SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
____________________
(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 September 30, 2011
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)
35 Melanie Lane
Whippany, New Jersey
(Address of principal executive offices)
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95-4062211
(I.R.S. employer
identification no.)
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
þ
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):
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
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 October 19, 2011, the total number of outstanding shares of common stock was 9,469,540.
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 six month periods ended September 30, 2011 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, 2011, as filed with
the Securities and Exchange Commission (SEC) on June 3, 2011.
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 2012, which commenced on April 1, 2011. 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 REMIANDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
3
BREEZE-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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ASSETS
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September 30, 2011
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March 31, 2011
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CURRENT ASSETS:
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Cash
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$
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10,628
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$
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6,381
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Accounts receivable (net of allowance for doubtful accounts
of $249 at September 30, 2011 and $235 at March 31, 2011)
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11,467
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18,522
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Inventories
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19,509
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14,751
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Prepaid expenses and other current assets
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662
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727
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Deferred income taxes
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6,803
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7,375
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Total current assets
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49,069
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47,756
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PROPERTY:
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Property and equipment
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18,125
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17,586
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Less accumulated depreciation and amortization
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9,930
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9,235
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Property net
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8,195
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8,351
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OTHER ASSETS:
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Deferred income taxes
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8,173
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8,750
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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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Qualification units-net
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4,054
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3,179
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Other
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5,668
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5,910
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Total other assets
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22,097
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22,041
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TOTAL ASSETS
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$
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79,361
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$
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78,148
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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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821
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Accounts payable trade
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9,441
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8,041
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Accrued compensation
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2,231
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3,010
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Accrued income taxes
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327
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287
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Other current liabilities
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4,689
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4,042
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Total current liabilities
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17,509
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15,380
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LONG-TERM DEBT, NET OF CURRENT PORTION
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9,858
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11,500
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OTHER LONG-TERM LIABILITIES
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16,292
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17,835
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COMMITMENTS AND CONTINGENCIES (Note 13)
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TOTAL LIABILITIES
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43,659
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44,715
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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 $.01 par
value; issued, 9,896,244 at September 30, 2011 and 9,846,003
at March 31, 2011
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99
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98
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Additional paid-in capital
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95,671
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95,068
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Accumulated deficit
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(53,125
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)
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(54,837
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Accumulated other comprehensive loss
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(112
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)
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(147
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)
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42,533
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40,182
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Less treasury stock, at cost 426,704 at September 30, 2011
and 416,967 at March 31, 2011
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(6,831
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(6,749
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)
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Total stockholders equity
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35,702
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33,433
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TOTAL LIABILITIES & STOCKHOLDERS EQUITY
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$
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79,361
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$
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78,148
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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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Six Months Ended
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September 30,
2011
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September 30,
2010
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September 30,
2011
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September 30,
2010
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Net sales
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$
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17,880
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$
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15,106
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$
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36,128
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$
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31,646
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Cost of sales
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9,921
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8,930
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20,785
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19,337
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Gross profit
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7,959
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6,176
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15,343
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12,309
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Selling, general, and administrative expenses
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3,851
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3,517
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7,755
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6,591
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Engineering expense
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2,063
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1,299
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4,348
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2,855
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Relocation expense
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211
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Operating income
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2,045
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1,360
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3,240
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2,652
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Interest expense
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102
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170
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236
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383
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Other expense net
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20
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81
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50
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145
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Income before incomes taxes
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1,923
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1,109
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2,954
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2,124
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Income tax provision
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808
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466
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1,241
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892
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Net income
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$
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1,115
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$
|
643
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$
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1,713
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$
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1,232
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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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0.12
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$
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0.07
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$
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0.18
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$
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0.13
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Diluted net income per share
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0.12
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0.07
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|
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0.18
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|
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0.13
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Weighted-average basic shares outstanding
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9,470,000
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9,400,000
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9,457,000
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9,398,000
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Weighted-average diluted shares outstanding
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9,628,000
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9,412,000
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9,596,000
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9,412,000
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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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Six Months Ended
|
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September 30,
|
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September 30,
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2011
|
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2010
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|
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Cash flows from operating activities:
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Net income
|
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$
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1,713
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$
|
1,232
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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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|
767
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998
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Non-cash reserve accretion
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212
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218
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Stock based compensation
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327
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|
195
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Provision for losses on accounts receivable
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14
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|
6
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Deferred taxes-net
|
|
|
1,124
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|
|
|
764
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|
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Changes in assets and liabilities:
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Decrease in accounts receivable and other receivables
|
|
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7,041
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|
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|
1,310
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Increase in inventories
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|
(4,758
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)
|
|
|
(543
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)
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Decrease (increase) in other assets
|
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|
298
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|
|
|
(277
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)
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Increase in accounts payable
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|
1,400
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|
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|
717
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(Decrease) increase in accrued compensation
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(779
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)
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|
202
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|
Increase in accrued income taxes
|
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|
40
|
|
|
|
86
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|
Decrease in other liabilities
|
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|
(1,048
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)
|
|
|
(396
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)
|
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Net cash provided by operating activities
|
|
|
6,351
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|
|
|
4,541
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|
|
|
|
|
|
|
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|
|
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Cash flows from investing activities:
|
|
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|
|
|
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|
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Capital expenditures
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|
|
(540
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)
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|
|
(386
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)
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Capitalized Qualification units
|
|
|
(937
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)
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|
|
(174
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)
|
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Net cash (used in) investing activities
|
|
|
(1,477
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)
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|
|
(560
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)
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|
|
|
|
|
|
|
|
|
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Cash flows from financing activities:
|
|
|
|
|
|
|
|
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Payments on long-term debt
|
|
|
(821
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)
|
|
|
(2,465
|
)
|
Net borrowings (repayments) of other debt
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
194
|
|
|
|
|
|
|
Net cash (used in) financing activities
|
|
|
(627
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)
|
|
|
(2,465
|
)
|
|
|
|
|
|
|
|
|
|
|
Increase in cash
|
|
|
4,247
|
|
|
|
1,516
|
|
Cash at beginning of period
|
|
|
6,381
|
|
|
|
3,371
|
|
|
Cash at end of period
|
|
$
|
10,628
|
|
|
$
|
4,887
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Interest payments
|
|
$
|
203
|
|
|
$
|
325
|
|
Income tax payments
|
|
|
78
|
|
|
|
42
|
|
Non-cash financing activity for stock option exercise
|
|
|
82
|
|
|
|
|
|
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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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
Basic Earnings per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding for basic earnings per share calculation
|
|
|
9,470,000
|
|
|
|
9,400,000
|
|
|
|
9,457,000
|
|
|
|
9,398,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding
|
|
|
9,470,000
|
|
|
|
9,400,000
|
|
|
|
9,457,000
|
|
|
|
9,398,000
|
|
Stock options (a)
|
|
|
158,000
|
|
|
|
12,000
|
|
|
|
139,000
|
|
|
|
14,000
|
|
|
|
|
|
|
Weighted-average common shares
outstanding for diluted earnings
per share calculation
|
|
|
9,628,000
|
|
|
|
9,412,000
|
|
|
|
9,596,000
|
|
|
|
9,412,000
|
|
|
|
|
|
|
|
|
|
(a)
|
|
During the three and six month periods ended September 30, 2011, options to purchase 195,000
and 208,000 shares of common stock, respectively, and during the three and six month periods
ended September 30, 2010, options to purchase 354,000 and 360,000 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.
