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 31, 2010
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
(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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35 Melanie Lane
Whippany, New Jersey
(Address of principal executive offices)
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07981
(Zip Code)
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Registrants telephone number, including area code: (973) 602-1001
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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
þ
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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 January 14, 2011, the total number of outstanding shares of common stock was 9,429,036.
2
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The results reflected in the unaudited condensed consolidated Statement of Operations for the three
and nine month periods ended December 31, 2010 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, 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, 2010.
When the Company refers to its fiscal year in this Quarterly Report on Form 10-Q, the Company is
referring to the fiscal year ended on March 31
st
of that year. Thus the Company is
currently operating in its fiscal year 2011, which commenced on April 1, 2010. Unless the context
expressly indicates a contrary intention, all references to years in this filing are to the
Companys fiscal years. Figures in this Quarterly Report on Form 10-Q are in thousands, except for
share amounts or where expressly noted.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
3
B
REEZE-EASTERN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Data)
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(Unaudited)
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(Audited)
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December 31, 2010
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March 31, 2010
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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3,421
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$
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3,371
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Accounts receivable (net of allowance for doubtful accounts
of $233 at December 31, 2010 and $150 at March 31, 2010)
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14,291
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12,102
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Tax refund receivable
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904
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904
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Inventories
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18,102
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17,365
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Prepaid expenses and other current assets
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696
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423
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Deferred income taxes
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4,986
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5,686
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Total current assets
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42,400
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39,851
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PROPERTY:
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Property and equipment
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17,243
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20,323
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Less accumulated depreciation and amortization
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8,833
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10,748
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Property net
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8,410
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9,575
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OTHER ASSETS:
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Deferred income taxes
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12,937
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13,718
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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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3,800
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3,800
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Other
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8,948
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8,762
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Total other assets
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26,087
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26,682
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TOTAL ASSETS
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$
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76,897
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$
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76,108
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LIABILITIES AND STOCKHOLDERS EQUITY
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CURRENT LIABILITES:
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Revolving credit facility
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$
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$
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Current portion of long-term debt
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822
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3,286
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Accounts payable trade
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8,226
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5,578
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Accrued compensation
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2,954
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2,286
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Accrued income taxes
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223
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114
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Other current liabilities
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3,010
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3,399
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Total current liabilities
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15,235
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14,663
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LONG-TERM DEBT, NET OF CURRENT PORTION
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12,321
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14,786
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OTHER LONG-TERM LIABILITIES
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18,946
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18,839
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COMMITMENTS AND CONTINGENCIES (Note 13)
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TOTAL LIABILITIES
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46,502
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48,288
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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 $.01 par
value; issued, 9,846,003 at December 31, 2010 and 9,813,097
at March 31, 2010
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98
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98
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Additional paid-in capital
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94,939
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94,612
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Accumulated deficit
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(57,677
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(59,863
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Accumulated other comprehensive loss
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(216
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(285
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37,144
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34,562
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Less treasury stock, at cost 416,967 at December 31, 2010 and 416,147 at March 31, 2010
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(6,749
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(6,742
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Total stockholders equity
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30,395
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27,820
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TOTAL LIABILITIES & STOCKHOLDERS EQUITY
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$
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76,897
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$
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76,108
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See notes to condensed consolidated financial statements.
4
BREEZE-EASTERN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF 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 31, 2010
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December 27, 2009
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December 31, 2010
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December 27, 2009
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Net sales
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$
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19,614
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$
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21,168
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$
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51,260
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$
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50,938
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Cost of sales
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12,339
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13,159
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31,676
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31,732
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Gross profit
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7,275
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8,009
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19,584
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19,206
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Selling, general, and administrative expenses
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5,434
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4,522
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14,880
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13,194
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Relocation expense
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14
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211
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203
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Operating income
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1,841
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3,473
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4,493
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5,809
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Interest expense
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167
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213
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550
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676
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Other expense net
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31
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58
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176
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186
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Income before incomes taxes
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1,643
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3,202
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3,767
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4,947
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Income tax provision
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690
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1,345
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1,582
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2,078
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Net income
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$
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953
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$
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1,857
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$
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2,185
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$
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2,869
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Earnings per common share:
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Basic net income per share
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$
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0.10
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$
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0.20
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$
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0.23
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$
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0.31
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Diluted net income per share
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0.10
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0.20
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0.23
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0.31
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Weighted-average basic shares outstanding
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9,429,000
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9,400,000
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9,409,000
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9,385,000
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Weighted-average diluted shares outstanding
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9,464,000
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9,404,000
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9,430,000
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9,393,000
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See notes to condensed consolidated financial statements.
5
BREEZE-EASTERN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands of Dollars)
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Nine Months Ended
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December 31, 2010
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December 27, 2009
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Cash flows from operating activities:
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Net income
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$
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2,185
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$
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2,869
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Adjustments
to reconcile net income to net cash provided by operating activities:
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Loss on disposal of property and equipment
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29
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Depreciation and amortization
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1,470
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1,125
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Non-cash reserve accretion
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328
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17
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Stock based compensation
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325
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532
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Provision for losses on accounts receivable
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82
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121
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Deferred taxes-net
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1,431
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1,786
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Changes in assets and liabilities:
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(Increase) decrease in accounts receivable and other receivables
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(2,271
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)
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5,480
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Increase in inventories
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(737
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)
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(6,104
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)
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Increase in other assets
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(90
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)
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(657
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)
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Increase in accounts payable
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2,648
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246
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Increase in accrued compensation
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664
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132
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Increase in accrued income taxes
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109
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|
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162
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Decrease in other liabilities
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(491
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)
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(380
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)
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Net cash provided by operating activities
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5,682
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5,329
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Cash flows from investing activities:
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Capital expenditures
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(327
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)
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(4,864
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)
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Capitalized project costs
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(376
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)
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(840
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)
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Net cash (used in) investing activities
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(703
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)
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(5,704
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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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(4,929
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)
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(2,464
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)
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Net borrowings (repayments) of other debt
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|
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2,700
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Net cash (used in) provided by financing activities
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(4,929
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)
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|
236
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|
|
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|
|
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Increase (decrease) in cash
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50
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(139
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)
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Cash at beginning of period
|
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|
3,371
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|
|
|
2,667
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Cash at end of period
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$
|
3,421
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|
|
$
|
2,528
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Supplemental information:
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Interest payments
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$
|
478
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|
|
$
|
599
|
|
Income tax payments
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|
|
42
|
|
|
|
127
|
|
See notes to condensed consolidated financial statements.
6
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
NOTE 1.
Financial Presentation
The following unaudited, Condensed Consolidated Statements of Operations, Condensed Consolidated
Balance Sheets, and Condensed Consolidated Statements of Cash Flows are of Breeze-Eastern
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.
Certain prior year amounts may have been reclassified to conform to the current period
presentation.
NOTE 2.
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 as well as
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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|
|
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|
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|
|
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Three Months Ended
|
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Nine Months Ended
|
|
|
December 31,
|
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December 27,
|
|
December 31,
|
|
December 27,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
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Basic Earnings per Common Share:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Weighted-average common shares
outstanding for basic earnings
per share calculation
|
|
|
9,429,000
|
|
|
|
9,400,000
|
|
|
|
9,409,000
|
|
|
|
9,385,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Diluted Earnings per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding
|
|
|
9,429,000
|
|
|
|
9,400,000
|
|
|
|
9,409,000
|
|
|
|
9,385,000
|
|
Stock options (a)
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|
|
35,000
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|
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4,000
|
|
|
|
21,000
|
|
|
|
8,000
|
|
|
|
|
|
|
Weighted-average common shares
outstanding for diluted earnings
per share calculation
|
|
|
9,464,000
|
|
|
|
9,404,000
|
|
|
|
9,430,000
|
|
|
|
9,393,000
|
|
|
|
|
|
|
|
|
|
(a)
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|
During the three and nine month periods ended December 31, 2010, options to purchase 327,000
and 349,000 shares of common stock, respectively, and during the three and nine month periods
ended December 27, 2009, options to purchase 493,000 and 456,000 shares of common stock,
respectively, were not included in the computation of diluted earnings per share because the
exercise prices of these options were greater than the average market price of the common
share.
|
7
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
NOTE 3.
