SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

Commission file number 1-7872

 

BREEZE-EASTERN CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(973) 602-1001

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(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 Act).  Yes o     No þ

 

The aggregate market value of the voting common equity held by non-affiliates of the registrant on September 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter), based on the closing price of the registrant’s common stock on the NYSE Amex (formerly American Stock Exchange) on such date, was $23,655,051. Shares of common stock held by executive officers and directors have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not a determination for any other purpose.

 

As of May 1, 2011, the registrant had 9,441,536 shares of common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The registrant’s Proxy Statement for the 2011 Annual Meeting of Stockholders is incorporated by reference into Part III of this Annual Report on Form 10-K. With the exception of those portions that are specifically incorporated by reference in this Annual Report on Form 10-K, such Proxy Statement shall not be deemed filed as part of this Report or incorporated by reference herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended March 31, 2011.

 

 

BREEZE-EASTERN CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 2011

 

 

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objective of management for future operations, are forward-looking statements. In addition, 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 have 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, 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 United States 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” beginning on page 6 of this report and “Item 7 — Management’s 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.

 

 

Breeze-Eastern Corporation, a Delaware corporation, designs, develops, manufactures, sells and services sophisticated engineered mission equipment for specialty aerospace and defense applications. We were originally organized in 1962 as a California corporation and reincorporated in Delaware in 1986. Unless the context otherwise requires, references to the “Company,” the “Registrant,” “Breeze-Eastern,” “we” or “us” refer to Breeze-Eastern Corporation and its consolidated subsidiaries. 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.

 

CORE BUSINESS

 

Our core business is aerospace and defense products. We believe we are the world’s 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

 

Products include new equipment and spare parts sales and represented approximately 74%, 72%, and 71% of our total revenues in Fiscal 2011, Fiscal 2010, and Fiscal 2009, respectively.

 

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. Sales of hoist and winch products accounted for approximately 57%, 51%, and 46% of our total revenues in Fiscal 2011, Fiscal 2010, and Fiscal 2009, respectively.

 

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. Sales of cargo hook products accounted for approximately 12%, 14%, and 16% of our total revenues in Fiscal 2011, Fiscal 2010, and Fiscal 2009, respectively.

 

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.

 

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 supplier’s 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. Sales of weapons handling products accounted for approximately 5%, 7%, and 9% of our total revenues in Fiscal 2011, Fiscal 2010, and Fiscal 2009, respectively.

 

SERVICES

 

Services include overhaul and repair and engineering sales and represented 26%, 28%, and 29% of our total revenues in Fiscal 2011, Fiscal 2010, and Fiscal 2009, respectively.

 

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. Overhaul and repair represented 22%, 24%, and 23% of our total revenues in Fiscal 2011, Fiscal 2010, and Fiscal 2009, respectively.

 

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 Consolidated Financial Statements” contained elsewhere in this report.

MAJOR CUSTOMERS

 

We have three major customers: the U.S. Government, United Technologies Corporation and Finmeccanica SpA, which accounted for 28%, 21%, and 16%, respectively, of the total consolidated net sales for Fiscal 2011.

 

GOVERNMENT SALES

 

Our direct sales to the U.S. Government and sales for U.S. Government and foreign government end use represented 69%, 67%, and 68% of consolidated revenue during Fiscal 2011, Fiscal 2010, and Fiscal 2009, respectively. U.S. Government sales, both direct and indirect, are generally made under standard government contracts including fixed price and cost plus. As a U.S. Government contractor, we are subject to routine audits and investigations by U.S. Government agencies.

 

In accordance with normal practice, contracts and orders with the U.S. Government are subject to partial or complete termination at any time, at the option of the customer. In the event of a termination for convenience by the government, there generally are provisions for recovery of our allowable incurred costs and a proportionate share of the profit or fee on the work completed, consistent with regulations of the U.S. Government.

 

BACKLOG

 

We measure backlog by the amount of products or services that customers committed by contract to purchase as of a given date. Backlog at March 31, 2011 was $131,151 as compared with $130,144 at March 31, 2010 as new orders exceeded shipments in Fiscal 2011. Approximately $87,635 of our backlog at March 31, 2011 is not scheduled for shipment during the next twelve months. For additional discussion on our backlog, see “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

COMPONENTS, RAW MATERIALS, AND SEASONALITY

 

The various component parts and, to some extent, assembly of components and subsystems by subcontractors used by us to produce our products are generally available from more than one source. In those instances where only a single source for any material or part is available, such items can generally be redesigned to accommodate materials or parts made by other suppliers, although this may lead to delays in meeting customer requirements. In some cases, we stock an adequate supply of the single source materials or parts for use until a new supplier can be approved.