|
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 consists of
restricted stock awards and stock options.
Net income for the three and six month periods ended September 30, 2011, includes stock-based
compensation expense of $111 net of tax, or $0.01 per diluted share, and $190 net of tax, or $0.02
per diluted share, respectively. Net income for the three and six month periods ended September 30,
2010, includes stock-based compensation expense of $44 net of tax, or $0.00 per diluted share, and
$114 net of tax, or $0.01 per diluted share, respectively. Stock based compensation expense is
included in selling, general and administrative expenses.
7
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
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 2004, 2006,
2007 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 2012 was $2.81 and $2.13. In
Fiscal 2011, the Black-Scholes weighted-average values per option granted were $2.21 and $2.41.
The Black-Scholes option pricing model uses dividend yield, volatility, risk-free rate, expected
term, and forfeiture assumptions to value options granted in Fiscal 2012 and Fiscal 2011. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 $2.81
|
|
|
2012 $2.13
|
|
|
2011 $2.21
|
|
|
2011 $2.41
|
|
|
|
value per
|
|
|
value per
|
|
|
value per
|
|
|
value per
|
|
|
|
option
|
|
|
option
|
|
|
option
|
|
|
option
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Volatility
|
|
|
25.4
|
%
|
|
|
25.3
|
%
|
|
|
25.7
|
%
|
|
|
30.2
|
%
|
Risk-free interest rate
|
|
|
1.9
|
%
|
|
|
1.9
|
%
|
|
|
2.1
|
%
|
|
|
3.2
|
%
|
Expected term of
options (in years)
|
|
|
7.0
|
|
|
|
7.0
|
|
|
|
7.0
|
|
|
|
7.0
|
|
8
Notes To Unaudited Condensed Consolidated Financial Statements
($ 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, 2011
|
|
|
674,911
|
|
|
$
|
934
|
|
|
|
6
|
|
|
$
|
8.03
|
|
Granted
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
7.71
|
|
Exercised
|
|
|
(37,500
|
)
|
|
|
78
|
|
|
|
|
|
|
|
7.36
|
|
Canceled or expired
|
|
|
(2,667
|
)
|
|
|
|
|
|
|
|
|
|
|
6.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2011
|
|
|
659,744
|
|
|
|
1,219
|
|
|
|
6
|
|
|
|
8.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2011
|
|
|
498,745
|
|
|
|
794
|
|
|
|
6
|
|
|
|
8.52
|
|
Unvested options expected to become
exercisable after September 30, 2011
|
|
|
160,999
|
|
|
|
425
|
|
|
|
9
|
|
|
|
6.65
|
|
Shares available for future option grants at
September 30, 2011 (a)
|
|
|
43,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
In October 2011, the stockholders approved the Companys 2012 Incentive Compensation Plan
with 750,000 shares of common stock available to be issued pursuant to the Plan.
|
There were 25,000 options granted during the first six months of Fiscal 2012 with a weighted
average grant date fair value equal to $7.71.
Cash received from stock option exercises during the first six months of Fiscal 2012 was
approximately $163. In lieu of a cash payment for stock option exercises, the Company received
9,592 shares of common stock, which were retired into treasury, valued at the price of the common
stock at the transaction date. There was no tax benefit generated to the Company from options
granted prior to April 1, 2006 and exercised during the first six months of fiscal 2012.
During the first six months of Fiscal 2012 and Fiscal 2011, stock option compensation expense
recorded in selling, general and administrative expenses was $147 and $120, respectively, before
taxes of $62 and $50, respectively. As of September 30, 2011, there was $337 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
approximately two 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, 2011
|
|
|
33,752
|
|
|
$
|
6.95
|
|
Granted
|
|
|
12,741
|
|
|
|
11.24
|
|
Vested
|
|
|
(32,133
|
)
|
|
|
6.99
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at September 30, 2011
|
|
|
14,360
|
|
|
|
10.68
|
|
|
|
|
|
|
|
|
|
9
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
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. Other than the
restricted stock granted in Fiscal 2012, 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. Restricted stock awards granted to officers and employees in
Fiscal 2012 contain forfeiture and transfer restrictions that lapse after six months.
