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EXCEL - IDEA: XBRL DOCUMENT - BREEZE-EASTERN CORP | Financial_Report.xls |
EX-32.1 - EX-32.1 - BREEZE-EASTERN CORP | y90589exv32w1.htm |
EX-31.2 - EX-31.2 - BREEZE-EASTERN CORP | y90589exv31w2.htm |
EX-31.1 - EX-31.1 - BREEZE-EASTERN CORP | y90589exv31w1.htm |
Table of Contents
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-7872
BREEZE-EASTERN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 95-4062211 | |
(State or other jurisdiction of | (I.R.S. employer | |
incorporation or organization) | identification no.) | |
35 Melanie Lane | ||
Whippany, New Jersey | 07981 | |
(Address of principal executive offices) | (Zip Code) |
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 Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
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 July 21, 2011, the total number of outstanding shares of common stock was 9,469,685.
INDEX
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EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
2
Table of Contents
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
month period ended June 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.
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 31st 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 REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
3
Table of Contents
BREEZE-EASTERN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Data)
(In Thousands of Dollars, Except Share Data)
(Unaudited) | (Audited) | |||||||
ASSETS | June 30, 2011 | March 31, 2011 | ||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 10,450 | $ | 6,381 | ||||
Accounts receivable (net of allowance for doubtful accounts
of $248 at June 30, 2011 and $235 at March 31, 2011) |
12,764 | 18,522 | ||||||
Inventories |
17,333 | 14,751 | ||||||
Prepaid expenses and other current assets |
650 | 727 | ||||||
Deferred income taxes |
7,201 | 7,375 | ||||||
Total current assets |
48,398 | 47,756 | ||||||
PROPERTY: |
||||||||
Property and equipment |
18,299 | 17,586 | ||||||
Less accumulated depreciation and amortization |
9,586 | 9,235 | ||||||
Property net |
8,713 | 8,351 | ||||||
OTHER ASSETS: |
||||||||
Deferred income taxes |
8,516 | 8,750 | ||||||
Goodwill |
402 | 402 | ||||||
Real estate held for sale |
3,800 | 3,800 | ||||||
Qualification units-net |
3,621 | 3,179 | ||||||
Other |
5,989 | 5,910 | ||||||
Total other assets |
22,328 | 22,041 | ||||||
TOTAL ASSETS |
$ | 79,439 | $ | 78,148 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITES: |
||||||||
Revolving credit facility |
$ | | $ | | ||||
Current portion of long-term debt |
| | ||||||
Accounts payable trade |
9,981 | 8,041 | ||||||
Accrued compensation |
3,260 | 3,010 | ||||||
Accrued income taxes |
288 | 287 | ||||||
Other current liabilities |
3,232 | 4,042 | ||||||
Total current liabilities |
16,761 | 15,380 | ||||||
LONG-TERM DEBT, NET OF CURRENT PORTION |
10,679 | 11,500 | ||||||
OTHER LONG-TERM LIABILITIES |
17,616 | 17,835 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 13) |
| | ||||||
TOTAL LIABILITIES |
45,056 | 44,715 | ||||||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock authorized, 300,000 shares; none issued |
| | ||||||
Common stock authorized, 14,700,000 shares of $.01 par
value; issued, 9,896,244 at June 30, 2011 and 9,846,003
at March 31, 2011 |
99 | 98 | ||||||
Additional paid-in capital |
95,479 | 95,068 | ||||||
Accumulated deficit |
(54,239 | ) | (54,837 | ) | ||||
Accumulated other comprehensive loss |
(126 | ) | (147 | ) | ||||
41,213 | 40,182 | |||||||
Less
treasury stock, at cost 426,559 at June 30, 2011
and 416,967 at March 31, 2011 |
(6,830 | ) | (6,749 | ) | ||||
Total stockholders equity |
34,383 | 33,433 | ||||||
TOTAL LIABILITIES & STOCKHOLDERS EQUITY |
$ | 79,439 | $ | 78,148 | ||||
See notes to condensed consolidated financial statements.
4
Table of Contents
BREEZE-EASTERN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In Thousands of Dollars, Except Share and Per Share Data)
(UNAUDITED)
(In Thousands of Dollars, Except Share and Per Share Data)
Three Months Ended | ||||||||
June 30, 2011 | June 30, 2010 | |||||||
Net sales |
$ | 18,248 | $ | 16,540 | ||||
Cost of sales |
10,864 | 10,407 | ||||||
Gross profit |
7,384 | 6,133 | ||||||
Selling, general, and administrative expenses |
3,904 | 3,073 | ||||||
Engineering expense |
2,285 | 1,556 | ||||||
Relocation expense |
| 211 | ||||||
Operating income |
1,195 | 1,293 | ||||||
Interest expense |
134 | 214 | ||||||
Other expense net |
30 | 64 | ||||||
Income before incomes taxes |
1,031 | 1,015 | ||||||
Income tax provision |
433 | 426 | ||||||
Net income |
$ | 598 | $ | 589 | ||||
Earnings per common share: |
||||||||
Basic net income per share |
$ | 0.06 | $ | 0.06 | ||||
Diluted net income per share |
0.06 | 0.06 | ||||||
Weighted-average basic shares outstanding |
9,445,000 | 9,397,000 | ||||||
Weighted-average diluted shares outstanding |
9,564,000 | 9,412,000 |
See notes to condensed consolidated financial statements.