Stock-Based Compensation
The Company records stock-based compensation using a fair-value method in its condensed
consolidated financial statements. Currently, the Companys stock-based compensation relates to
restricted stock awards and stock options.
Net income for the three and nine month periods ended December 31, 2010, includes stock-based
compensation expense of $75 net of tax, or $0.01 per diluted share, and $188 net of tax, or $0.02
per diluted share, respectively. Net income for the three and nine month periods ended December
27, 2009, includes stock-based compensation expense of $102 net of tax, or $0.01 per diluted share,
and $309 net of tax, or $0.03 per diluted share, respectively. Stock based compensation expense is
included in selling, general and administrative expenses.
The Company maintains the Amended and Restated 1992 Long-Term Incentive Plan (the 1992 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 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 September 2014. The
1999 Plan expired in July 2009, and no further grants or awards may be made under this plan. Under
the 1999 Plan, there remain outstanding unexercised options granted in Fiscal years 2001, 2004,
2006 and 2008. The 1992 Plan expired in September 2002, and no further grants or awards may be
made under this plan. There remain outstanding unexercised options granted in Fiscal 2002 under
the 1992 Plan.
Under each of the 1992, 1999, 2004, and 2006 Plans, option exercise prices equal the fair market
value of the common shares at the respective grant dates. Prior to May 1999, options granted to
officers and employees and all options granted to non-employee directors expired if not exercised
on or before five years after the date of the grant. Beginning in May 1999, options granted 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 certain circumstances, including a change of control of the Company as
defined in the various Plans, option vesting may be accelerated.
The Black-Scholes weighted-average value per option granted in Fiscal 2011 was $2.21 and $2.41. In
Fiscal 2010, the Black-Scholes weighted-average values per option granted were $2.52, $2.55, and
$2.63. The Black-Scholes option pricing model uses dividend yield, volatility, risk-free rate,
expected term, and forfeiture assumptions to value options granted in Fiscal 2011 and Fiscal 2010.
Expected volatilities are based on historical volatility of the Companys common stock and other
factors. 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 uses historical data to
estimate the expected option term. The Company assumed no forfeitures because of the limited
number of employees at the executive and senior management levels who receive stock options, past
employment history, and current stock price projections. The Company uses the following
assumptions to estimate the fair value of option grants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 $2.21
|
|
2011 $2.41
|
|
2010 $2.52
|
|
2010 $2.55
|
|
2010 $2.63
|
|
|
value per
|
|
value per
|
|
value per
|
|
value per
|
|
value per
|
|
|
option
|
|
option
|
|
option
|
|
option
|
|
option
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Volatility
|
|
|
25.7
|
%
|
|
|
30.2
|
%
|
|
|
32.6
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Risk-free interest rate
|
|
|
2.1
|
%
|
|
|
3.2
|
%
|
|
|
3.1
|
%
|
|
|
3.2
|
%
|
|
|
3.4
|
%
|
Expected term of
options (in years)
|
|
|
7.0
|
|
|
|
7.0
|
|
|
|
7.0
|
|
|
|
7.0
|
|
|
|
7.0
|
|
8
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
The following table summarizes stock option activity under all plans and other grants authorized by
the Board of Directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
Approximate
|
|
Weighted-
|
|
|
|
|
|
|
Intrinsic
|
|
Remaining
|
|
Average
|
|
|
Number
|
|
Value
|
|
Contractual
|
|
Exercise
|
|
|
of Shares
|
|
(in thousands)
|
|
Term (Years)
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2010
|
|
|
624,911
|
|
|
$
|
198
|
|
|
|
7
|
|
|
$
|
8.38
|
|
Granted
|
|
|
117,000
|
|
|
|
|
|
|
|
|
|
|
|
6.74
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(65,000
|
)
|
|
|
|
|
|
|
|
|
|
|
9.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
676,911
|
|
|
|
283
|
|
|
|
7
|
|
|
|
8.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December
31, 2010
|
|
|
429,244
|
|
|
|
124
|
|
|
|
5
|
|
|
|
8.83
|
|
Unvested options expected to become
exercisable after December 31, 2010
|
|
|
247,667
|
|
|
|
159
|
|
|
|
9
|
|
|
|
6.64
|
|
Shares available for future option
grants at
December 31, 2010 (a)
|
|
|
78,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
May be decreased by restricted stock grants.
|
No options were exercised during the first nine months of Fiscal 2011.
During the first nine months of Fiscal 2011 and Fiscal 2010, stock option compensation expense
recorded in selling, general and administrative expenses was $193 and $317, respectively, before
taxes of $81 and $133, respectively. As of December 31, 2010, there was $504 of unrecognized
compensation cost related to stock options granted-but-not-yet-vested that are expected to become
exercisable. This cost is expected to be recognized over a weighted-average period of 2.0 years.
Except as otherwise authorized by the Board of Directors, it is the general policy of the Company
that the stock underlying the option grants consists 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 (consisting solely of independent
Directors) may at any time offer to repurchase a stock option that is exercisable and has not
expired.
A summary of restricted stock award activity under all plans follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
Number
|
|
Grant Date
|
|
|
of Shares
|
|
Fair Value
|
|
Non-vested at March 31, 2010
|
|
|
37,984
|
|
|
$
|
6.43
|
|
Granted
|
|
|
32,906
|
|
|
|
6.85
|
|
Vested
|
|
|
(36,899
|
)
|
|
|
6.29
|
|
Cancelled
|
|
|
(239
|
)
|
|
|
11.07
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2010
|
|
|
33,752
|
|
|
|
6.95
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards are utilized both for director compensation and awards to officers and
employees, and are distributed in a single grant of shares which are subject to forfeiture prior to
vesting and have voting and dividend rights from the date of distribution. Outstanding restricted
stock awards to officers and employees have forfeiture and transfer restrictions that lapse ratably
over three years beginning one year after the date of the award.
9
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
Outstanding restricted stock awards granted to non-employee directors contain forfeiture provisions
that lapses after one year and transfer restrictions that lapse six months after the person ceases
to be a director. In certain circumstances, including a change of control of the Company as
defined in the various Plans, forfeiture lapses 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 expensed 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. During the first nine months of Fiscal 2011 and Fiscal
2010, compensation expense related to restricted stock awards recorded in selling, general and
administrative expenses was $132 and $215, respectively, before taxes of $56 and $90, respectively.
As of December 31, 2010 there was approximately
$175 of unrecognized compensation cost related to non-vested restricted stock awards, which is
expected to be recognized over a period of 1 year.
NOTE 4.
Inventories
Inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2010
|
|
Finished goods
|
|
$
|
414
|
|
|
$
|
1,985
|
|
Work in process
|
|
|
6,123
|
|
|
|
6,133
|
|
Purchased and manufactured parts
|
|
|
14,043
|
|
|
|
11,785
|
|
|
|
|
|
|
|
|
|
|
|
20,580
|
|
|
|
19,903
|
|
Reserve for slow moving and obsolescence
|
|
|
(2,478
|
)
|
|
|
(2,538
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,102
|
|
|
$
|
17,365
|
|
|
|
|
|
|
|
|
Inventory obsolescence is determined by identifying specific items based on the age of inventory
and by establishing a general reserve based on annual purchases. Analyzing inventory by age showed
little movement once items have aged five years, and historical trends showed that 1.1% of
purchases would eventually be scrapped. Accordingly, the Company used these two factors in
determining the amount of the reserve.
NOTE 5.