Other than the restricted stock granted in Fiscal 2011, outstanding restricted stock awards granted
to non-employee directors contain forfeiture provisions that lapse 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 six months of Fiscal 2012 and Fiscal
2011, compensation expense related to restricted stock awards recorded in selling, general and
administrative expenses was $181 and $76, respectively, before taxes of $76 and $32, respectively.
As of September 30, 2011 there was approximately $81 of unrecognized compensation cost related to
non-vested restricted stock awards, which is expected to be recognized over a period of less than
one year.
NOTE 4.
Inventories
Inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
Finished goods
|
|
$
|
1,105
|
|
|
$
|
895
|
|
Work in process
|
|
|
7,210
|
|
|
|
6,007
|
|
Purchased and manufactured parts
|
|
|
13,955
|
|
|
|
10,460
|
|
|
|
|
|
|
|
|
|
|
|
22,270
|
|
|
|
17,362
|
|
Reserve for slow moving and obsolescence
|
|
|
(2,761
|
)
|
|
|
(2,611
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,509
|
|
|
$
|
14,751
|
|
|
|
|
|
|
|
|
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 six month periods
ended September 30, 2011 was $344 and $693, respectively, and for the three and six month periods
ended September 30, 2010 was $528 and $998, respectively.
Average estimated useful lives for property are as follows.
|
|
|
Machinery and equipment
|
|
3 to 10 years
|
Furniture and fixtures
|
|
3 to 10 years
|
Computer hardware and software
|
|
3 to 5 years
|
Leasehold improvements
|
|
10 years
|
10
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
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.
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 six month period ended September 30, 2011 are summarized as
follows.
|
|
|
|
|
Balance at March 31, 2011
|
|
$
|
255
|
|
Warranty costs incurred
|
|
|
(79
|
)
|
Change in estimates to pre-existing warranties
|
|
|
(88
|
)
|
Product warranty accrual
|
|
|
89
|
|
|
|
|
|
Balance at September 30, 2011
|
|
$
|
177
|
|
|
|
|
|
NOTE 7.
Income Taxes
Income taxes for the three and six month periods ended September 30, 2011 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 September 30, 2011, the Company has federal and state net operating loss carry forwards, or
NOLs, of approximately $10,119 and $665, respectively, which are due to expire in Fiscal 2022
through Fiscal 2030 and Fiscal 2012 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 September 30, 2011, the current deferred tax assets are $6,803, and non-current deferred tax
assets are $8,173. If the Company does not generate adequate taxable earnings, some or all of our
deferred tax assets may not be realized. Additionally, changes to the federal and state income tax
laws also could impact our ability to use the NOLs. In such cases, the Company may need to revise
the valuation allowance established related to deferred tax assets for state purposes.
The Internal Revenue Code of 1986, as amended (the Code), imposes significant limitations on the
utilization of NOLs in the event of an ownership change as defined under section 382 of the Code
(the Section 382 Limitation). The Section 382 Limitation is an annual limitation on the amount
of pre-ownership NOLs that a corporation may use to offset its post-ownership change income. The
Section 382 Limitation is calculated by multiplying the value of a corporations stock immediately
before an ownership change by the long-term tax-exempt rate (as published by the Internal Revenue
Service). Generally, an ownership change occurs with respect to a corporation if the aggregate
increase in the percentage of stock ownership by value of that corporation by one or more 5%
shareholders (including specified groups of shareholders who, in the aggregate, own at least 5% of
that corporations stock) exceeds 50 percentage points over a three-year testing period. The
Company believes that it has not gone through an ownership change over the most recent three-year
testing period that would cause the Companys NOLs to be subject to the Section 382 Limitation.
However, given the Companys current ownership structure, the creation of one or more new 5%
shareholders could result in the Companys NOLs being subject to the Section 382 Limitation.
At September 30, 2011, the Company had no unrecognized tax benefits for uncertain tax positions.
11
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
NOTE 8.
Long-Term Debt Payable to Banks
Long-term debt, including current maturities, consists of the following.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
March 31, 2011
|
|
Senior Credit Facility
|
|
$
|
10,679
|
|
|
$
|
11,500
|
|
Less current maturities
|
|
|
821
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term debt, net of current maturities
|
|
$
|
9,858
|
|
|
$
|
11,500
|
|
|
|
|
|
|
|
|
Senior Credit Facility
-
The Company has a 60-month, $33,000 senior credit facility consisting of a
$10,000 revolving line of credit (the Revolver) 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 $821 over the life of the loan and $6,571 due at maturity in August
2013. During Fiscal 2011, the Company accelerated term-loan payments by making four quarterly
term-loan pre-payments totaling $3,286. During the first quarter of Fiscal 2012, the Company made
one $821 term loan repayment
by pre-paying the amount due in April 2012. Accordingly, the balance sheet reflects $821 of current
maturities due under the term loan of the Senior Credit Facility as of September 30, 2011.
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
September 30, 2011, the Senior Credit Facility had a blended interest rate of approximately 1.5%,
for debt of $10,500 tied to LIBOR and for debt of $179 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 required the Company to enter into an interest rate swap through August 2011
(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 September 30,
2011, there were no outstanding borrowings under the Revolver, $202 in outstanding (standby)
letters of credit, and $9,798 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 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 was permitted to exclude
from fixed charges certain one-time capital expenditures of up to $5,500 related to the facility
relocation in Fiscal 2011. At September 30, 2011, the Company was in compliance with the covenant
provisions of the Senior Credit Facility.
Interest Rate Swap
The Senior Credit Facility required the Company to enter into an interest rate
swap for at least three years in an amount not less than 50% of the term loan for the first two
years and 35% of the term loan for the third year. An interest rate swap, a type of derivative
financial instrument, is used to minimize the effects of interest rate fluctuations on cash flows.