5
Table of Contents
BREEZE-EASTERN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands of Dollars)
(UNAUDITED)
(In Thousands of Dollars)
Three Months Ended | ||||||||
June 30, 2011 | June 30, 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 598 | $ | 589 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Loss on disposal of property and equipment |
| 4 | ||||||
Depreciation and amortization |
376 | 470 | ||||||
Non-cash reserve accretion |
106 | 108 | ||||||
Stock based compensation |
136 | 119 | ||||||
Provision for losses on accounts receivable |
13 | 4 | ||||||
Deferred taxes-net |
393 | 343 | ||||||
Changes in assets and liabilities: |
||||||||
Decrease (increase) in accounts receivable and other receivables |
5,745 | (2,782 | ) | |||||
(Increase) decrease in inventories |
(2,582 | ) | 465 | |||||
(Increase) decrease in other assets |
(2 | ) | 281 | |||||
Increase in accounts payable |
1,940 | 582 | ||||||
Increase (decrease) in accrued compensation |
250 | (19 | ) | |||||
Increase in accrued income taxes |
1 | 41 | ||||||
Decrease in other liabilities |
(1,098 | ) | (158 | ) | ||||
Net cash provided by operating activities |
5,876 | 47 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(713 | ) | (174 | ) | ||||
Capitalized Qualification units |
(467 | ) | (61 | ) | ||||
Net cash (used in) investing activities |
(1,180 | ) | (235 | ) | ||||
Cash flows from financing activities: |
||||||||
Payments on long-term debt |
(821 | ) | (822 | ) | ||||
Net borrowings (repayments) of other debt |
| | ||||||
Exercise of stock options |
194 | | ||||||
Net cash (used in) financing activities |
(627 | ) | (822 | ) | ||||
Increase (decrease) in cash |
4,069 | (1,010 | ) | |||||
Cash at beginning of period |
6,381 | 3,371 | ||||||
Cash at end of period |
$ | 10,450 | $ | 2,361 | ||||
Supplemental information: |
||||||||
Interest payments |
$ | 112 | $ | 162 | ||||
Income tax payments |
40 | 42 | ||||||
Non-cash financing activity for stock option exercise |
82 | |
See notes to condensed consolidated financial statements.
6
Table of Contents
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
($ 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.
June 30, | June 30, | |||||||
2011 | 2010 | |||||||
Basic Earnings per Common Share: |
||||||||
Weighted-average common shares outstanding for
basic earnings per share calculation |
9,445,000 | 9,397,000 | ||||||
Diluted Earnings per Common Share: |
||||||||
Weighted-average common shares outstanding |
9,445,000 | 9,397,000 | ||||||
Stock options (a) |
119,000 | 15,000 | ||||||
Weighted-average common shares outstanding for
diluted earnings per share calculation |
9,564,000 | 9,412,000 | ||||||
(a) | During the three month periods ended June 30, 2011 and June 30, 2010, options to purchase 222,000 and 367,000 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 relates to
restricted stock awards and stock options.
Net income for the three month periods ended June 30, 2011 and June 30, 2010, includes stock-based
compensation expense of $79 net of tax, or $0.01 per diluted share, and $69 net of tax, or $0.01
per diluted share, respectively. Stock based compensation expense is included in selling, general
and administrative expenses.
The Company maintains the Amended and Restated 1992 Long-Term Incentive Plan (the 1992 Plan), the
1999 Long-Term Incentive Plan (the 1999 Plan), the 2004 Long-Term Incentive Plan (the 2004
Plan), and the 2006 Long-Term Incentive Plan (the 2006 Plan).
Under the terms of the 2006 Plan, 500,000 shares of the Companys common stock may be granted as
stock options or awarded as restricted stock to officers, non-employee directors, and certain
employees of the Company through July 2016. Under the terms of the 2004 Plan, 200,000 shares of
the Companys common stock may be granted as stock options or awarded as restricted stock to
officers, non-employee directors, and certain employees of the Company through September 2014. The
1999 Plan expired in July 2009, and no further grants or awards may be made under this plan. Under
the 1999 Plan, there remain outstanding unexercised options granted in Fiscal years 2001, 2004,
2006 and 2008. The 1992 Plan expired in September 2002,
7
Table of Contents
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
($ In Thousands Except Share Amounts)
(Unaudited)
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 $2.13. In Fiscal
2011, the Black-Scholes weighted-average values per option granted were $2.21 and $2.41,
respectively. 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 $2.13 | 2011 $2.21 | 2011 $2.41 | ||||||||||
value per | value per | value per | ||||||||||
option | option | option | ||||||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Volatility |
25.3 | % | 25.7 | % | 30.2 | % | ||||||
Risk-free interest rate |
1.9 | % | 2.1 | % | 3.2 | % | ||||||
Expected term of options (in
years) |
7.0 | 7.0 | 7.0 |
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 |
15,000 | | | 6.85 | ||||||||||||
Exercised |
(37,500 | ) | 78 | | 7.36 | |||||||||||
Canceled or expired |
| | | | ||||||||||||
Outstanding at June 30, 2011 |
652,411 | 2,134 | 7 | 8.05 | ||||||||||||
Options exercisable at June 30, 2011 |
423,744 | 1,110 | 5 | 8.76 | ||||||||||||
Unvested options expected to become
exercisable after June 30, 2011 |
228,667 | 1,024 | 9 | 6.71 | ||||||||||||
Shares available for future option
grants at
June 30, 2011 (a) |
52,567 |
8
Table of Contents
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
($ In Thousands Except Share Amounts)
(Unaudited)
(a) | May be decreased by restricted stock grants. |
There were 15,000 options granted during the first three months of Fiscal 2012 with a weighted
average grant date fair value equal to $6.85.