Property, Equipment, and Related Depreciation
Property and equipment are recorded at cost, and equipment is depreciated on a straight-line basis
over its estimated economic useful life. Depreciation expense for the three and nine month periods
ended December 31, 2010 was $469 and $1,463, respectively, and for the three and nine month periods
ended December 27, 2009 was $376 and $1,105, respectively.
Average estimated useful lives for property are as follows.
|
|
|
Machinery and equipment
|
|
3 to 10 years
|
Furniture and fixtures
|
|
3 to 10 years
|
Computer hardware and software
|
|
3 to 5 years
|
Leasehold improvements
|
|
10 years
|
The Company classified as real estate held for sale on the condensed consolidated balance sheets a
property owned in Glen Head, New York that is currently under sales contract. The sale of the
property is expected to be concluded upon completion of municipal approvals and soil remediation
pursuant to the remediation plan approved by the New York Department of Environmental Conservation.
The net sale proceeds are expected to be $3,800. See Note 13 for a discussion of environmental
matters related to this site.
10
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
NOTE 6.
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 31, 2010 are summarized as follows.
|
|
|
|
|
Balance at March 31, 2010
|
|
$
|
179
|
|
Warranty costs incurred
|
|
|
(99
|
)
|
Change in estimates to pre-existing warranties
|
|
|
35
|
|
Product warranty accrual
|
|
|
113
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
228
|
|
|
|
|
|
NOTE 7.
Income Taxes
Income taxes for the three and nine month periods ended December 31, 2010 was computed using the
effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing
review and evaluation by management.
At December 31, 2010, the Company has federal and state net operating loss carry forwards, or NOLs,
of approximately $21,013 and $10,229, respectively, which are due to expire in Fiscal 2022 through
Fiscal 2030 and Fiscal 2011 through Fiscal 2017, respectively. These 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 valuation allowance of $265 exists relating to
other items, as it is managements belief that it is more likely than not that a portion of this
deferred asset is not realizable.
At December 31, 2010, the current deferred tax assets are $4,986, and non-current deferred tax
assets are $12,937. If the Company does not generate adequate taxable earnings, some or all of
our deferred tax assets 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.
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 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 over the most recent three-year
testing period that would cause the Companys NOLs to be subject to the Section 382 Limitation.
However, given the Companys current ownership structure, the creation of one or more new 5%
shareholders could result in the Companys NOLs being subject to the Section 382 Limitation.
In the second quarter of Fiscal 2011, the Internal Revenue Service (IRS) commenced an examination
of the Companys Federal income tax return for Fiscal 2009.
At December 31, 2010, the Company had no unrecognized tax benefits for uncertain tax positions.
11
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
NOTE 8.
Long-Term Debt Payable to Banks
Long-term debt, including current maturities, consists of the following.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
March 31, 2010
|
|
|
Senior Credit Facility
|
|
$
|
13,143
|
|
|
$
|
18,072
|
|
Less current maturities
|
|
|
822
|
|
|
|
3,286
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
12,321
|
|
|
$
|
14,786
|
|
|
|
|
|
|
|
|
Senior Credit Facility
The Company has a 60-month, $33,000 senior credit facility consisting of a
$10,000 revolving line of credit and, at the inception of the credit agreement in August 2008, a
term loan totaling $23,000 (the Senior Credit Facility). The term loan requires quarterly
principal payments of $822 over the life of the loan and $6,571 due at maturity in August 2013.
During the Fiscal 2011 second quarter, the Company made two $822 term loan repayments by paying the
required amount due on July 1, 2010, and pre-paying the amount due October 1, 2010. During the
Fiscal 2011 third quarter, the
Company made three $822 term loan repayments by pre-paying the amounts due in January 2011, April
2011 and July 2011. The Company made these accelerated term loan payment because of its strong cash
position. Accordingly, the balance sheet reflects $822 of current maturities due under the term
loan of the Senior Credit Facility as of December 31, 2010.
The Senior Credit Facility bears interest at either the Base Rate or the London Interbank Offered
Rate (LIBOR) plus applicable margins based on the Companys leverage ratio. The leverage ratio
is equal to consolidated total debt divided by consolidated EBITDA (the sum of net income,
depreciation, amortization, other non-cash charges and credits to net income, interest expense, and
income tax expense minus charges related to debt refinancing) for the most recent four quarters and
is calculated at each quarter end. The Base Rate is the higher of the Prime Rate or the Federal
Funds Open Rate plus 0.50%. The applicable margins for the Base Rate based borrowings are between
0% and 0.75%. The applicable margins for LIBOR-based borrowings are between 1.25% and 2.25%. At
December 31, 2010, the Senior Credit Facility had a blended interest rate of 3.5%, for debt of
$12,900 tied to LIBOR and for debt of $243 tied to the Prime Rate. The Company also pays a
commitment fee of 0.375% on the average daily unused portion of the Revolver. The Senior Credit
Facility requires the Company to enter into an interest rate swap (discussed below).
The Senior Credit Facility is secured by all of the Companys assets and allows the Company to
issue letters of credit against the total borrowing capacity of the facility. At December 31,
2010, there were no outstanding borrowings under the Revolver, $951 in outstanding (standby)
letters of credit, and $9,049 in Revolver availability. The Senior Credit Facility contains
certain financial covenants which require a minimum fixed charge coverage ratio that is not
permitted to be less than 1.25 : 1.0 and a leverage ratio (as defined above) that is not permitted
to be more than 2.5 : 1.0. The fixed charge coverage ratio is equal to consolidated EBITDA (as
defined above) divided by fixed charges (the sum of cash interest expense, cash income taxes,
dividends, cash environmental costs, scheduled principal installments on indebtedness adjusted for
prepayments, capital expenditures, and payments under capitalized leases). The Company is permitted
to exclude from fixed charges certain one-time capital expenditures of up to $5,500 related to the
facility relocation. At December 31, 2010, the Company was in compliance with the covenant
provisions of the Senior Credit Facility.
Interest Rate Swap
The Senior Credit Facility requires the Company to enter into an interest rate
swap for at least three years in an amount not less than 50% of the term loan for the first two
years and 35% of the term loan for the third year. An interest rate swap, a type of derivative
financial instrument, is used to minimize the effects of interest rate fluctuations on cash flows.
The Company does not use derivatives for trading or speculative purposes. In September 2008, the
Company entered into a three year interest rate swap to exchange floating rate for fixed rate
interest payments on the term loan as required by the Companys Senior Credit Facility. The swaps
net effect of the spread between the floating rate (30 day LIBOR) and the fixed rate (3.25%), is
settled monthly, and is reflected as an adjustment to interest expense in the period incurred. The
adjustment to record the swap at its fair value is included in accumulated other comprehensive
loss, net of tax. The Company reduced its existing unrealized loss on the interest rate swap
during the first nine months of Fiscal 2011.
12
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
NOTE 9.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date (i.e. an
exit price). The accounting guidance includes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The three levels of the fair value hierarchy
are as follows:
|
|
|
Level 1- Unadjusted quoted prices for identical assets or liabilities in active markets;
|
|
|
|
|
Level 2-Inputs other than quoted prices in active markets for identical assets or
liabilities that are observable whether directly or indirectly for substantially the full
term of the asset or liability; and
|
|
|
|
|
Level 3-Unobservable inputs for the asset or liability, which include managements own
assumptions about what the assumptions market participants would use in pricing the asset
or liability, including assumptions about risk.
|
The carrying amount reported in the Condensed Consolidated Balance Sheets for cash, accounts
receivable, accounts payable and accrued expenses approximates fair value because of the short-term
maturity of those instruments. The carrying amount for borrowings under the revolving portion of
the Senior Credit Facility, if applicable, would approximate fair value because of the variable
market interest rate charged to the Company for these borrowings. The fair value of the long-term
debt was estimated
using a discounted cash flow analysis and a yield rate that was estimated using yield rates for
publicly traded debt instruments of comparable companies with similar features.