 

In recent years, our revenues in the second half of our fiscal year have generally exceeded revenues in the first half. The timing of U.S. Government awards, availability of U.S. Government funding, and product deliveries are among the factors affecting the periods in which revenues are recorded. Management expects this trend to continue in Fiscal 2012.

 

EMPLOYEES

 

As of March 31, 2011, we had 164 salaried and hourly employees, and the United Auto Workers (UAW) represented 51 hourly employees at our facility. We reached a new three-year collective bargaining agreement with the UAW in November 2010 and consider our relations, with both our union and non-union employees, to be generally satisfactory.

 

INTERNATIONAL OPERATIONS AND SALES

 

We currently have no operations based outside of the United States. We had export sales of $28,598, $27,912, and $32,688 in Fiscal 2011, Fiscal 2010, and Fiscal 2009, respectively, representing 37%, 40%, and 43% of our consolidated net sales in each of those years. The risks and profitability of international sales are generally comparable with similar products sold by us in the United States. Net export sales by geographic area and customer domicile are set forth in Note 14 of our financial statements contained elsewhere in this report.

COMPETITION

 

We compete in some markets with the hoist and winch business unit of the Goodrich Corporation, which as a whole is a larger corporation that has substantially greater financial and technical resources than us. Generally, competitive factors include design capabilities, product performance, delivery, and price. Our ability to compete successfully in these markets depends on our ability to develop and apply technological innovations and to expand our customer base and product lines. Technological innovation, development, and application requires significant investment and capital expenditures. While we make each investment with the intent of getting a good financial return, in some cases we may not fully recover the full investment through future sales of products or services.

 

RESEARCH AND DEVELOPMENT

 

We conduct extensive research and development activities, primarily for developing new or improved products, under customer-sponsored contracts and with our own funding. Research and development costs, which are charged to selling, general, and administrative expense when incurred, amounted to $1,347, $1,848, and $1,689 for the years ended March 31, 2011, 2010, and 2009, respectively. Customer-sponsored research and development costs are charged to cost of sales when the associated revenue is recognized and were $2,323, $3,016, and $5,194 in Fiscal 2011, Fiscal 2010, and Fiscal 2009, respectively.

 

INTELLECTUAL PROPERTY

 

We have been the market leader since the initial development of rescue hoists for use on helicopters and have continually designed and manufactured rescue hoists since the 1940’s. Our intellectual property product knowledge enables us to continually evolve mission-critical products to meet our customers’ evolving needs. We generally retain the intellectual property rights to products we develop which typically lasts for the life of the product.

 

REGULATORY MATTERS

 

Aircraft Regulation

 

In the United States, our aircraft products are required to comply with Federal Aviation Administration regulations governing production and quality systems, airworthiness and installation approvals, repair procedures and continuing operational safety. Internationally, similar requirements exist for airworthiness, installation and operational approvals. These requirements are generally administered by the national aviation authorities of each country and, in the case of Europe, coordinated by the European Aviation Safety Agency (EASA).

 

Environmental Matters

 

We maintain compliance with federal, state, and local laws and regulations relating to materials used in production and to the discharge of wastes, and other laws and regulations relating to the protection of the environment. The costs of such compliance at our Whippany, New Jersey facility are not material to our operations.

 

We are subject to federal and state requirements for protection of the environment, including those for the remediation of contaminated sites relating to predecessor entities and previously-owned subsidiaries. At various times, we have been identified as a potentially responsible party pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), and analogous state environmental laws, for the cleanup of contamination resulting from past disposals of hazardous wastes at certain former facilities and at sites to which we, among others, sent wastes in the past. CERCLA requires potentially responsible persons to pay for cleanup of sites from which there has been a release or threatened release of hazardous substances. Courts have interpreted CERCLA to impose strict joint and several liabilities on all persons liable for cleanup costs. As a practical matter, however, at sites where there are multiple potentially responsible persons, the costs of cleanup typically are allocated among the parties according to a volumetric or other standard.

 

Where appropriate, we have sought contribution to remediation costs from other potentially responsible parties and made claims under available insurance policies. We also periodically assess the amount of reserves held for environmental liabilities for these sites based upon current information. While there is an inherent uncertainty in assessing the potential total cost to investigate and remediate a given site, we make a determination as to the reasonable

cost of investigation and remediation of each site based upon the information available to us at that time. Furthermore, the remediation efforts for a particular site may take place over a number of years and therefore a significant portion of the expenses represented by these reserves may not be incurred for some time. Factors that affect the actual liability for these sites include changes in federal and state environmental laws resulting in more stringent remediation requirements and actual operating results from remediation efforts which vary from estimated results.