Cash received from stock option exercises during the first three 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 three months of fiscal 2012.
During the first three months of Fiscal 2012 and Fiscal 2011, stock option compensation
expense recorded in selling, general and administrative expenses was $81 and $63, respectively,
before taxes of $34 and $23, respectively. As of June 30, 2011, there was $379 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 |
(846 | ) | 11.07 | |||||
Cancelled |
| | ||||||
Non-vested at June 30, 2011 |
45,647 | 8.07 | ||||||
Restricted stock awards are utilized both for director compensation and awards to officers and
employees, and are distributed in a single grant of shares which are subject to forfeiture prior to
vesting and have voting and dividend rights from the date of distribution. Outstanding restricted
stock awards to officers and employees have forfeiture and transfer restrictions that lapse ratably
over three years beginning one year after the date of the award.
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 three months of Fiscal 2012 and Fiscal
2011, compensation expense related to restricted stock awards recorded in selling, general and
administrative expenses was $55 and $56, respectively, before taxes of $23 and $23, respectively.
As of June 30, 2011 there was approximately $207 of unrecognized compensation cost related to
non-vested restricted stock awards, which is expected to be recognized over a period of
approximately two years.
9
Table of Contents
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
($ In Thousands Except Share Amounts)
(Unaudited)
NOTE 4. Inventories
Inventories are summarized as follows:
June 30, | March 31, | |||||||
2011 | 2011 | |||||||
Finished goods |
$ | 967 | $ | 895 | ||||
Work in process |
6,300 | 6,007 | ||||||
Purchased and manufactured parts |
12,752 | 10,460 | ||||||
20,019 | 17,362 | |||||||
Reserve for slow moving and obsolescence |
(2,686 | ) | (2,611 | ) | ||||
Total |
$ | 17,333 | $ | 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 month periods ended
June 30, 2011 and June 30, 2010 was $349 and $468, respectively.
Average estimated useful lives for property are as follows.
Machinery and equipment
|
3 to 10 years | |
Furniture and fixtures
|
3 to 10 years | |
Computer hardware and software
|
3 to 5 years | |
Leasehold improvements
|
10 years |
The Company classified as real estate held for sale on the condensed consolidated balance sheets a
property owned in Glen Head, New York that is currently under sales contract. The sale of the
property is expected to be concluded upon completion of municipal approvals and soil remediation
pursuant to the remediation plan approved by the New York Department of Environmental Conservation.
The net sale proceeds are expected to be $3,800. See Note 13 for a discussion of environmental
matters related to this site.
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 three month period ended June 30, 2011 are summarized as
follows.
Balance at March 31, 2011 |
$ | 255 | ||
Warranty costs incurred |
(41 | ) | ||
Change in estimates to pre-existing warranties |
(62 | ) | ||
Product warranty accrual |
36 | |||
Balance at June 30, 2011 |
$ | 188 | ||
10
Table of Contents
Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
($ In Thousands Except Share Amounts)
(Unaudited)
NOTE 7. Income Taxes
Income taxes for the three month period ended June 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 June 30, 2011, the Company has federal and state net operating loss carry forwards, or NOLs, of
approximately $14,102 and $3,227, 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 June 30, 2011, the current deferred tax assets are $7,201, and non-current deferred tax assets
are $8,516. 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 June 30, 2011, the Company had no unrecognized tax benefits for uncertain tax positions.
NOTE 8. Long-Term Debt Payable to Banks
Long-term debt, including current maturities, consists of the following.
June 30, 2011 | March 31, 2011 | |||||||
Senior Credit Facility |
$ | 10,679 | $ | 11,500 | ||||
Less current maturities |
| | ||||||
Total long-term debt |
$ | 10,679 | $ | 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 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 $821
term loan repayment by pre-paying the amount due in April 2012. Accordingly, the balance sheet
reflects no current maturities due under the term loan of the Senior Credit Facility as of June 30,
2011.
The Senior Credit Facility bears interest at either the Base Rate or the London Interbank Offered
Rate (LIBOR) plus applicable margins based on the Companys leverage ratio. The leverage ratio
is equal to consolidated total debt divided by
consolidated EBITDA (the sum of net income, depreciation, amortization, other non-cash charges and
credits to net income, interest expense, and income tax expense minus charges related to debt
refinancing) for the most recent four quarters and is
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Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
($ In Thousands Except Share Amounts)
(Unaudited)
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 June 30, 2011, the Senior Credit Facility had a blended interest rate of approximately
3.4%, 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 requires the Company to enter into an interest rate swap (discussed below).