The carrying amounts and fair value of the Companys financial instruments are presented below as
of December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Long-term debt
|
|
$
|
13,143
|
|
|
$
|
13,143
|
|
Interest rate swap liability included in
other long-term liabilities (Level 2)
|
|
|
98
|
|
|
|
98
|
|
NOTE 10.
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 $176 and $526, respectively, for the three and nine month periods ended December 31, 2010, and
$195 and $626, respectively, for the three and nine month periods ended December 27, 2009.
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). German law prohibits the transfer of unfunded pension obligations
which have vested for retired and former employees, so 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
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 recorded an asset equal to the benefit obligation for the Pension Plan of $3,325
and $3,376 as of December 31, 2010 and March 31, 2010, respectively. This asset is included in
other long-term assets and it is restricted in use to satisfy the legal liability associated with
the Pension Plan.
13
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
December 31,
|
|
December 27,
|
|
December 31,
|
|
December 27,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
Interest cost
|
|
$
|
11
|
|
|
$
|
9
|
|
|
$
|
32
|
|
|
$
|
27
|
|
Amortization of net (gain) loss
|
|
|
5
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
Net periodic cost
|
|
$
|
16
|
|
|
$
|
9
|
|
|
$
|
49
|
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
December 31,
|
|
December 27,
|
|
December 31,
|
|
December 27,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
Interest cost
|
|
$
|
47
|
|
|
$
|
101
|
|
|
$
|
136
|
|
|
$
|
197
|
|
Amortization of net (gain) loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost
|
|
$
|
47
|
|
|
$
|
101
|
|
|
$
|
136
|
|
|
$
|
197
|
|
|
|
|
NOTE 11.
Concentration of Credit Risk
The Company is subject to concentration of credit risk primarily with its trade receivables. The
Company grants credit to certain customers who meet pre-established credit requirements, and
generally requires no collateral from its customers. Estimates of potential credit losses are
provided for in the Companys condensed consolidated financial statements and are within
managements expectations. As of December 31, 2010, the Company had no other significant
concentrations of credit risk.
NOTE 12.
New Accounting Standards
In July 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) 2010-20, which amends Accounting Standards Codification (ASC) 310 by requiring more robust
and disaggregated disclosures about the credit quality of an entitys financing receivables and its
allowance for credit losses. The objective of enhancing these disclosures is to improve financial
statement users understanding of (1) the nature of an entitys credit risk associated with its
financing receivables and (2) the entitys assessment of that risk in estimating its allowance for
credit losses as well as changes in the allowance and the reasons for those changes. The guidance
is effective for the first reporting period beginning after December 15, 2010. The adoption of this
guidance is not expected to have a material impact on the Companys financial position, results of
operations, or cash flows.
NOTE 13.
Contingencies
Environmental Matters
The Company is involved in environmental proceedings and potential proceedings relating to soil and
groundwater contamination and other environmental matters at several of its former facilities that
were never required for its current operations. These facilities were part of the business disposed
of by TransTechnology Corporation, the former parent of the Company. Environmental cleanup
activities usually span multiple years, which make estimating liabilities a matter of judgment
because of such factors as changing remediation technologies, assessments of the extent of
contamination, and continually evolving regulatory environmental standards. The Company considers
these and other factors in estimates of the timing and amount of any future costs that may be
required for remediation actions. The Company records a liability for the amount that it
determines to be the best estimate of the cost of remediation. The Company does not discount the
recorded liabilities, as the amount and timing of future cash payments are not fixed or cannot be
reliably determined.
14
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
In the fourth quarter of Fiscal 2010, the Company reviewed and evaluated new information regarding
several of its environmental sites which triggered a reassessment of its environmental liability
estimates. To support this reassessment, the Company retained the services of a
nationally-recognized environmental consulting firm. Based upon the new information and the
consultants analysis and recommendations, the Company determined that its best estimate of its
future environmental liabilities is now $14,492 before offsetting cost-sharing of approximately
$1,500 that is classified mostly as a non-current asset.
At December 31, 2010 and March 31, 2010, the aggregate amount of liabilities recorded relative to
environmental matters was $14,492 and $14,496, respectively. In the first nine months of Fiscal
2011and Fiscal 2010, the Company spent $332 and $651, respectively, on environmental costs and for
the entire Fiscal 2010, the Company spent $772. In Fiscal 2011, the Company anticipates spending
$958. These costs will be charged against the Companys environmental liability reserve and will
not impact income. The Company performs quarterly reviews of the status of its environmental sites
and the related liabilities. Based on the reviews completed during Fiscal 2010, the Company
increased the liability by $9,722 from the amounts recorded at March 31, 2009. There are a number
of former operating facilities that the Company is monitoring or investigating for potential future
remediation. In some cases, although a loss may be probable, it is not possible at this time to
reasonably estimate the amount of any obligation for remediation activities because of
uncertainties with respect to assessing the extent of the contamination or the applicable
regulatory standard. The Company is also pursuing claims for contribution to site investigation and
cleanup costs against other potentially responsible parties (PRPs), including the U.S. Government.
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 federal and state environmental 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
actual remediation expenses that differ from those estimated. The Company does not include any
unasserted claims that it might have against others in determining its potential 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 may 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
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. The
Company does not discount the recorded liabilities.
In the first quarter of Fiscal 2003, the Company entered into a consent order for a former facility
in Glen Head, New York, which is currently subject to a contract for sale, pursuant to which the
Company developed a remediation plan for review and approval by the New York Department of
Environmental Conservation. The Company was advised during Fiscal 2010 that the Department of
Environmental Conservation was requiring additional offsite groundwater delineation studies as part
of its review. At the former facility in Glen Head, New York based upon the characterization work
performed to date and this latest request, the Company has accrued estimated costs of approximately
$4,230. The amounts and timing of payments are subject to the approved remediation plan and
additional discussions with the Department on the scope of the additional delineation study.
The Company sold the business previously operated at the property it owns in Saltzburg,
Pennsylvania (Federal Labs). The Company presented an environmental cleanup plan during the
fourth quarter of Fiscal 2000 for a portion of Federal Labs site, which 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
(the 1999 Consent Order). Pursuant to the Consent Order, 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 an additional $0.2 million paid in Fiscal 2001. The
Company concluded a second Consent Order with PaDEP in the third quarter of Fiscal 2001 for a
second portion of the Federal Labs site (the 2001 Consent Order), and a third Consent Order for
the remainder of the Federal Labs site was concluded in the third quarter of Fiscal 2003 (the 2003
Consent Order). The Company submitted an environmental cleanup plan for the portion of the
Federal Labs site covered by the 2003 Consent Order during the second
15
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
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 Federal Government pays 50% of the direct and
indirect environmental response costs associated with a portion of the Fed Labs site subject to the
1999 Consent Order. 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 a second portion of the Federal Labs site subject to the 2001
Consent Order. No future payments are due under this second agreement. The Company is currently
under a tolling agreement with the Federal Government with respect to the remainder of the Federal
Labs site while we negotiate a cost sharing arrangement with respect to the final portion of this
site subject to the 2003 Consent Order. However, there can be no assurance the Company will be
successful in these negotiations or any litigation seeking to enforce our rights to contribution
and or indemnification from the Federal Government with respect to this final portion of the
Federal Labs site. The reserves are shown without giving effect to any cost sharing payments due
from the Federal Government. These amounts are shown as other assets on our balance sheet.
At December 31, 2010, the reserve for environmental liabilities at Federal Labs was $5,860. 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 was 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 $100 and has provided for these estimated costs in the Companys
accrual for environmental liabilities.