The Company does not use derivatives for trading or speculative purposes. In September 2008, the
Company entered into a three year interest rate swap to exchange floating rate for fixed rate
interest payments on the term loan as required by the Companys Senior Credit Facility. The swaps
net effect of the spread between the floating rate (30 day LIBOR) and the fixed rate (3.25%), was
settled monthly, and was reflected as an adjustment to interest expense in the period incurred.
The adjustment to record the swap at its fair value was included in accumulated other comprehensive
loss, net of tax. The Company reduced its existing unrealized loss on the interest rate swap
during the first six months of Fiscal 2012. The interest rate swap expired in August 2011.
12
Notes To Unaudited Condensed Consolidated Financial Statements
($ 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 September 30, 2011.
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
|
|
Long-term debt (Level 3)
|
|
$
|
10,679
|
|
|
$
|
10,679
|
|
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 $239 and $405, respectively, for the three and six month periods ended September 30, 2011 and
$192 and $350, respectively, for the three and six month periods ended September 30, 2010.
The Company provides postretirement benefits to certain former 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 $3,214
and $3,358 as of September 30, 2011 and March 31, 2011, respectively. This asset is included in
other long-term assets and it is restricted in use to satisfy the legal liability associated with
the Pension Plan.
13
Notes To Unaudited Condensed Consolidated Financial Statements
($ 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
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Interest cost
|
|
$
|
10
|
|
|
$
|
11
|
|
|
$
|
19
|
|
|
$
|
18
|
|
Amortization of net (gain) loss
|
|
|
3
|
|
|
|
6
|
|
|
|
7
|
|
|
|
12
|
|
|
|
|
Net periodic cost
|
|
$
|
13
|
|
|
$
|
17
|
|
|
$
|
26
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Interest cost
|
|
$
|
42
|
|
|
$
|
45
|
|
|
$
|
85
|
|
|
$
|
89
|
|
Amortization of net (gain) loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost
|
|
$
|
42
|
|
|
$
|
45
|
|
|
$
|
85
|
|
|
$
|
89
|
|
|
|
|
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 September 30, 2011, the Company had no other significant
concentrations of credit risk.
NOTE 12.
New Accounting Standards
In September 2011, The Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2011-08,
IntangiblesGoodwill and Other (Topic 350): Testing Goodwill for
Impairment.
ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test
goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to
determine whether it is more likely than not that the fair value of a reporting unit is less than
its carrying amount as a basis for determining whether it is necessary to perform the two-step
goodwill impairment test described in Topic 350,
Intangibles-Goodwill and Other
. The
more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is
effective for annual and interim goodwill impairment tests performed for fiscal years beginning
after December 15, 2011. The adoption of this guidance is not expected to have a material impact on
the Companys financial position, results of operations, or cash flows.
In June 2011, the FASB issued ASU No. 2011-05,
Comprehensive Income (Topic 220): Presentation of
Comprehensive Income.
This guidance improves the comparability, consistency and transparency of
financial reporting and increases the prominence of items reported in other comprehensive income.
The guidance provided by this update becomes effective for interim and annual periods beginning on
or after December 15, 2011. Early adoption is permitted. The adoption of this guidance is not
expected to have a material impact on the Companys financial position, results of operations, or
cash flows.
In May 2011, the FASB issued ASU No. 2011-04,
Fair Value Measurement (Topic 820)
. This updated
accounting guidance establishes common requirements for measuring fair value and for disclosing
information about fair value measurements in accordance with U.S. generally accepted accounting
principles (GAAP) and International Financial Reporting Standards (IFRS). This guidance includes
amendments that clarify the intent about the application of existing fair value measurements and
14
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
disclosures, while other amendments change a principle or requirement for fair value measurements
or disclosures. This guidance is effective for interim and annual periods beginning after December
15, 2011. 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 businesses
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.
The Company retains the services of a nationally-recognized environmental consulting firm to help
monitor its environmental liabilities. Based upon the information and the consultants analysis
and recommendations, the Company determined that its best estimate of its future environmental
liabilities is $13,987 before offsetting cost-sharing of approximately $1,500 that is classified
mostly as a non-current asset.
At September 30, 2011 and March 31, 2011, the aggregate amount of liabilities recorded relative to
environmental matters was $13,987 and $14,293, respectively. In the first six months of Fiscal
2012 and Fiscal 2011, the Company spent $518 and $166,
respectively, on environmental costs, and for all of Fiscal 2011, the Company spent $638. The
Company performs quarterly reviews of the status of its environmental sites and the related
liabilities. 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, 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.
At the former facility in Glen Head, New York based upon the characterization work performed to
date, the Company has accrued estimated costs of approximately $3,768. The amounts and timing of
payments are subject to the approved remediation plan and additional discussions with the New York
Department of Environmental Conservation. The Company sold the business previously operated at the
property it owns in Saltzburg, Pennsylvania (Federal Labs). At September 30, 2011, the
15
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
reserve
for environmental liabilities at Federal Labs was $5,887. 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. There are other properties that have a combined environmental
liability of $4,332. 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. 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.
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 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.