The Senior Credit Facility is secured by all of the Companys assets and allows the Company to
issue letters of credit against the total borrowing capacity of the facility. At June 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 (as defined above) that is not permitted to be more than 2.5 : 1.0.
The fixed charge coverage ratio is equal to consolidated EBITDA (as defined above) divided by
fixed charges (the sum of cash interest expense, cash income taxes, dividends, cash environmental
costs, scheduled principal installments on indebtedness adjusted for prepayments, capital
expenditures, and payments under capitalized leases). The Company was permitted to exclude from
fixed charges certain one-time capital expenditures of up to $5,500 related to the facility
relocation. At June 30, 2011, the Company was in compliance with the covenant provisions of the
Senior Credit Facility.
Interest Rate Swap - The Senior Credit Facility requires the Company to enter into an interest rate
swap for at least three years in an amount not less than 50% of the term loan for the first two
years and 35% of the term loan for the third year. An interest rate swap, a type of derivative
financial instrument, is used to minimize the effects of interest rate fluctuations on cash flows.
The Company does not use derivatives for trading or speculative purposes. In September 2008, the
Company entered into a three year interest rate swap to exchange floating rate for fixed rate
interest payments on the term loan as required by the Companys Senior Credit Facility. The swaps
net effect of the spread between the floating rate (30 day LIBOR) and the fixed rate (3.25%), is
settled monthly, and is reflected as an adjustment to interest expense in the period incurred. The
adjustment to record the swap at its fair value is included in accumulated other comprehensive
loss, net of tax. The Company reduced its existing unrealized loss on the interest rate swap
during the first three months of Fiscal 2012.
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 June 30, 2011.
Carrying Amount | Fair Value | |||||||
Long-term debt |
$ | 10,679 | $ | 10,679 | ||||
Interest rate swap liability included in
other long-
term liabilities (Level 2) |
24 | 24 |
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Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
($ In Thousands Except Share Amounts)
(Unaudited)
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 $166 and $159, respectively, for the three month periods ended June 30, 2011 and June 30,
2010.
The Company provides postretirement benefits to certain union employees. The Company funds these
benefits on a pay-as-you-go basis. The measurement date is March 31.
In February 2002, the Companys subsidiary, Seeger-Orbis GmbH & Co. OHG, now known as
TransTechnology Germany GmbH (the Selling Company), sold its retaining ring business in Germany
to Barnes Group Inc. (Barnes). German law prohibits the transfer of unfunded pension obligations
which have vested for retired and former employees, so the legal responsibility for the pension
plan that related to the business (the Pension Plan) remained with the Selling Company. At the
time of the sale and subsequent to the sale, that pension liability was recorded based on the
projected benefit obligation since future compensation levels will not affect the level of pension
benefits. The relevant information for the Pension Plan is shown below under the caption Pension
Plan. The measurement date is December 31. Barnes has entered into an agreement with the Company
whereby Barnes is obligated to administer and discharge the pension obligation as well as indemnify
and hold the Selling Company and the Company harmless from these pension obligations. Accordingly,
the Company has recorded an asset equal to the benefit obligation for the Pension Plan of $3,402
and $3,358 as of June 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.
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 | Pension Plan | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest cost |
$ | 9 | $ | 11 | $ | 43 | $ | 44 | ||||||||
Amortization of net loss |
4 | | | | ||||||||||||
Net periodic cost |
$ | 13 | $ | 11 | $ | 43 | $ | 44 | ||||||||
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 June 30, 2011, the Company had no other significant
concentrations of credit risk.
NOTE 12. New Accounting Standards
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (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
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Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
($ In Thousands Except Share Amounts)
(Unaudited)
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
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 business
disposed of by TransTechnology Corporation, the former parent of the Company. Environmental
cleanup activities usually span multiple years, which make estimating liabilities a matter of
judgment because of such factors as changing remediation technologies, assessments of the extent of
contamination, and continually evolving regulatory environmental standards. The Company considers
these and other factors in estimates of the timing and amount of any future costs that may be
required for remediation actions. The Company records a liability for the amount that it
determines to be the best estimate of the cost of remediation. The Company does not discount the
recorded liabilities, as the amount and timing of future cash payments are not fixed or cannot be
reliably determined.
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 $14,135 before offsetting cost-sharing of approximately $1,556 that is classified
mostly as a non-current asset.
At June 30, 2011 and March 31, 2011, the aggregate amount of liabilities recorded relative to
environmental matters was $14,135 and $14,293, respectively. In the first three months of Fiscal
2012 and Fiscal 2011, the Company spent $263 and $58, respectively, on environmental costs and for
the entire Fiscal 2011, the Company spent $638. In Fiscal 2012, the Company anticipates spending
$1,899. The increased spending is primarily related to the Glen Head, New York property. These
costs will be charged against the Companys environmental liability reserve and will not impact
income. The Company performs quarterly reviews of the status of its environmental sites and the
related liabilities. There are a number of former operating facilities that the Company is
monitoring or investigating for potential future remediation. In some cases, although a loss may
be probable, it is not possible at this time to reasonably estimate the amount of any obligation
for remediation activities because of uncertainties with respect to assessing the extent of the
contamination or the applicable regulatory standard. The Company is also pursuing claims for
contribution to site investigation and cleanup costs against other potentially responsible parties
(PRPs), including the U.S. Government.