The Company has entered into a sales contract for the Glen Head, New York property for $4,000, and
it is classified as held for sale in the amount of $3,800 after allowing for certain costs. The
contract does not include a price adjustment clause and although there are conditions precedent to
the buyers obligations to close, the contract does not allow for contract termination. Thus, the
buyer cannot unilaterally terminate the contract without liability, a buy-out, or some other
settlement that must be negotiated with the Company. However, there is no outside date for closing
to occur and we must provide the buyer with a funded remediation plan and environmental insurance
prior to the buyer being obligated to close. The buyer has indicated its intent to build
residential housing on the property and has been engaged in the lengthy process of securing the
municipal
approvals necessary to redevelop this former industrial site for residential purposes. Based on
information provided by the buyer, the Company believes that all necessary approvals precedent to
the sale of the Glen Head property are likely to be completed and the sale closed by June 2011.
The property is the subject of a consent order with the State of New York in which the Company has
developed a remediation plan for review and approval by the New York Department of Environmental
Conservation. The Company received a request from the Department in Fiscal 2010 to provide
delineation and testing with respect to offsite groundwater contamination. Neither the consent
order nor the remediation plan affect the buyers obligation to close under the sales contract. At
the time the sales contract was entered into in July 2001, the property had an appraised value of
$3,300 without adjusting for the Companys estimated cost of remediation, which is separately
reserved. In 2005, the property had an appraised value of $4,200 without adjusting for the
Companys estimated cost of remediation. The property has not been appraised since 2005.
Litigation
The Company is also engaged in various other legal proceedings incidental to its business. It is
the opinion of management that, after taking into consideration information furnished by its
counsel, these matters will have no material effect on the Companys consolidated financial
position or the results of operations or cash flows in future periods.
NOTE 14.
Segment, Geographic Location and Customer Information
Our products and related services aggregate into one reportable segment sophisticated
mission equipment for specialty aerospace and defense applications. The nature of the production
process (assemble, inspect, and test) is similar for all products, as are the customers and
distribution methods.
16
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
Net sales greater than 10% of total revenues derived from customers for the three and nine month
periods ended December 31, 2010 and December 27, 2009 are summarized as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
December 31,
|
|
December 27,
|
|
December 31,
|
|
December 27,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Customer A
|
|
|
36
|
%
|
|
|
22
|
%
|
|
|
29
|
%
|
|
|
22
|
%
|
Customer B
|
|
|
24
|
|
|
|
18
|
|
|
|
21
|
|
|
|
19
|
|
Customer C
|
|
|
17
|
|
|
|
15
|
|
|
|
16
|
|
|
|
19
|
|
Customer D
|
|
|
*
|
|
|
|
17
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
*
|
|
Represents less than 10% of total revenues.
|
Net sales below show the geographic location of customers for the three and nine month periods
ended December 31, 2010 and December 27, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 27,
|
|
|
December 31,
|
|
|
December 27,
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
United States
|
|
$
|
13,083
|
|
|
$
|
14,204
|
|
|
$
|
31,349
|
|
|
$
|
30,179
|
|
Italy
|
|
|
2,134
|
|
|
|
1,760
|
|
|
|
5,340
|
|
|
|
7,019
|
|
England
|
|
|
1,135
|
|
|
|
1,282
|
|
|
|
2,085
|
|
|
|
1,893
|
|
Other European countries
|
|
|
603
|
|
|
|
772
|
|
|
|
3,095
|
|
|
|
2,804
|
|
Pacific and Far East
|
|
|
717
|
|
|
|
1,113
|
|
|
|
3,886
|
|
|
|
3,407
|
|
Other international
|
|
|
1,942
|
|
|
|
2,037
|
|
|
|
5,505
|
|
|
|
5,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,614
|
|
|
$
|
21,168
|
|
|
$
|
51,260
|
|
|
$
|
50,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Unless otherwise indicated or the context otherwise requires, all references to the Company, the
registrant we, us or our and similar terms in this report refer to Breeze-Eastern
Corporation and its subsidiaries. All dollar amounts stated herein are in thousands except per
share amounts. All references to years in this report refer to the fiscal year ended March 31 of
the indicated year unless otherwise specified. This report reflects all adjustments of a normal
recurring nature, which are, in the opinion of management, necessary for fair presentation of the
results of operations for the periods reflected. Certain prior fiscal year amounts may have been
reclassified to conform to the current fiscal year presentation.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements other than statements of historical facts included or incorporated by
reference in this report, including, without limitation, statements regarding our future financial
position, business strategy, budgets, projected revenues, projected costs and plans and objective
of management for future operations, are forward-looking statements. Forward-looking statements
generally can be identified by the use of forward-looking terminology such as may, will,
expects, intends, plans, projects, estimates, anticipates, or believes or the
negative thereof or any variation there on or similar terminology or expressions.
We based these forward-looking statements on our current expectations and projections about future
events. These forward-looking statements are not guarantees and are subject to known and unknown
risks, uncertainties and assumptions about us that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such forward-looking statements.
Important factors that could cause actual results to differ materially from our expectations
include, but are not limited to: changes in business conditions, changes in applicable laws, rules
and regulations affecting us in locations in which we conduct business, interest rate trends, a
decline or redirection of the U.S. defense budget, the termination of any contracts with the U.S.
Government, changes in our sales strategy and product development plans, changes in the
marketplace, developments in environmental proceedings that we are involved in, continued services
of our executive management team, competitive pricing pressures, market acceptance of our products
under development, delays in the development of products, changes in spending allocation or the
termination, postponement, or failure to fund one or more significant contracts by the U.S.
Government or other customers, determination by us to dispose of or acquire additional assets,
events impacting the U.S. and world financial markets and economies, and statements of assumption
underlying any of the foregoing, as well as other factors set forth under Item 1A. Risk Factors
contained in the Companys Annual Report on Form 10-K filed for the Fiscal year ended March 31,
2010 and Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations below.
All subsequent written and oral forward-looking statements attributable to us, or persons acting on
our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law,
we assume no duty to update or revise our forward-looking statements based on changes in internal
estimates, expectations, or otherwise.
18
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
OVERVIEW
We design, develop, manufacture, sell, and service sophisticated engineered mission equipment for
specialty aerospace and defense applications. We have long been
recognized as the worlds leading designer, manufacturer, service provider, and supplier of
mission-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.
CORE BUSINESS
Our core business is aerospace and defense products. We believe we are the worlds leading
designer, manufacturer, service provider, and supplier of mission-critical electric and hydraulic
rescue hoists and cargo hook systems. We also manufacture weapons handling systems, cargo winches,
and tie-down equipment. These products are sold primarily to military and civilian agencies and
aerospace contractors. Our emphasis is on the engineering, assembly, testing, service, and support
of our products.
PRODUCTS AND SERVICES
Our products and related services aggregate into one reportable segment. The nature of the
production process (assemble, inspect, and test), customers, and product distribution are similar
for all products. We sell our products through internal marketing representatives and independent
sales representatives and distributors.
Products
As a pioneer of helicopter rescue hoist technology, we continue to develop sophisticated helicopter
hoist and winch systems, including systems for the current generation of Blackhawk, Seahawk,
Osprey, Chinook, Ecureuil, Dolphin, Merlin/Cormorant, Super Stallion, Changhe Z-11, Agusta A109,
Agusta A119, AgustaWestland AW139, and AgustaWestland Future Lynx helicopters. We also design,
market, sell and service a broad line of hydraulic and electric aircraft cargo winch systems with
capacities from 900 pounds to over 7,000 pounds.
Our external cargo hook systems are original equipment on many military medium and heavy lift
helicopters manufactured today. These hook systems range from smaller 1,000-pound capacity models
up to the largest 36,000-pound capacity hooks employed on the Super Stallion helicopter. Our
latest designs incorporate load sensing and display technology and automatic load release features.
We also manufacture cargo and aircraft tie-downs which are included in this product line.
We make static-line retrieval and cargo winches for military cargo aircraft including the Boeing
C-17, Alenia C-27J, and CASA CN-235, CASA C-295, and Airbus A400M. In addition, we have a contract
with Airbus to develop and sell a new cargo positioning and restraint system for the A400M cargo
plane and will be the sole supplier of this system with anticipated delivery beginning after Fiscal
2012.
