fiscal years beginning after December 15, 2008. The adoption of the provisions of SFAS 141R is not
expected to have a material effect on our financial position, results of operations, or cash flows.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, An Amendment of ARB No. 51. SFAS 160 amends ARB 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. It also amends certain of ARB 51s consolidation procedures for consistency with the
requirements of SFAS 141R. SFAS 160 is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The statement shall be applied
prospectively as of the beginning of the fiscal year in which the statement is initially adopted.
The adoption of the provisions of SFAS 160 is not expected to have a material effect on our
financial position, results of operations, or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, providing companies with an option to report selected financial assets and
liabilities at fair value. This standards objective is to reduce both complexity in accounting
for financial instruments and the volatility in earnings caused by measuring related assets and
liabilities differently. Generally accepted accounting principles have required different
measurement attributes for different assets and liabilities that can create artificial volatility
in earnings. SFAS 159 helps to mitigate this type of accounting-induced volatility by enabling
companies to report related assets and liabilities at fair value, which would likely reduce the
need for companies to comply with detailed rules for hedge accounting. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons between companies that
choose different measurement attributes for similar types of assets and liabilities. The standard
requires companies to provide additional information that will help investors and other users of
financial statements to more easily understand the effect of the Companys choice to use fair value
on its earnings. It also requires entities to display the fair value of those assets and
liabilities for which the Company has chosen to use fair value on the face of the balance sheet.
SFAS 159 is effective for us on April 1, 2008. The adoption of the provisions of SFAS 159 is not
expected to have a material effect on our financial position, results of operations, or cash flows.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 106, and 132(R). SFAS 158
requires companies to recognize a net asset for a defined benefit postretirement pension or
healthcare plans over funded status or a net liability for a plans under funded status in its
balance sheet. SFAS 158 also requires companies to recognize changes in the funded status of a
defined benefit postretirement plan in accumulated other comprehensive income in the year in which
the changes occur. SFAS 158 was adopted on March 31, 2007. Additionally, SFAS 158 requires
companies to measure plan assets and benefit obligations as of the date of our fiscal year end
balance sheet, which is consistent with our current practice. This requirement is effective for
fiscal years ending after December
15, 2008. The adoption of SFAS 158 is not expected to have a material effect on our financial
position, results of operations, or cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair
value, establishes a framework for measuring fair value in accordance with generally accepted
accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective
for fiscal years beginning after November 15, 2007. The adoption
of SFAS 157 is not expected to have a material effect on our
financial position, results of operations or cash flows.
28
In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes An
Interpretation of SFAS 109. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with SFAS 109, Accounting for
Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. In addition, FIN No. 48 provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48
are to be applied to all tax positions upon initial adoption of this standard. Only tax positions
that meet the more-likely-than-not recognition threshold at the effective date may be recognized or
continue to be recognized as an adjustment to the opening balance of retained earnings (or other
appropriate components of equity) for that fiscal year. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006. We adopted FIN 48 effective April 1, 2007. See
Note 6 of Notes to Unaudited Consolidated Financial Statements included elsewhere in this Form
10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various market risks, primarily changes in interest rates associated with the
Senior Credit Facility. At December 30, 2007, approximately $37.6 million of the Senior Credit
Facility was tied to LIBOR and, as such, a 1% increase or decrease will have the effect of
increasing or decreasing annual interest expense by approximately $0.4 million based on the amount
outstanding under the facility at December 30, 2007.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Companys Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives, and management
necessarily is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As of December 30, 2007, the Company carried out an evaluation under the supervision and with the
participation of the Companys management, including the Companys Chief Executive Officer and the
Companys Chief Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures. Based on the foregoing, the Companys Chief
Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and
procedures were effective.
There have been no changes in the Companys internal control over financial reporting (as defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) during the first nine
months of the fiscal year to which this report relates that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are engaged in various legal proceedings incidental to our business. It is the opinion of
management that, after taking into consideration information furnished by our counsel, these
matters will not have a material effect on our consolidated financial position, results of
operations, or cash flows in future periods.
Item 1A.
Risk Factors
In addition to the other information set forth in this report, you should carefully consider the
factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year
ended March 31, 2007, as amended,
29
as filed with the Securities and Exchange Commission, and
incorporated herein by reference, which factors could materially affect our business, financial
condition, financial results or future performance.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Senior Credit Facility described in Part I above prohibits the payment of dividends.
Item 6. Exhibits
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10.1
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Waiver Under Amended and Restated Credit Agreement dated as of October 17, 2007
by and among the Company, the lenders listed on the signatory pages thereof, Wells Fargo
Foothill, Inc.
,
as the co-lead arranger and administrative agent for such lenders and AC
Finance LLC, as co-lead arranger.
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31.1
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32
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Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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BREEZE-EASTERN CORPORATION
(Registrant)
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Dated: February 6, 2008
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By:
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/s/ Joseph F. Spanier
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Joseph F. Spanier, Executive Vice President, Chief Financial Officer and Treasurer *
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*
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On behalf of the Registrant and as Principal Financial and Accounting Officer.
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30
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