Although the Company takes great care in the development of these risk assessments and future cost
estimates, the actual amount of the remediation costs may be different from those estimated as a
result of a number of factors including: changes to federal and state environmental regulations or
laws; changes in local construction costs and the availability of personnel and materials;
unforeseen remediation requirements that are not apparent until the work actually commences; and
actual remediation expenses that differ from those estimated. The Company does not include any
unasserted claims that it might have against others in determining its potential liability for such
costs, and, except as noted with regard to specific cost sharing arrangements, has no such
arrangements, nor has the Company taken into consideration any future claims against insurance
carriers that it may have in determining its environmental liabilities. In those situations where
the Company is considered a de minimis participant in a remediation claim, the failure of the
larger participants to meet their obligations could result in an increase in the liability with
regard to such a site.
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Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
($ In Thousands Except Share Amounts)
(Unaudited)
The Company continues to participate in environmental assessments and remediation work at
eleven locations, including certain former facilities. Due to the nature of environmental
remediation and monitoring work, such activities can extend for up to 30 years, depending upon the
nature of the work, the substances involved, and the regulatory requirements associated with each
site. The Company does not discount the recorded liabilities.
In the first quarter of Fiscal 2003, the Company entered into a consent order for a former facility
in Glen Head, New York, which is currently subject to a contract for sale, pursuant to which the
Company developed a remediation plan for review and approval by the New York Department of
Environmental Conservation. The Company was advised during Fiscal 2010 that the Department of
Environmental Conservation was requiring additional offsite groundwater delineation studies as part
of its review. At the former facility in Glen Head, New York based upon the characterization work
performed to date and this latest request, the Company has accrued estimated costs of approximately
$3,959. The amounts and timing of payments are subject to the approved remediation plan and
additional discussions with the Department on the scope of the additional delineation study.
The Company sold the business previously operated at the property it owns in Saltzburg,
Pennsylvania (Federal Labs). The Company presented an environmental cleanup plan during the
fourth quarter of Fiscal 2000 for a portion of Federal Labs site, which was approved during the
third quarter of Fiscal 2004. This plan was submitted pursuant to the Consent Order and Agreement
with the Pennsylvania Department of Environmental Protection (PaDEP) concluded in Fiscal 1999
(the 1999 Consent Order). Pursuant to the Consent Order, the Company paid $0.2 million for past
costs, future oversight expenses and in full settlement of claims made by PaDEP related to the
environmental remediation of the site with an additional $0.2 million paid in Fiscal 2001. The
Company concluded a second Consent Order with PaDEP in the third quarter of Fiscal 2001 for a
second portion of the Federal Labs site (the 2001 Consent Order), and a third Consent Order for
the remainder of the Federal Labs site was concluded in the third quarter of Fiscal 2003 (the 2003
Consent Order). The Company submitted an environmental cleanup plan for the portion of the
Federal Labs site covered by the 2003 Consent Order during the second quarter of Fiscal 2004. The
Company is also administering an agreed settlement with the Federal Government, concluded in the
first quarter of Fiscal 2000, under which the Federal Government pays 50% of the direct and
indirect environmental response costs associated with a portion of the Fed Labs site subject to the
1999 Consent Order. The Company also concluded an agreement in the first quarter of Fiscal 2006,
under which the Federal Government paid an amount equal to 45% of the estimated environmental
response costs associated with a second portion of the Federal Labs site subject to the 2001
Consent Order. No future payments are due under this second agreement. The Company is currently
under a tolling agreement with the Federal Government with respect to the remainder of the Federal
Labs site while we negotiate a cost sharing arrangement with respect to the final portion of this
site subject to the 2003 Consent Order. However, there can be no assurance the Company will be
successful in these negotiations or any litigation seeking to enforce our rights to contribution
and or indemnification from the Federal Government with respect to this final portion of the
Federal Labs site. The reserves are shown without giving effect to any cost sharing payments due
from the Federal Government. These amounts are shown as other assets on our balance sheet.
At June 30, 2011, the reserve for environmental liabilities at Federal Labs was $5,857. 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 $4,319. In
addition, the Company has been named as a potentially responsible party in four environmental
proceedings pending in several states in which it is alleged that the Company was a generator of
waste that was sent to landfills and other treatment facilities. Such properties generally relate
to businesses which have been sold or discontinued. The Company estimates that expected future
costs, and the estimated proportional share of remedial work to be performed associated with these
proceedings, will not exceed $100 and has provided for these estimated costs in the Companys
accrual for environmental liabilities.