Once our products are qualified and approved for use with a particular aircraft model, sales of
products and services generally continue over the life of the aircraft model, which can be decades.
It can be expensive and difficult for a second suppliers product to become qualified and approved
on the same aircraft.
19
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
Our weapons handling systems include weapons handling equipment for land-based rocket launchers and
munitions hoists for loading missiles and other loads using electric power or exchangeable battery
packs. We also supply equipment for the United States, Japanese, and European Multiple-Launch
Rocket Systems (MLRS), and the United States High Mobility Artillery Rocket System (HIMARS), which
uses specialized hoists to load and unload rocket pod containers. We also provide actuators and
specialty gearboxes for specialty weapons applications.
Services
We perform overhaul, repair, and maintenance services for all of our products. Most of these
services are performed at our Whippany, New Jersey facility. We also
have a network of authorized licensed
third-party service centers around the world that perform these services.
In addition to performing research and development to design new products, improve existing
products, and add new features to our product line, we also provide engineering services to adapt
our products to customer specific needs and aircraft models on a fee-for-service basis.
We discuss segment information in Note 14 of our Notes to Condensed Consolidated Financial
Statements contained in Item 1 of Part I of this report.
LABOR MATTERS
The United Auto Workers (UAW) represents certain hourly employees at our facility. Our collective
bargaining agreement with these employees expired on September 30, 2010. The Company and the union
employees operated under a mutually agreed extension of the expired agreement until reaching a new
three-year agreement on October 28, 2010.
STRATEGIC
INTENT
Our primary strategy is to continue to expand our position as a market leader in the design,
development, and service of sophisticated mission equipment for specialty aerospace and defense
applications. We intend to maintain our position by continuing to focus on our principal customers
and on geographic areas where we have developed our reputation as a premier provider of aircraft
hoist and lift equipment, and by expanding both our customer base and product lines. We believe
that continued spending on research and development to improve the quality of our product offerings
and remaining on the leading edge of technological advances in our chosen markets is also crucial
to our business. In this regard, we will continue to commit resources to product research and
development.
CRITICAL ACCOUNTING POLICIES
For information regarding our critical accounting policies, please refer to the discussion provided
in our Annual Report on Form 10-K for our fiscal year ended March 31, 2010 under the caption Item
7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and our Notes to Consolidated Financial Statements included therein.
20
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
Results of Operations
Three Months Ended December 31, 2010 Compared with Three Months Ended December 27, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
December 31,
|
|
December 27,
|
|
Increase/(Decrease)
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
|
Products
|
|
$
|
14,244
|
|
|
$
|
15,430
|
|
|
$
|
(1,186
|
)
|
|
|
(7.7
|
)%
|
Services
|
|
|
5,370
|
|
|
|
5,738
|
|
|
|
(368
|
)
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
Net sales
|
|
|
19,614
|
|
|
|
21,168
|
|
|
|
(1,554
|
)
|
|
|
(7.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
8,752
|
|
|
|
9,539
|
|
|
|
(787
|
)
|
|
|
(8.3
|
)
|
Services
|
|
|
3,587
|
|
|
|
3,620
|
|
|
|
(33
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
12,339
|
|
|
|
13,159
|
|
|
|
(820
|
)
|
|
|
(6.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
7,275
|
|
|
|
8,009
|
|
|
|
(734
|
)
|
|
|
(9.2
|
)
|
As a % of net sales
|
|
|
37.1
|
%
|
|
|
37.8
|
%
|
|
|
N/A
|
|
|
|
(0.7
|
)%Pt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative
expenses
|
|
|
5,434
|
|
|
|
4,522
|
|
|
|
912
|
|
|
|
20.2
|
%
|
Relocation expense
|
|
|
|
|
|
|
14
|
|
|
|
(14
|
)
|
|
|
N/A
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,841
|
|
|
|
3,473
|
|
|
|
(1,632
|
)
|
|
|
(47.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
167
|
|
|
|
213
|
|
|
|
(46
|
)
|
|
|
(21.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
953
|
|
|
$
|
1,857
|
|
|
$
|
(904
|
)
|
|
|
(48.7
|
)%
|
Net Sales.
Fiscal 2011 third quarter net sales of $19,614 were lower by $1,554, or 7.3%, from net
sales of $21,168 in the Fiscal 2010 third quarter. Fiscal 2011 products sales of $14,244 were
$1,186, or 7.7%, below prior year primarily due to lower volume of new equipment of $1,876 due to a
large OEM weapon handling shipment last year, partly offset by higher spare parts volume of $689 to
the U.S. military during the Fiscal 2011 third quarter.
Fiscal 2011 third quarter services sales of $5,370 were lower by $368, or 6.4%, compared with the
prior year primarily due to reduced overhaul and repair volume.
The timing of U.S. Government awards, availability of U.S. Government funding, and product delivery
schedules are among the factors that affect the period of recording revenues. Over the past
several years, revenues in the second half of the fiscal year exceeded revenues in the first half of the fiscal
year. We expect Fiscal 2011 revenues will be consistent with this pattern.
Cost of Sales.
Products cost of sales of $8,752 in the Fiscal 2011 third quarter were 8.3% lower
than the prior year due to the lower weapons handling sales volume and to a greater mix of spare
parts sales that have lower costs. Cost of services provided in the Fiscal 2011 third quarter of
$3,587 were 0.9% lower than the prior year
21
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
due to lower sales volume, partly offset by higher
overhaul & repair costs.
Gross profit.
Gross profit of $7,275 in the Fiscal 2011 third quarter was $734, or 9.2% less than
the corresponding period in Fiscal 2010 due primarily to lower weapons handling sales volume and
higher overhaul & repair costs. As a percent of sales, the gross profit margin was 37.1% for the
Fiscal 2011 third quarter compared with 37.8% for the prior year.
Selling, General, and Administrative Expenses.
Selling, general, and administrative (SG&A)
expenses were $5,434 in the Fiscal 2011 third quarter compared with $4,522 in the Fiscal 2010 third
quarter, an increase of $912, or 20.2%. This increase is primarily due to outside costs including
legal fees for negotiating the collective bargaining agreement, information technology costs,
incentive compensation accruals based on the plan formula compared with zero accrual in the prior
Fiscal year, and amortization related to the relocation that impacted the current Fiscal year. As
a percent of sales, SG&A was 27.7% in the Fiscal 2011 third quarter versus 21.4% in the comparable
period last year, partly reflecting lower sales.
Interest Expense
. Interest expense was $167 in the Fiscal 2011 third quarter versus $213 in the
Fiscal 2010 third quarter. The decline in interest expense is primarily due to $8,450 lower total
debt at December 31, 2010 compared with December 27, 2009.
Net Income
. Net income was $953, or $0.10 per diluted share, in the Fiscal 2011 third quarter
compared with $1,857, or $0.20 per diluted share, in the same period in Fiscal 2010. The decrease
is due to the lower sales volume, lower gross profit, and higher SG&A costs.
New Orders
. New products and services orders received during the three months ended December 31,
2010 rose 32.2% to $15,753 compared with $11,915 during the three months ended December 27, 2009.
The increase was due to spare parts, mostly from the U.S. military but also from third-party
overhaul & repair service centers, new equipment, and engineering. New orders for services for the three
months ended December 31, 2010 were 21.4% higher than the prior year due to reversing a U.S.
Government engineering order for the FCS Program in the prior year. Orders for new equipment
increased by $1,428, or 32.9%, primarily due to spare parts.
Backlog.
Backlog at December 31, 2010 was $132,774 compared with $130,144 at March 31, 2010 and
$126,568 at December 27, 2009. The backlog at December 31, 2010, March 31, 2010, and December 27,
2009 includes approximately $70,563, $69,463, and $67,200, respectively, for the Airbus A400M
military transport aircraft that was once scheduled to commence shipping in late calendar 2009 and
continue through 2020. Airbus now indicates shipments are likely to commence in calendar 2012.