Net sales of 10% or more of total revenues derived from one customer for the three and six month
periods ended September 30, 2011 and September 30, 2010 are summarized as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Customer A
|
|
|
27
|
%
|
|
|
18
|
%
|
|
|
30
|
%
|
|
|
26
|
%
|
Customer B
|
|
|
29
|
|
|
|
20
|
|
|
|
24
|
|
|
|
19
|
|
Customer C
|
|
|
17
|
|
|
|
18
|
|
|
|
12
|
|
|
|
16
|
|
Customer D
|
|
|
10
|
|
|
|
10
|
|
|
|
11
|
|
|
|
11
|
|
Net sales below show the geographic location of customers for the three and six month periods ended
September 30, 2011 and September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
Location
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
United States
|
|
$
|
10,802
|
|
|
$
|
7,990
|
|
|
$
|
24,341
|
|
|
$
|
18,266
|
|
England
|
|
|
2,495
|
|
|
|
590
|
|
|
|
2,893
|
|
|
|
950
|
|
Italy
|
|
|
628
|
|
|
|
1,649
|
|
|
|
1,445
|
|
|
|
3,206
|
|
Other European countries
|
|
|
719
|
|
|
|
1,603
|
|
|
|
1,389
|
|
|
|
2,492
|
|
Pacific and Far East
|
|
|
1,206
|
|
|
|
1,634
|
|
|
|
1,528
|
|
|
|
3,168
|
|
Other international
|
|
|
2,030
|
|
|
|
1,640
|
|
|
|
4,532
|
|
|
|
3,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,880
|
|
|
$
|
15,106
|
|
|
$
|
36,128
|
|
|
$
|
31,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
NOTE 15.
Subsequent Event
At the Companys 2011 Annual Meeting of Stockholders, stockholders approved the Shareholder Rights
Plan (the Rights Plan) that the Company adopted in July 2011. The terms of the Rights Plan
provide for the Companys stockholders to receive one right (a Right) for each outstanding common
share held. In general, the Rights will become exercisable if a person or group acquires
additional shares that would take total holdings to 10% or more of the Companys common stock or
announces a tender offer or exchange offer for 10% or more of the Companys common stock. The
Rights Plan grandfathers in the existing interest of stockholders who currently own in excess of
10%, but would be triggered by any additional purchases.
When the Rights initially become exercisable, as described above, each holder of a Right will be
allowed to purchase one one-thousandth of a share of a newly created series of the Companys
preferred shares at an exercise price of $14.00. However, if a person acquires 10% or more of the
Companys common stock in a transaction that was not approved by the Board of Directors, each Right
would entitle the holder (other than such acquiring person) to purchase common stock in an amount
equivalent to the exercise price at a 75% discount to the market price of the Companys common
stock at that time the Rights Plan is triggered.
The Rights will expire on July 18, 2014. The Company may redeem the rights for $0.01 each at any
time until the tenth business day following public announcement that a person or group has acquired
10% or more of its outstanding common stock or one of the grandfathered common stockholders has
purchased additional common stock.
In
October 2011, the Companys stockholders approved an amendment to the Companys certificate of incorporation
to increase the authorized number of shares of common stock from 14,700,000 to 100,000,000. The
stockholders also approved the Companys 2012 Incentive Compensation Plan with 750,000 shares of
common stock available to be issued pursuant to the Plan.
In October 2011, the Company entered into separate Standstill Agreements with its two largest
investors, Tinicum Capital Partners II, LP and Wynnefield Partners Small Cap Value, L.P. Tinicum
is currently the beneficial owner of approximately 35% of the Companys common stock. Wynnefield is
currently the beneficial owner of approximately 22% of the Companys common stock.
Pursuant to the Standstill Agreements, Tinicum and Wynnefield each agreed, among other things, that
for a period of 18 months, they would not acquire any additional shares of the Companys common
stock; make or in any way participate in the solicitation of proxies; seek to call a meeting of
stockholders; seek to advise or influence other stockholders with respect to the voting of the
Companys common stock or seek to effect control of the management, Board of Directors, or
policies of the Company.
Tinicum and Wynnefield each also agreed that they would vote in favor of the Companys nominees to
the Board of Directors at the Companys 2011 Annual Meeting (to be held October 6) and the 2012
Annual Meeting, and vote in favor of the adoption of the Shareholder
Rights Plan which was submitted to and approved by the stockholders at the 2011 Annual Meeting.
The Company agreed, among other things, to fix the number of directors to serve on the Board of
Directors at seven, and not adopt an advance notice bylaw provision with respect to shareholder
business or director elections.
The Standstill Agreements are for a period of 18 months; however they will automatically
terminate if either Tinicum or Wynnefield sells, transfers or disposes of shares of the Companys
common stock such that either of them holds less than 15% of the then issued and outstanding
shares, or the Company nominates for election as a director any person other than the agreed upon
Company nominees or certain agreed-upon replacements.
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 (the Exchange Act). 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,
2011 as filed with the SEC on June 3, 2011 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. We also
manufacture weapons-handling systems, cargo winches, cargo hook systems 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.
Our business is affected by global economic and geo-political conditions, particularly defense
spending by the United States Government. In particular, as the U.S. military activity in Iraq and
Afghanistan is reduced, reductions and redirection of United States defense spending could have a
material impact on revenues and earnings in future periods. However, the Company believes that the
primary missions will drive procurement and the use of its equipment (search and rescue, special
operations, and cargo delivery) will continue to get a relatively high funding priority.
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 support our current and
expected investments. As an example, developing the Airbus A400M military transport aircraft has
taken longer than was originally expected, but flight testing is now underway and we expect
material revenues starting in Fiscal 2013.
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 leading military medium and heavy lift
helicopters. 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, and CASA C-295. In addition, we have a contract with Airbus
to develop and
19
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
produce three products for the new cargo positioning and restraint system for the A400M cargo
aircraft and will be the sole supplier of these products 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 is usually
decades. It is expensive and difficult for a second suppliers product to become qualified and
approved on the same aircraft.
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 supply this equipment for the United States, Japanese, and European Multiple-Launch
Rocket Systems (MLRS) and the United States High Mobility Artillery Rocket System (HIMARS). 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 have also licensed third-party
vendors around the world to 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.
STRATEGY
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. During Fiscal 2010, we completed the move to our more-modern manufacturing and
assembly facility in Whippany, New Jersey. This facility is also our corporate headquarters and
consolidates all operations in one location.