The Company has entered into a sales contract for the Glen Head, New York property for
$4,000, and it is classified as held for sale in the amount of $3,800 after allowing for certain
costs. The contract does not include a price adjustment clause and although there are conditions
precedent to the buyers obligations to close, the contract does not allow for contract
termination. Thus, the buyer cannot unilaterally terminate the contract without liability, a
buy-out, or some other settlement that must be negotiated with the Company. However, there is no
outside date for closing to occur and we must provide the buyer with a funded remediation plan and
environmental insurance prior to the buyer being obligated to close. The buyer has indicated its
intent to build residential housing on the property and has been engaged in the lengthy process of
securing the municipal
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Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
($ In Thousands Except Share Amounts)
(Unaudited)
approvals necessary to redevelop this former industrial site for residential purposes. The
property is the subject of a consent order with the State of New York in which the Company has
developed a remediation plan for review and approval by the New York Department of Environmental
Conservation. The Company received a request from the Department in Fiscal 2010 to provide
delineation and testing with respect to offsite groundwater contamination. Neither the consent
order nor the remediation plan affect the buyers obligation to close under the sales contract. At
the time the sales contract was entered into in July 2001, the property had an appraised value of
$3,300 without adjusting for the Companys estimated cost of remediation, which is separately
reserved. In 2005, the property had an appraised value of $4,200 without adjusting for the
Companys estimated cost of remediation. The property has not been appraised since 2005.
Litigation
The Company is also engaged in various other legal proceedings incidental to its business. It is
the opinion of management that, after taking into consideration information furnished by its
counsel, these matters will have no material effect on the Companys consolidated financial
position or the results of operations or cash flows in future periods.
NOTE 14. Segment, Geographic Location and Customer Information
Our products and related services aggregate into one reportable segment sophisticated
mission equipment for specialty aerospace and defense applications. The nature of the production
process (assemble, inspect, and test) is similar for all products, as are the customers and
distribution methods.
During the three month period ended June 30, 2011, 33%, 20% and 11% of net sales were made
to three major customers, respectively. During the three month period ended June 30, 2010, 32%, 17%, 13% and 11% of net sales were made to four major customers, respectively.
Net sales below show the geographic location of customers for the three month periods ended June
30, 2011 and June 30, 2010:
June 30, | June 30, | |||||||
Location | 2011 | 2010 | ||||||
United States |
$ | 13,539 | $ | 10,276 | ||||
Italy |
817 | 1,557 | ||||||
England |
398 | 360 | ||||||
Other European countries |
670 | 889 | ||||||
Pacific and Far East |
322 | 1,534 | ||||||
Other International |
2,502 | 1,924 | ||||||
Total |
$ | 18,248 | $ | 16,540 | ||||
NOTE 15. Subsequent Event
In
July 2011, the Company adopted a Shareholder Rights Plan (the Rights Plan). 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 $14.00. However, if a person acquires 10% or more of the
Companys common stock in a transaction that was not approved by the Board of Directors, each Right
would entitle the holder (other than such acquiring person) to purchase common stock in an
amount equivalent to the exercise price at a 75% discount to the market price of the Companys
common stock at that time the Rights Plan is triggered.
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Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)
($ In Thousands Except Share Amounts)
(Unaudited)
The Rights will expire on July 18, 2014. The Company may redeem the rights for $0.01 each at
any time until the tenth business day following public announcement that a person or group has
acquired 10% or more of its outstanding common stock or one of the grandfathered common stockholders has purchased additional common stock.
The Rights
Plan will terminate if it is not ratified by the Companys stockholders within 12 months
of its adoption. The Company intends to submit the Rights Plan for
approval by its stockholders at
its 2011 Annual Meeting of Stockholders.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
($ 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 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.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
($ In Thousands Except Share Amounts)
OVERVIEW
We design, develop, manufacture, sell, and service sophisticated engineered mission equipment for
specialty aerospace and defense applications. We have long been recognized as the worlds leading
designer, manufacturer, service provider, and supplier of mission-critical rescue hoists and cargo
hook systems. We also manufacture weapons-handling systems, cargo winches, and tie-down equipment.
Our products are designed to be efficient and reliable in extreme operating conditions and are
used to complete rescue operations and military insertion/extraction operations, move and transport
cargo, and load weapons onto aircraft and ground-based launching systems.
Our business is affected by global economic and geo-political conditions, particularly defense
spending by the United States Government. In particular, any decline in or a redirection of the
United States defense budget could have a material impact on revenues and earnings in future
periods. Although the United States defense spending levels are historically high, the priority of
the wars in Iraq and Afghanistan has resulted in less procurement for replacement parts and service
for our products than in prior years.
As our OEM customers development timetables have been extended, we have experienced corresponding
product development schedule slippage and increased investment. We have not seen, nor do we
currently anticipate, any program cancellations and still expect all of our current product
development projects to lead to production and aftermarket services which support our current and
expected investments. As an example, the Airbus A400M military transport aircraft is not expected
to generate material revenues until after Fiscal 2012.
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
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.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
($ In Thousands Except Share Amounts)
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, houses state-of-the-art assembly and manufacturing
equipment, and has been designed to provide greater efficiencies in the procurement, assembly and
distribution of finished products throughout the United States and Europe.