 

Information concerning our specific environmental liabilities and reserves is contained in Note 13 of our “Notes to Consolidated Financial Statements” contained elsewhere in this report.

 

ADDITIONAL INFORMATION

 

We maintain a website at http://www.breeze-eastern.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, which we file with the Securities and Exchange Commission (SEC) are available on our web site, free of charge, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Information that can be accessed through our website is not incorporated by reference in this Report and, accordingly, readers should not consider such information to be part of this Report. The reports noted above may also be obtained at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. The SEC also maintains a web site at www.sec.gov that contains reports, proxy statements, and information regarding SEC registrants, including Breeze-Eastern.

 

 

An investment in our common stock involves risk.  You should carefully consider the following risk factors in addition to other information in this Annual Report on Form 10-K before purchasing our common stock. The risks and uncertainties described below are those that we currently deem to be material and that we believe are specific to our company and our industry. In addition to these risks, our business may be subject to risks currently unknown to us. If any of these or other risks actually occurs, our business may be adversely affected, the trading price of our common stock may decline and you may lose all or part of your investment.

 

Risks Associated with our Business and/or Industry

 

A substantial amount of our revenue is derived from the U.S. Government, Finmeccanica SpA, and United Technologies Corporation; a termination or reduction in the volume of business with any of these customers would have a material adverse effect on our revenue and profits.

 

Approximately 28%, 21%, and 16% of our consolidated net sales in Fiscal 2011 were to the U.S. Government (direct), United Technologies Corporation and Finmeccanica SpA, respectively. These sales are made principally for the benefit of the military services of the U.S. Department of Defense and defense organizations of other countries and are affected by, among other things, budget authorization and appropriation processes. In the event that defense expenditures are reduced for products we manufacture or services we provide and are not offset by revenues from additional foreign sales, new programs, or products or services that we currently manufacture or provide, we may experience a reduction in our revenues and earnings and a material adverse effect on our business, financial condition, and results of operations. Further, there can be no assurance that our significant customers will continue to buy our products and services at current or increased levels.

 

We depend heavily on government contracts that may not be fully funded or may be terminated, and the failure to receive funding or the termination of one or more of these contracts could reduce our sales and increase our costs.

 

Sales to the U.S. Government and its prime contractors and subcontractors represent a significant portion of our business. In Fiscal 2011, sales under U.S. Government contracts represented approximately 59% of our total sales. Sales to foreign governments represented approximately 10% of our total sales. We expect that the percentage of our revenues from government contracts will continue to be substantial in the future. Government programs can be structured into a series of individual contracts. The funding of these programs is generally subject to annual congressional appropriations, and congressional priorities are subject to change. In addition, government expenditures for defense programs may decline or these defense programs may be terminated. A decline in government

expenditures or redirection of government funding may result in a reduction in the volume of contracts awarded to us. We have resources applied to specific government contracts and if any of those contracts were terminated, we may incur substantial costs redeploying those resources.

 

As a U.S. Government contractor, we are subject to a number of procurement rules and regulations and any non-compliance could subject us to fines, penalties or debarment.

 

We must comply with and are affected by laws and regulations relating to the award, administration, and performance of U.S. Government contracts. Government contract laws and regulations affect how we conduct business with our customers and, in some instances, impose added costs on our business. A violation of specific laws and regulations could result in fines and penalties, contract termination, or debarment from bidding on future contracts. These fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow cost accounting standards, receiving or paying kickbacks, or filing false claims. We have been, and expect to continue to be, subjected to audits and investigations by government agencies. The failure to comply with the terms of government contracts could harm our business reputation and could also result in progress payments being withheld.

 

Our business could be adversely affected by a negative audit by the U.S. Government.

 

As a U.S. Government contractor, we are subject to routine audits and investigations by U.S. Government agencies such as the Defense Contract Audit Agency (DCAA). These agencies review a contractor’s performance under its contracts, cost structure, and compliance with applicable laws, regulations, and standards. The DCAA also reviews the adequacy of a contractor’s compliance with its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation, and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed or must be refunded if already reimbursed. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties as well as administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or prohibition from doing business with the U.S. Government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.

 

The U. S. Government has the right to terminate or not renew any contract with us at any time and without notice. Any such action would have a material adverse effect on our results of operations.