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, 2011, as filed with the SEC
on June 3, 2011, 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 September 30, 2011 Compared with Three Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Increase/(Decrease)
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
|
|
Products
|
|
$
|
13,474
|
|
|
$
|
10,788
|
|
|
$
|
2,686
|
|
|
|
24.9
|
%
|
Services
|
|
|
4,406
|
|
|
|
4,318
|
|
|
|
88
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
17,880
|
|
|
|
15,106
|
|
|
|
2,774
|
|
|
|
18.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
7,041
|
|
|
|
5,851
|
|
|
|
1,190
|
|
|
|
20.3
|
|
Services
|
|
|
2,880
|
|
|
|
3,079
|
|
|
|
(199
|
)
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
9,921
|
|
|
|
8,930
|
|
|
|
991
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
7,959
|
|
|
|
6,176
|
|
|
|
1,783
|
|
|
|
28.9
|
|
As a % of net sales
|
|
|
44.5
|
%
|
|
|
40.9
|
%
|
|
|
N/A
|
|
|
3.6
|
% Pt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
expenses
|
|
|
3,851
|
|
|
|
3,517
|
|
|
|
334
|
|
|
|
9.5
|
%
|
Engineering expense
|
|
|
2,063
|
|
|
|
1,299
|
|
|
|
764
|
|
|
|
58.8
|
|
Relocation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,045
|
|
|
|
1,360
|
|
|
|
685
|
|
|
|
50.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
102
|
|
|
|
170
|
|
|
|
(68
|
)
|
|
|
(40.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,115
|
|
|
$
|
643
|
|
|
$
|
472
|
|
|
|
73.4
|
%
|
Net Sales.
Fiscal 2012 second quarter net sales of $17,880 increased by $2,774, or 18.4%, from net
sales of $15,106 in the Fiscal 2011 second quarter. This is the highest sales in the second quarter
that the Company has ever delivered. Fiscal 2012 second quarter products sales of $13,474 were
$2,686, or 24.9%, above prior year primarily due to increased spare parts volume of $1,926 in hoist
& winch sales to international customers and also cargo hook sales. New production volume grew by
$760 primarily in cargo hooks.
Fiscal 2012 second quarter services sales of $4,406 were higher by $88, or 2.0%, compared with the
prior year primarily due to increased overhaul and repair volume of
$612 primarily in cargo hooks.
This was partly offset by lower engineering sales of $524 primarily due to lower weapons handling
sales.
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 2012 revenues will be consistent with this pattern.
Cost of Sales.
Products cost of sales of $7,041 in the Fiscal 2012 second quarter were $1,190, or
20.3% higher than the same period in Fiscal 2011 primarily due to higher sales. Cost of services
provided of $2,880 in the Fiscal 2012 second quarter were $199, or 6.5%, lower than the prior year
due to lower engineering volume. In the prior year, under-absorbed overhead of $420
resulted from the labor slow down as a part of labor collective bargaining negotiations. This under-absorption
was split
between products at 40% and services at 60%. In the Fiscal 2012 second quarter, overhead
absorption was near breakeven.
21
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
Gross profit.
Gross profit of $7,959 in the Fiscal 2012 second quarter was $1,783, or 28.9%, ahead
of the same period in Fiscal 2011. The dollar increase is due to sales volume growth in spare
parts, new production, and overhaul & repair and under-absorbed manufacturing overhead in the prior
year. As a percent of sales, the gross profit margin was 44.5% for the Fiscal 2012 second quarter
compared with 40.9% for the prior year. Gross profit as a percent of sales increased from the
favorable product mix impact of spare parts volume and because of under-absorbed overhead in the
prior-year quarter.
Operating Expenses.
Total operating expenses were $5,914, or 33.1% of net sales, in the second
quarter of Fiscal 2012 compared with $4,816 or 31.9% of net sales in the comparable prior year
period. Selling, general, and administrative (SG&A) expenses were $3,851 in the Fiscal 2012
second quarter compared with $3,517 in the second quarter of Fiscal 2011, an increase of $334. The
increase is primarily due to sales commission expenses. As a percent of sales, SG&A was 21.5% in
the Fiscal 2012 second quarter versus 23.3% in the comparable period last year.
Engineering expenses were $2,063 in the second quarter of Fiscal 2012 compared with $1,299 in the
second quarter of Fiscal 2011. The increase reflects accelerated new product development for
awarded aerospace platforms, primarily the A400M,HS-35000, and CH-53K and an accrual for a product
delivery delay. Engineering expenses in the second quarter of Fiscal 2012 were reduced by $800 in
reimbursements from Airbus.
Interest Expense
. Interest expense was $102 in the second quarter of Fiscal 2012 versus $170 in
the second quarter of Fiscal 2011. The decline in interest expense is primarily due to $4,928
lower total debt at September 30, 2011 compared with September 30, 2010, and also due to an
interest-rate swap expiring in August, 2011.
Net Income
. Net income was $1,115, or $0.12 per diluted share, in the Fiscal 2012 second quarter
compared with $643, or $0.07 per diluted share, in the same period in Fiscal 2011. The improvement
is due to higher gross profit resulting from the increased sales volume, partly offset by higher
operating expenses.
New Orders
. New products and services orders received during the three months ended September 30,
2011 decreased by 15.2% to $15,614 compared with $18,407 during the three months ended September
30, 2010. The decrease was due to spare parts, overhaul & repair, and engineering, partly offset
by higher new production orders. New equipment orders increased by $1,745 from hoist & winch
products. Spare parts orders decreased due to order timing from a third-party repair company.
New orders for overhaul & repair for the three months ended September 30, 2011 were lower than the
prior year due to timing of US military orders. Engineering orders decreased because of a large
weapons handling order received in the second quarter of Fiscal 2011.
Backlog.