We measure backlog by the amount of products or services that customers committed by contract to
purchase as of a given date. Backlog may vary substantially over time due to the size and timing
of orders. Backlog of approximately $50,513 at December 31, 2010 is scheduled for shipment during
the next twelve months. Although significant cancellations of purchase orders or substantial
reductions of product quantities in existing contracts seldom occur, such cancellations or
reductions could substantially and materially reduce backlog. Therefore, backlog information may
not represent the actual amount of shipments or sales for any future period.
The book-to-bill ratio is computed by dividing the new orders received during a period by the sales
for the same period. A book-to-bill ratio in excess of 1.0 is potentially indicative of continued
overall growth in sales. The book to bill ratio was 0.8 for the Fiscal 2011 third quarter and 0.6
for the Fiscal 2010 third quarter.
22
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
Nine Months Ended December 31, 2010 Compared with Nine Months Ended December 27, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
December 31,
|
|
December 27,
|
|
Increase/(Decrease)
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
|
Products
|
|
$
|
38,117
|
|
|
$
|
35,343
|
|
|
$
|
2,774
|
|
|
|
7.8
|
%
|
Services
|
|
|
13,143
|
|
|
|
15,595
|
|
|
|
(2,452
|
)
|
|
|
(15.7
|
)
|
|
|
|
|
|
|
|
Net sales
|
|
|
51,260
|
|
|
|
50,938
|
|
|
|
322
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
21,798
|
|
|
|
21,403
|
|
|
|
395
|
|
|
|
1.8
|
|
Services
|
|
|
9,878
|
|
|
|
10,329
|
|
|
|
(451
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
31,676
|
|
|
|
31,732
|
|
|
|
(56
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
19,584
|
|
|
|
19,206
|
|
|
|
378
|
|
|
|
2.0
|
|
As a % of net sales
|
|
|
38.2
|
%
|
|
|
37.7
|
%
|
|
|
N/A
|
|
|
|
0.5
|
% Pt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative
expenses
|
|
|
14,880
|
|
|
|
13,194
|
|
|
|
1,686
|
|
|
|
12.8
|
%
|
Relocation expense
|
|
|
211
|
|
|
|
203
|
|
|
|
8
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,493
|
|
|
|
5,809
|
|
|
|
(1,316
|
)
|
|
|
(22.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
550
|
|
|
|
676
|
|
|
|
(126
|
)
|
|
|
(18.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,185
|
|
|
$
|
2,869
|
|
|
$
|
(684
|
)
|
|
|
(23.8
|
)%
|
Net Sales.
Fiscal 2011 first nine months net sales of $51,260 increased by $322, or 0.6%, from net
sales of $50,938 in the corresponding period in Fiscal 2010. Fiscal 2011 products sales of $38,117
were $2,774, or 7.8%, above prior year primarily due to increased spare parts volume of $6,049
resulting primarily from U.S. military and third-party overhaul & repair service centers, partly offset
by lower new equipment volume of $3,275.
Fiscal 2011 first nine months services sales of $13,143 were lower by $2,452, or 15.7%, compared
with the prior year primarily due to reduced overhaul and repair volume and also due to lower
engineering services volume. Overhaul and repair sales were lower than last year due to ramping up
operations in the Fiscal 2011 first quarter following our March 2010 relocation to our Whippany,
New Jersey facility.
The timing of U.S. Government awards, availability of U.S. Government funding, and product delivery
schedules are among the factors that affect the period of recording revenues. Over the past
several years, revenues in the second half of the fiscal year exceeded revenues in the first half
of the fiscal year. We expect Fiscal 2011 revenues will be consistent with this pattern.
Cost of Sales.
Products cost of sales of $21,798 in the Fiscal 2011 first nine months were $395,
or 1.8% higher than the prior year primarily due to higher sales and also due to under-absorbed
manufacturing overhead, partly offset by lower costs on spare parts. Cost of services provided of
$9,878 in the Fiscal 2011
first nine months were $451, or 4.4%, lower than the prior year due to lower overhaul & repair
volume, partly offset by under-absorbed overhead.
23
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
Gross profit.
Gross profit of $19,584 in the Fiscal 2011 first nine months was $378, or 2.0%,
ahead of the same period in Fiscal 2010. The dollar increase is due to sales volume growth in
spare parts, partly offset by under-absorbed overhead. As a percent of sales, the gross profit
margin was 38.2% for the Fiscal 2011 first nine months compared with 37.7% for the prior year.
The gross profit margin is lower by 3.2% points due to the one-time impact of our relocation during the fiscal first quarter and labor negotiations during the fiscal second quarter.
Selling, General, and Administrative Expenses.
Selling, general, and administrative (SG&A)
expenses were $14,880 in the Fiscal 2011 first nine months compared with $13,194 in Fiscal 2010, an
increase of $1,686, or 12.8%. The increase is due to higher incentive compensation accruals based
on the plan formula compared to zero accrual in the prior Fiscal year, outside consulting costs,
third-party sales commissions, and amortization related to the relocation that impacted the current
Fiscal year. As a percent of sales, SG&A was 29.0% in the Fiscal 2011 first nine months versus
25.9% in the comparable period last year.
We relocated our headquarters and factory to Whippany, New Jersey during the Fiscal 2010 fourth
quarter and incurred $211 of expenses related to the move in the Fiscal 2011 first six months (none
in the Fiscal third quarter) and $203 in the first nine months in Fiscal 2010.
Interest Expense
. Interest expense was $550 in the Fiscal 2011 first nine months versus $676 in
Fiscal 2010. The decline in interest expense is primarily due to $8,450 lower total debt at
December 31, 2010 compared with December 27, 2009.
Net Income
. Net income was $2,185, or $0.23 per diluted share, in the Fiscal 2011 first nine
months compared with $2,869, or $0.31 per diluted share, in the same period in Fiscal 2010. The
lower net income is primarily due to higher SG&A expenses.
New Orders
. New products and services orders received during the nine months ended December 31,
2010 increased 15.9% to $53,890 compared with $46,518 during the nine months ended December 27,
2009. The increase was mostly due to spare parts orders, primarily from the U.S. military, and
also to engineering partly offset by lower new equipment orders. Orders for new equipment
decreased by $3,860, or 15.9%, primarily due to customers deferring their production requirements.
New orders for services for the nine months ended December 31, 2010 were 19.9% higher than the
prior year, due to engineering orders for the Predator-C this year and reversing a U.S. Government
engineering order for the FCS Program in the prior year.
Backlog
The book to bill ratio for the first nine months of Fiscal 2011 was 1.1 and for the first nine
months of Fiscal 2010 was 0.9. Cancellations of purchase orders or reductions of product
quantities in existing contracts, although seldom occurring, could substantially and materially
reduce the Companys backlog. Therefore, the 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
$33,000 Senior Credit Facility. Our liquidity requirements depend on a number of factors, many of
which are beyond our control, including the timing of production under contracts with the U.S.
Government. Our working capital needs fluctuate between periods as a result of changes in program
status and the timing of payments by program. Additionally, because sales are generally made on
the basis of individual purchase orders, liquidity requirements vary based on the timing and volume
of orders. Based on cash on hand, future cash expected to
24
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
be generated from operations, and the
Senior Credit Facility, we expect to have sufficient cash to meet liquidity requirements for the
next twelve months.
Our $33,000 Senior Credit Facility consists of a $10,000 revolving line of credit (Revolver) and,
at the inception of the credit agreement in August 2008, a term loan totaling $23,000. The Senior
Credit Facility is secured by all of our assets and accrues interest at either the Base Rate (as
defined in the credit agreement) or the London Interbank Offered Rate (LIBOR) plus applicable
margins based on our leverage ratio (as defined in the credit agreement) for the most recent four
quarters and is calculated at each quarter end. At December 31, 2010, the term loan balance was
$13,143, there were no outstanding Revolver borrowings, there were $951 in outstanding (standby)
letters of credit, and $9,049 of availability under the Revolver. The Senior Credit Facility
contains certain financial covenants, including fixed charge coverage ratio and leverage ratio.