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 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.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
($ In Thousands Except Share Amounts)
Results of Operations
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
Three Months Ended | Increase/(Decrease) | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | $ | % | |||||||||||||
Products |
$ | 13,892 | $ | 13,085 | $ | 807 | 6.2 | % | ||||||||
Services |
4,356 | 3,455 | 901 | 26.1 | ||||||||||||
Net sales |
18,248 | 16,540 | 1,708 | 10.3 | ||||||||||||
Products |
7,990 | 7,200 | 790 | 11.0 | ||||||||||||
Services |
2,874 | 3,207 | (333 | ) | (10.4 | ) | ||||||||||
Cost of sales |
10,864 | 10,407 | 457 | 4.4 | ||||||||||||
Gross profit |
7,384 | 6,133 | 1,251 | 20.4 | ||||||||||||
As a % of net sales |
40.5 | % | 37.1 | % | N/A | 3.4 | % Pt | |||||||||
Selling, general,and administrative expenses |
3,904 | 3,073 | 831 | 27.0 | % | |||||||||||
Engineering expense |
2,285 | 1,556 | 729 | 46.9 | ||||||||||||
Relocation expense |
| 211 | (211 | ) | N/A | |||||||||||
Operating income |
1,195 | 1,293 | (98 | ) | (7.6 | ) | ||||||||||
Interest expense |
134 | 214 | (80 | ) | (37.4 | ) | ||||||||||
Net income |
$ | 598 | $ | 589 | $ | 9 | 1.5 | % |
Net Sales. Fiscal 2012 first three months net sales of $18,248 increased by $1,708, or 10.3%, from
net sales of $16,540 in the corresponding period in Fiscal 2011. Fiscal 2012 products sales of
$13,892 were $807, or 6.2%, above prior year primarily due to increased new equipment volume of
$3,807 in hoist & winch to the U.S. Government and weapons handling HIMARS to Lockheed Martin,
partly offset by lower spare parts volume of $3,000 which occurred as a result of large spare
parts volume with U.S. military and third-party overhaul & repair service centers.
Fiscal 2012 first three months services sales of $4,356 were higher by $901, or 26.1%, compared
with the prior year primarily due to increased overhaul and repair volume with the U.S. Government.
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 $7,990 in the Fiscal 2012 first three months were $790,
or 11.0% higher than the prior year primarily due to higher sales and also due to higher costs on
U.S. Government products, partly offset by lower costs from lower spare parts volume. Cost of
services provided of $2,874 in the Fiscal 2012 first three months
were $333, or 10.4%, lower than
the prior year due to under-absorbed overhead in the prior year.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
($ In Thousands Except Share Amounts)
Gross profit. Gross profit of $7,384 in the Fiscal 2012 first three months was $1,251, or
20.4%, ahead of the same period in Fiscal 2011. The dollar increase is due to sales volume growth
in new production and overhaul & repair and under-absorbed manufacturing overhead in the prior
year. As a percent of sales, the gross profit margin was 40.5% for the Fiscal 2012 first three
months compared with 37.1% for the prior year.
Operating Expenses. Total operating expenses were $6,189, or 33.9% of net sales, in the first
three months of Fiscal 2012 compared with $4,840 or 29.3% of net sales in the comparable prior year
period. Selling, general, and administrative (SG&A) expenses were $3,904 in the Fiscal 2012
first three months compared with $3,073 in the first three months of Fiscal 2011, an increase of
$831. The increase is primarily due to costs for business strategy development,
an accrual for a product development delay, a Shareholder Rights Plan (Note 15), and environmental planning.
As a percent of sales, SG&A was 21.4% in the Fiscal 2012 first three months versus 18.6% in the comparable period
last year.
Engineering expenses were $2,285 in the first three months of Fiscal 2012 compared with $1,556 in
the first three months of Fiscal 2011. The increase reflects new product development for awarded aerospace
platforms and was reduced by $516 in expense reimbursements from Airbus.
We incurred $211 of expenses related to our headquarters and factory relocation to Whippany, New
Jersey in the first three months of Fiscal 2011; we incurred no
relocation costs in the first three months of Fiscal 2012.
Interest
Expense. Interest expense was $134 in the first three months of Fiscal 2012 versus $214 in
the first three months of Fiscal 2011. The decline in interest expense is primarily due to $6,571
lower total debt at June 30, 2011 compared with June 30, 2010.
Net Income. Net income was $598, or $0.06 per diluted share, in the Fiscal 2012 first three months
compared with $589, or $0.06 per diluted share, in the same period in Fiscal 2011. The benefit
from higher gross profit resulting from the increased sales volume was offset by higher operating
expenses.
New Orders. New products and services orders received during the three months ended June 30, 2011
decreased by 31.1% to $13,595 compared with $19,730 during the three months ended June 30, 2010.
The decrease was due to spare parts, overhaul & repair, and new equipment. Orders for new
equipment decreased by $2,209, and spare parts orders decreased by $2,669 due to a large U.S.
Government order in Fiscal 2011 not being repeated in Fiscal 2012.
New orders for overhaul & repair for the three months ended June 30, 2011 were $1,304 lower than
the prior year due to a large U.S. Government order in Fiscal 2011 not being repeated in Fiscal
2012.
Backlog. Backlog at June 30, 2011 was $126,498 compared with $131,151 at March 31, 2011 and
$133,334 at June 30, 2010. The backlog at June 30, 2011, March 31, 2011, and June 30, 2010
includes approximately $71,343, $71,343, and $69,936, 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 $45,306 at June 30, 2011 is scheduled for shipment during the
next twelve months. Although significant cancellations of purchase orders or substantial
reductions of product quantities in existing contracts seldom occur, such cancellations or
reductions could substantially and materially reduce backlog. Therefore, backlog information may
not represent the actual amount of shipments or sales for any future period.