Backlog at September 30, 2011 was $124,232 compared with $131,151 at March 31, 2011 and
$136,635 at September 30, 2010. The backlog at September 30, 2011, March 31, 2011, and September
30, 2010 includes $71,343, $71,343, and $69,699, 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 $47,907 at September 30, 2011 is scheduled for shipment during
the next twelve months. Although significant cancellations of purchase orders or substantial
reductions of product quantities in existing contracts seldom occur, such cancellations or
reductions could substantially and materially reduce backlog. Therefore, backlog information may
not represent the actual amount of shipments or sales for any future period.
22
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
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 0.9 for the Fiscal 2012 second quarter and 1.2
for the Fiscal 2011 second quarter.
Six Months Ended September 30, 2011 Compared with Six Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Increase/(Decrease)
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
|
|
Products
|
|
$
|
27,366
|
|
|
$
|
23,873
|
|
|
$
|
3,493
|
|
|
|
14.6
|
%
|
Services
|
|
|
8,762
|
|
|
|
7,773
|
|
|
|
989
|
|
|
|
12.7
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
36,128
|
|
|
|
31,646
|
|
|
|
4,482
|
|
|
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
15,031
|
|
|
|
13,029
|
|
|
|
2,002
|
|
|
|
15.4
|
|
Services
|
|
|
5,754
|
|
|
|
6,308
|
|
|
|
(554
|
)
|
|
|
(8.8
|
)
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
20,785
|
|
|
|
19,337
|
|
|
|
1,448
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
15,343
|
|
|
|
12,309
|
|
|
|
3,034
|
|
|
|
24.6
|
|
As a % of net sales
|
|
|
42.5
|
%
|
|
|
38.9
|
%
|
|
|
N/A
|
|
|
3.6
|
% Pt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general,
and administrative
expenses
|
|
|
7,755
|
|
|
|
6,591
|
|
|
|
1,164
|
|
|
|
17.7
|
%
|
Engineering expense
|
|
|
4,348
|
|
|
|
2,855
|
|
|
|
1,493
|
|
|
|
52.3
|
|
Relocation expense
|
|
|
|
|
|
|
211
|
|
|
|
(211
|
)
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,240
|
|
|
|
2,652
|
|
|
|
588
|
|
|
|
22.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
236
|
|
|
|
383
|
|
|
|
(147
|
)
|
|
|
(38.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,713
|
|
|
$
|
1,232
|
|
|
$
|
481
|
|
|
|
39.0
|
%
|
Net Sales.
Fiscal 2012 first six months net sales of $36,128 increased by $4,482, or 14.2%, from
net sales of $31,646 in the first six months of Fiscal 2011. Fiscal 2012 products sales of $27,366
were $3,493, or 14.6%, above prior year primarily due to increased new equipment volume of $4,563
resulting primarily from U.S. military, partly offset by lower spare parts volume because the
prior-year period included large sales to the U.S. military.
Fiscal 2012 first six months services sales of $8,762 were higher by $989, or 12.7%, compared with
prior year primarily due to higher volume to third-party overhaul & repair customers, partly offset
by lower engineering weapons handling 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. Fiscal 2011 was
consistent with recent years with revenues in the second half of the fiscal year exceeding revenues
in the first half of the fiscal year; we believe Fiscal 2012 revenues will be consistent with this
pattern.
Cost of Sales.
Products cost of sales of $15,031 in the Fiscal 2012 first six months were 15.4%
higher than the prior year primarily due to higher sales and an unfavorable product mix of more new
production and fewer spare parts. The impact of overhead absorption is discussed below. Cost of
services provided of $5,754 in the Fiscal 2012 first six months were $554 lower than the prior year
due under-absorbed manufacturing overhead in the prior year.
23
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
The prior year included under-absorbed overhead of $1,642 related to our relocation and a labor
slowdown related to labor collective bargaining negotiations. This under-absorption was
approximately split between products at 40% and services at 60%. In
the first six months of Fiscal 2012, our manufacturing
overhead was slightly over-absorbed.
Gross profit.
Gross profit of $15,343 in the Fiscal 2012 first six months was 24.6% ahead of the
same period in Fiscal 2011. The dollar increase is due to sales volume growth and manufacturing
absorption. As a percent of sales, the gross profit margin was 42.5% for the Fiscal 2012 first six
months compared with 38.9% for the prior year.
Operating Expenses.
Total operating expenses were $12,103, or 33.5% of net sales, in the first six
months of Fiscal 2012 compared with $9,657 or 30.5% of net sales in the comparable prior year
period. Selling, general, and administrative (SG&A) expenses were $7,755 in the Fiscal 2012
first six months compared with $6,591 in the first six months of Fiscal 2011, an increase of
$1,164. The increase is primarily due to costs for business strategy development, a Shareholder
Rights Plan (discussed in Note 15 of the Notes to
Condensed Consolidated Financial Statements contained in Part
I, Item 1 of this report), and sales commissions. As a percent of sales, SG&A was 21.5% in the Fiscal
2012 first six months versus 20.8% in the comparable period last year.
Engineering expenses were $4,348 in the first six months of Fiscal 2012 compared with $2,855 in the
first six months of Fiscal 2011. The increase reflects new product development for awarded
aerospace platforms, primarily the A400M, HS-35000, and CH-35K, and an accrual for a product
development delay. Engineering expense was reduced in the first six months of Fiscal 2012 by
$1,316 in expense reimbursements from Airbus.
We incurred $211 of expenses related to our headquarters and factory relocation to Whippany, New
Jersey in the first six months of Fiscal 2011; we have incurred no relocation costs since the
Fiscal 2011 first quarter.
Interest Expense
. Interest expense was $236 in the Fiscal 2012 first six months versus $383 in
Fiscal 2011. The decline in interest expense is primarily due to $4,928 lower total debt at
September 30, 2011 compared with September 30, 2010, and also due to an interest-rate swap expiring
in August, 2011.