 

In some instances, laws and regulations impose terms or rights that are more favorable to the government than those typically available to commercial parties in negotiated transactions. For example, the U.S. Government may terminate any government contract and, in general, subcontracts, at its convenience as well as for default based on performance. Upon termination for convenience of a fixed-price type contract, we normally are entitled to receive the purchase price for delivered items, reimbursement for allowable costs for work-in-process, and an allowance for profit on the contract or adjustment for loss if contract completion would have resulted in a loss. Upon termination for convenience of a cost-reimbursement contract, we normally are entitled to reimbursement of allowable costs plus a portion of the fee. Such allowable costs would normally include the cost to terminate agreements with our suppliers and subcontractors. The amount of the fee recovered, if any, is related to the portion of the work accomplished prior to termination and is determined by negotiation.

 

A termination arising from default could expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders. In addition, on those contracts for which we are teamed with others and are not the prime contractor, the U.S. Government could terminate a prime contract under which we are a subcontractor, irrespective of the quality of our services as a subcontractor.

 

In addition, our U.S. Government contracts typically span one or more base years and multiple option years. The U.S. Government generally has the right to not exercise option periods and may not exercise an option period if the U.S. Government is not satisfied with our performance on the contract.

The aircraft manufacturing industry is heavily regulated, and if we fail to comply with applicable requirements, our results of operations could suffer.

 

Governmental agencies throughout the world, including the U.S. Federal Aviation Administration, or the FAA, prescribe standards and qualification requirements for aircraft components, including virtually all aviation products. Specific regulations vary from country to country, although compliance with FAA requirements generally satisfies regulatory requirements in other countries. We include, with some of the products we sell to our aircraft manufacturing customers, documentation certifying that each part complies with applicable regulatory requirements and meets applicable standards of airworthiness established by the FAA or the equivalent regulatory agencies in other countries. In order to sell our products, we and the products we manufacture must also be certified by our individual OEM customers. If any of the material authorizations or approvals qualifying us to supply our products is revoked or suspended, then the sale of the subject product would be prohibited by law, which would have an adverse effect on our business, financial condition, and results of operations.

 

From time to time, the FAA or equivalent regulatory agencies in other countries propose new regulations or changes to existing regulations, which are usually more stringent than existing regulations. If these proposed regulations are adopted and enacted, we may incur significant additional costs to achieve compliance, which could have a material adverse effect on our business, financial condition, and results of operations.

 

Cancellations, reductions, or delays in customer orders may adversely affect our results of operations.

 

Our overall operating results are affected by many factors, including the timing of orders from large customers and the timing of expenditures to manufacture parts and purchase inventory in anticipation of future sales of products and services. A large portion of our operating expenses are relatively fixed. Cancellations, reductions, or delays in customer orders could have a material adverse effect on our business, financial condition, and results of operations.

 

Our backlog is subject to reduction and cancellation at any time without notice, which could negatively impact our future revenues and results of operations.

 

Backlog represents products or services that our customers have committed by contract to purchase from us. Backlog as of March 31, 2011 was $131,151. Backlog is subject to fluctuations and is not necessarily indicative of future sales. The U.S. Government may unilaterally modify or cancel its contracts with us. In addition, under certain of our commercial contracts, our customers may unilaterally modify or terminate their orders at any time for their convenience. Accordingly, certain portions of our backlog can be cancelled or reduced at the option of the U.S. Government and commercial customers. Our failure to replace cancelled or reduced backlog could negatively impact our revenues and results of operations.

 

We are subject to competition from entities which could have a substantial impact on our business.

 

We compete in some markets with entities that are larger and have substantially greater financial and technical resources than us. Generally, competitive factors include design capabilities, product performance, delivery, and price. Our ability to compete successfully in such markets will depend on our ability to develop and apply technological innovations and to expand our customer base and product lines. In addition, the development and application of technological innovations may mandate an expenditure of significant capital which may not be recovered through future sales of products or services. There can be no assurance that we will continue to successfully compete in any or all of the businesses discussed above. Our failure to compete successfully or to invest in technology where there is no recovery through product sales could have a materially adverse effect on our profitability.

 

Our potential tax benefits from net operating loss carry forwards are subject to a number of risks.

 

We have federal and state net operating loss carry forwards (“NOLs”) of approximately $15,335 and $4,462, respectively. Our 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. If we do not generate adequate taxable earnings, some or all of our net operating loss carry forwards may not be realized. Additionally, changes to the federal and state income tax laws also could impact its ability to use the NOLs. In such cases, we may need to

revise the valuation allowance established related to deferred tax assets for state purposes. The risks to realizing the tax benefit from NOLs are discussed in additional detail in Note 5 of our financial statement contained elsewhere in this report.