Unless waived, any failure to comply with such covenants could constitute an event of default
resulting in the acceleration of all amounts due under the Senior Credit Facility. A more complete
description of these covenants is contained in Note 8 of our financial statements included in Part
I, Item 1 of this report. At December 31, 2010, we were in compliance with all covenant provisions
of the Senior Credit Facility.
During the Fiscal 2011 second quarter, we made two $822 term loan repayments by paying the required
amount due on July 1, 2010, and pre-paying the amount due October 1, 2010. During the Fiscal 2011
third quarter, we made three $822 term loan repayments by pre-paying the amounts due in January
2011, April 2011, and July 2011. We made these accelerated term loan payment because of our strong
cash generation and high cash balance. With the accelerated principal payments, the next principal
payment is due October 1, 2011; thus, the current portion of long term debt reflects the $822
obligation due within one year.
Working Capital
Working capital at December 31, 2010 was $27,165, an increase of $1,977, versus $25,188 at March
31, 2010. The ratio of current assets to current liabilities was 2.8:1.0 at December 31, 2010
compared with 2.7:1.0 at the beginning of Fiscal 2011. The working capital increase resulted
primarily from a $2,189 increase in accounts receivable, a $2,464 decrease in the current portion
of long-term debt, and a $737 increase in inventories. Partly offsetting these amounts was a
$2,648 accounts payable increase, $700 decrease in current deferred income taxes, $668 accrued
compensation increase and a $603 net increase in other working capital items.
The accounts receivable days outstanding based on 360 days decreased to 55.1 days at December 31,
2010, from 69.0 days at December 27, 2009, due primarily to lower accounts receivable balances
exceeding ninety-days outstanding. Inventory turnover increased to 2.8 turns at December 31, 2010
versus 2.0 turns at December 27, 2009 due to managements focus since January 2010 on reducing
inventory.
Capital Expenditures
Capital expenditures-operations for the nine months ended December 31, 2010 and December 27, 2009
were $327 and $4,864, respectively, which include capitalized relocation expenditures of $162,
before a build-out credit of $233 received, and $4,553, respectively. Capitalized project costs
for engineering for the nine months ended December 31, 2010 and December 27, 2009 were $376 and
$840, respectively.
Senior Credit Facility
The Senior Credit Facility is discussed in Note 8 of the Notes to Condensed Consolidated Financial
Statements contained in Part I, Item 1 of this report.
25
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
Interest Rate Swap
The Interest Rate Swap is discussed in Note 8 of the Notes to Condensed Consolidated Financial
Statements contained in Part I, Item 1 of this report.
TAX BENEFITS FROM NET OPERATING LOSSES
The Tax Benefits from Net Operating Losses is discussed in Note 7 of the Notes to Condensed
Consolidated Financial Statements contained in Part I, Item 1 of this report.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations in future fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
More Than
|
|
|
Total
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
|
|
|
Debt principal
repayments (a)
|
|
$
|
13,143
|
|
|
$
|
822
|
|
|
$
|
12,321
|
|
|
$
|
|
|
|
$
|
|
|
Estimated interest
payments on
long-term debt (b)
|
|
|
641
|
|
|
|
109
|
|
|
|
532
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
8,924
|
|
|
|
1,079
|
|
|
|
2,142
|
|
|
|
1,977
|
|
|
|
3,726
|
|
Purchase
obligations (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,708
|
|
|
$
|
2,010
|
|
|
$
|
14,995
|
|
|
$
|
1,977
|
|
|
$
|
3,726
|
|
|
|
|
|
|
|
(a)
|
|
Obligations for long-term debt reflect the requirements of the term loan under the Senior
Credit Facility. See Note 8 of Notes to Condensed Consolidated Financial Statements contained in
Part I, Item 1of this report.
|
|
(b)
|
|
Estimated interest payments on long-term debt reflect the scheduled interest payments of the
term loan under the Senior Credit Facility and assume an effective weighted average interest rate
of 3.5%, our blended interest rate at December 31, 2010.
|
|
(c)
|
|
Our supplier purchase orders contain provisions allowing vendors to recover certain costs in
the event of cancellation for convenience by us. We believe that we do not have ongoing purchase
obligations with respect to our suppliers that are material in amount or that would result,
individually or collectively, in a material loss exposure to us if cancelled for convenience.
Furthermore, purchase obligations for capital assets and services historically have not been
material in amount.
|
INFLATION
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.
CONTINGENCIES
Environmental matters
Environmental matters are discussed in Note 13 of the Notes to Condensed
Consolidated Financial Statements contained in Part 1, Item 1 of this report.
26
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
Litigation
Litigation is discussed in Note 13 of the Notes to Condensed Consolidated Financial
Statements contained in Part 1, Item 1 of this report.
RECENTLY ISSUED ACCOUNTING STANDARDS
The recent accounting pronouncements are discussed in Note 12 of the Notes to Condensed
Consolidated Financial Statements contained in Part 1, Item 1 of this report.
($ In Thousands Except Share data)
27
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our business is affected by global economic and geo-political conditions, particularly defense
spending by the United States Government. In particular, any decline in or a redirection of the
United States defense budget could have a material impact on revenues and earnings in future
periods. Although the United States Defense spending levels are historically high, the priority of
the wars in Iraq and Afghanistan has resulted in less procurement for replacement parts and service
for our products than in prior years.
As our OEM customers development timetables have been extended, we have experienced corresponding
product development schedule slippage and increased investment. We have not seen, nor do we
currently anticipate, any program cancellations and still expect all of our current product
development projects to lead to production and aftermarket services which supports our current and
expected investments. As an example, the Airbus A400M military transport aircraft is not expected
to generate material revenues until after Fiscal 2012.
We are exposed to various market risks, primarily changes in interest rates associated with our
Senior Credit Facility. The Senior Credit Facility requires us to enter into an interest rate swap
for at least three years in an amount not less than 50% of the term loan for the first two years
and 35% of the term loan for the third year. An interest rate swap, a type of derivative financial
instrument, is used to minimize the effects of interest rate fluctuations on cash flows. We do not
use derivatives for trading or speculative purposes. In September 2008, we entered into a
three-year interest rate swap to exchange floating rate for fixed rate interest payments on the
term loan as required by our Senior Credit Facility. The swaps net effect of the spread between
the floating rate (30 day LIBOR) and the fixed rate (3.25%), is settled monthly, and is reflected
as an adjustment to interest expense in the period incurred. An unrealized loss to adjust the
interest rate swap to its fair value was recorded net of tax, in accumulated other comprehensive
loss, during the first nine months of Fiscal 2011.
At December 31, 2010, $12,900 of our Senior Credit Facility was tied to LIBOR, and a 1% increase or
decrease in interest rates would increase or decrease annual interest expense by approximately $77
based on the debt outstanding under the facility at December 31, 2010.
28
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) as of the end of the period
covered by this report pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31, 2010, our
disclosure controls and procedures were effective to ensure (i) that information we are required to
disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms,
and (ii) that such information is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, in order to allow timely decisions regarding
required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15(d)-15(f) during the quarter ended December 31, 2010 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are engaged in various other legal proceedings incidental to the Companys business. Management
believes that, after taking into consideration information furnished by its counsel, these matters
will not have a material effect on the 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, the user/reader 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, 2010 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 6. EXHIBITS
|
|
|
31.1
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
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 3, 2011
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By:
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/s/ Mark D. Mishler
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Mark D. Mishler, Senior Vice President,
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Chief Financial Officer, Treasurer, and Secretary*
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*
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On behalf of the Registrant and as Principal Financial and Accounting Officer.
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29
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