Net Income
. Net income was $1,713, or $0.18 per diluted share, in the Fiscal 2012 first six months
compared with $1,232, or $0.13 per diluted share, in the same period in Fiscal 2011. The net
income increase resulted from the higher sales volume and gross profit, lower interest expense,
both of which were partly offset by higher SG&A expenses.
New Orders
. New products and services orders received during the six months ended September 30,
2011 decreased 23.4% to $29,209 compared with $38,137 during the six months ended September 30,
2010. The decrease was primarily due to large spare parts order from the U.S. military in the
prior year. Orders for new equipment decreased by $464, or 3.2%.
New orders for overhaul & repair for the six months ended September 30, 2012 were lower than the
prior year due to timing of U.S. military orders. Engineering orders decreased because of a large
weapons handling order received in the prior year.
Backlog
The book to bill ratio for the first six months of Fiscal 2012 was 0.8 compared with 1.2 for the
first six months of Fiscal 2011.Cancellations of purchase orders or reductions of product
quantities in existing contracts, although seldom occurring, could substantially and materially
reduce the Companys backlog. Therefore, the backlog may not represent the actual amount of
shipments or sales for any future period.
Liquidity and Capital Resources
Our principal sources of liquidity are cash on hand, cash generated from operations, and our Senior
Credit Facility. Our liquidity requirements depend on a number of factors, many of which are
beyond our control,
24
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
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 be generated from operations, and the Senior Credit Facility, we
expect to have sufficient cash to meet liquidity requirements for the next twelve months. 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.
During Fiscal 2011, the Company accelerated term-loan payments by making four quarterly term-loan
pre-payments totaling $3,286. During the first quarter of Fiscal 2012, the Company made one
accelerated $821 term loan repayment by pre-paying the amount due in April 2012. The Company made
these accelerated term loan payment because of its strong cash position. Accordingly, the balance
sheet reflects current maturities of $821 due under the term loan of the Senior Credit Facility as
of September 30, 2011.
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. In Fiscal 2012, the Company anticipates spending
$2,615 on environmental costs. These costs will be charged against the Companys environmental
liability reserve and will not impact income.
Working Capital
Net working capital at September 30, 2011 was $31,560, a decrease of $816, versus $32,376 at March
31, 2011. The ratio of current assets to current liabilities was 2.8:1.0 at September 30, 2011
compared with 3.1:1.0 at the beginning of Fiscal 2012. The net working capital decrease resulted
primarily from a $7,055 net decrease in accounts receivable, a $1,400 increase in accounts payable,
and an $821 increase in the current portion of long-term debt. This was partly offset by a $4,247
increase in cash and a $4,758 increase in inventory. There was a net increase of $545 in other
working capital items.
The accounts receivable days outstanding decreased to 61.2 days at September 30, 2011, from 70.8
days at September 30, 2010 due to collection of past due accounts. Inventory turnover decreased to
1.9 turns at September 30, 2011 versus 2.0 turns at September 30, 2010.
Capital Expenditures
Capital expenditures for the six months ended September 30, 2011 and 2010 were $540 and $386,
respectively. The increase is primarily for test equipment for newly-developed products and to
increase operations efficiency as well as information technology. Capital expenditures for the six
months ended September, 30, 2010 include capitalized relocation expenditures of $164. Capitalized
qualification units for the six months ended September 30, 2011 and 2010 were $937 and $174,
respectively. The increase is due to newly-developed products ending development and beginning
qualification testing.
Senior Credit Facility
The Senior Credit Facility is discussed in Note 8 of the Notes to Condensed Consolidated Financial
Statements contained in Part I, Item 1 of this report.
Interest Rate Swap
The Interest Rate Swap is discussed in Note 8 of the Notes to Condensed Consolidated Financial
Statements contained in Part I, Item 1 of this report.
25
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
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)
|
|
$
|
10,679
|
|
|
$
|
821
|
|
|
$
|
9,858
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated interest
payments on
long-term debt (b)
|
|
|
264
|
|
|
|
155
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
8,115
|
|
|
|
1,079
|
|
|
|
2,096
|
|
|
|
1,937
|
|
|
|
3,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
obligations (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,058
|
|
|
$
|
2,055
|
|
|
$
|
12,063
|
|
|
$
|
1,937
|
|
|
$
|
3,003
|
|
|
|
|
|
|
|
(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 1.5%, our blended interest rate at September 30, 2011.
|
|
(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.
Litigation
Litigation is 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)
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.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2011, we did not have any relationships with unconsolidated entities or
financial partners, such as entities often referred to as structured finance or variable interest
entities, established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such relationships.
27
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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%), was settled monthly, and was reflected
as an adjustment to interest expense in the period incurred. The adjustment to record the swap at
its fair value was included in accumulated other comprehensive loss, net of tax. The Company
reduced its existing unrealized loss on the interest rate swap during the first six months of
Fiscal 2012. The interest rate swap expired in August 2011.
At September 30, 2011, $10,500 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
$107 based on the debt outstanding under the facility at September 30, 2011.
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 September 30, 2011, 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 Exchange Act 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 first six months of Fiscal 2012 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 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, 2011 as filed with the SEC on June 3, 2011 and incorporated herein by
reference, which factors could materially affect our business, financial condition, financial
results or future performance.
Item 6. EXHIBITS
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3.1
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Certificate of Designation, Rights, Preferences of Series A Preferred Stock (incorporated by reference to
Exhibit 3.1 to the Current Report on Form 8-K, filed with the SEC on July 19, 2011)
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4.1
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Rights Agreement, dated as of July 14, 2011 effective as of July 18, 2011 between Breeze-Eastern
Corporation and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.1 to the Current
Report on Form 8-K, filed with the SEC on July 19, 2011)
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31.1
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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BREEZE-EASTERN CORPORATION
(Registrant)
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Dated: October 27, 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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