The book-to-bill ratio is computed by dividing the new orders received during a period by the sales
for the same period. A book-to-bill ratio in excess of 1.0 is potentially indicative of continued
overall growth in sales. The book to bill ratio was 0.7 for the Fiscal 2012 first quarter and 1.2
for the Fiscal 2011 first quarter.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
($ In Thousands Except Share Amounts)
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, 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.
Our Senior Credit Facility consists of a $10,000 revolving line of credit (Revolver) and, at the
inception of the credit agreement in August 2008, a term loan totaling $23,000. The Senior Credit
Facility is secured by all of our assets and accrues interest at either the Base Rate (as defined
in the credit agreement) or the London Interbank Offered Rate (LIBOR) plus applicable margins
based on our leverage ratio (as defined in the credit agreement) for the most recent four quarters
and is calculated at each quarter end. At June 30, 2011, the term loan balance was $10,679, there
were no outstanding Revolver borrowings, there were $202 in outstanding (standby) letters of
credit, and $9,798 of availability under the Revolver. The Senior Credit Facility contains certain
financial covenants, including fixed charge coverage ratio and leverage ratio. Unless waived, any
failure to comply with such covenants could constitute an event of default resulting in the
acceleration of all amounts due under the Senior Credit Facility. A more complete description of
these covenants is contained in Note 8 of our financial statements included in Part I, Item 1 of
this report. At June 30, 2011, we were in compliance with all covenant provisions of the Senior
Credit Facility.
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 no current maturities due under the term loan of the Senior Credit Facility as of
June 30, 2011.
Working Capital
Net working capital at June 30, 2011 was $31,637, a decrease of $739, versus $32,376 at March 31,
2011. The ratio of current assets to current liabilities was 2.9:1.0 at June 30, 2011 compared
with 3.1:1.0 at the beginning of Fiscal 2012. The net working capital decrease resulted primarily
from a $5,758 decrease in accounts receivable and a $1,940 increase in accounts payable, partly
offset by a $4,069 increase in cash and a $2,582 increase in inventory. There was a net increase
of $308 in other working capital items.
The accounts receivable days outstanding increased to 68.9 days at June 30, 2011, from 61.5 days at
June 30, 2010. Inventory turnover remained constant at 2.4 turns at June 30, 2011 and June 30,
2010.
Capital Expenditures
Capital expenditures for the three months ended June 30, 2011 and June 30, 2010 were $713 and $174,
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
three months ended June, 30, 2010 include capitalized relocation expenditures of $129. Capitalized
Qualification units for the three
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Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
($ In Thousands Except Share Amounts)
months ended June 30, 2011 and June 30, 2010 were $467 and $61, 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.
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 Fiscal Year | ||||||||||||||||||||
Total | 2012 | 2013-2014 | 2015-2016 | 2017 & beyond | ||||||||||||||||
Debt principal
repayments (a) |
$ | 10,679 | $ | | $ | 10,679 | $ | | $ | | ||||||||||
Estimated interest
payments on
long-term debt (b) |
417 | | 417 | | | |||||||||||||||
Operating leases |
8,384 | 1,080 | 2,111 | 1,959 | 3,234 | |||||||||||||||
Purchase
obligations (c) |
| | | | | |||||||||||||||
Total |
$ | 19,480 | $ | 1,080 | $ | 13,207 | $ | 1,959 | $ | 3,234 | ||||||||||
(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 1 of this report. | |
(b) | Estimated interest payments on long-term debt reflect the scheduled interest payments of the term loan under the Senior Credit Facility and assume an effective weighted average interest rate of 3.4%, our blended interest rate at June 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. |
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Table of Contents
Managements Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
($ In Thousands Except Share Amounts)
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.
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.
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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%), is settled monthly, and is reflected
as an adjustment to interest expense in the period incurred. An unrealized loss to adjust the
interest rate swap to its fair value was recorded net of tax, in accumulated other comprehensive
loss, during the first three months of Fiscal 2012.
At June 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 $58
based on the debt outstanding under the facility at June 30, 2011.
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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 June 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 fiscal quarter ended June 30, 2011 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are engaged in various other legal proceedings incidental to the Companys business. Management
believes that, after taking into consideration information furnished by its counsel, these matters
will not have a material effect on the consolidated financial position, results of operations, or
cash flows in future periods.
Item 1A. RISK FACTORS
In addition to the other information set forth in this report, the user/reader should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K
for the year ended March 31, 2011 as filed with the Securities and Exchange Commission and
incorporated herein by reference, which factors could materially affect our business, financial
condition, financial results or future performance.
Item 6. EXHIBITS
31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
BREEZE-EASTERN CORPORATION (Registrant) |
||||
Dated: August 4, 2011 | By: | /s/ Mark D. Mishler | ||
Mark D. Mishler, Senior Vice President, | ||||
Chief Financial Officer, Treasurer, and Secretary * | ||||
* | On behalf of the Registrant and as Principal Financial and Accounting Officer. |
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