 

We are subject to liability under environmental laws.

 

Our business and facilities are subject to numerous federal, state, and local laws and regulations relating to the use, manufacture, storage, handling, and disposal of hazardous materials and other waste products. Environmental laws generally impose liability for investigation, remediation, and removal of hazardous materials and other waste products on property owners and those who dispose of materials at waste sites whether or not the waste was disposed of legally at the time in question. We are currently addressing environmental remediation at certain former facilities, and we have been named as a potentially responsible party along with other organizations in a number of environmental clean-up sites and may be named in connection with future sites. We are required to contribute to the costs of the investigation and remediation and have taken reserves in our financial statements for future costs deemed probable and estimable for these costs. Although we have estimated and reserved for future environmental investigation and remediation costs, the final resolution of these liabilities may significantly vary from our estimates and could potentially have an adverse effect on our results of operations and financial position. Our contingencies associated with environmental matters are described in Note 13 of “Notes to Consolidated Financial Statements” which is included elsewhere in this Report.

 

Our sales to foreign countries expose us to risks and adverse changes in local legal, tax, and regulatory schemes.

 

In Fiscal 2011, 37% of our consolidated sales were to customers outside the United States. We expect international export sales to continue to contribute to our earnings for the foreseeable future. The export sales are subject in varying degrees to risks inherent in doing business outside the United States. Such risks include, without limitation:

 

 

Government regulations could limit our ability to sell our products outside the United States and otherwise adversely affect our business.

 

In Fiscal 2011, approximately 20% of our sales were subject to compliance with the United States Export Administration regulations. Our failure to obtain the requisite licenses, meet registration standards or comply with other government export regulations would hinder our ability to generate revenues from the sale of our products outside the United States. Compliance with these government regulations may also subject us to additional fees and operating costs. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position. In order to sell our products in European Union countries, we must satisfy certain technical requirements. If we are unable to comply with those requirements with respect to a significant quantity of our products, our sales in Europe would be restricted. Doing business internationally also subjects us to numerous U.S. and foreign laws and regulations, including, without limitation, regulations relating to import-export control, technology transfer restrictions, foreign corrupt practices and anti-boycott provisions. Failure by us or our sales representatives or consultants to comply with these laws and regulations could result in administrative, civil or criminal liabilities and could, in the extreme case, result in suspension or debarment from government contracts or suspension of our export privileges, which would have a material adverse effect on us.

 

While we believe our control systems are effective, there are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected.

 

We continue to take action to assure compliance with the internal controls, disclosure controls, and other requirements of the Sarbanes-Oxley Act of 2002. Our management, including our Chief Executive Officer and Chief

Financial Officer, cannot guarantee that our internal controls and disclosure controls will prevent all possible errors or all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

 

The terms of our credit agreement may restrict our current and future operating and financial flexibility.

 

The credit agreement that is in effect with respect to our debt includes covenants that, among other things, restrict our ability to:

 

 

Our credit agreement also contains covenants that require us to:

 

 

We may be unable to comply with the covenants under our credit agreement in the future. A failure to comply with the covenants under our credit agreement could result in an event of default. In the event of a default our lender could elect to declare all borrowings, accrued and unpaid interest and other fees outstanding, due and payable, and require us to apply all of our available cash to repay these borrowings.

 

We are subject to financing and interest rate exposure risks that could adversely affect our business and operating results.

 

Changes in the availability, terms and cost of capital, increases in interest rates or a reduction in credit rating could cause the cost of doing business to increase, limit the ability to fund the development of products, and place us at a competitive disadvantage. The current contraction in credit markets could impact our ability to finance our operations.

Our operations are conducted at a single location.

 

The risk that substantial impairment of our facility as a consequence of a natural disaster or other event could have a material adverse effect on operations.

 

We depend on component availability, subcontractor performance, and key suppliers to manufacture and deliver our products and services.

 

We are dependent upon the delivery of component parts by suppliers and, to some extent, the assembly of components and subsystems used by us in manufacturing our products in a timely and satisfactory manner and to remain in full compliance with applicable terms and conditions. We are generally subject to specific procurement requirements, which may, in effect, limit the suppliers and subcontractors we may utilize. In some instances, we are dependent on sole-source suppliers. If any of these suppliers or subcontractors fails to meet our needs, the development of alternatives could cause delays in meeting the customer requirements. While we may enter into long-term or volume purchase agreements with certain suppliers and take other actions to ensure the availability of needed materials, components and subsystems, we cannot be sure that such items will be available in the quantities we require, if at all. If we experience a material supplier or subcontractor problem, the ability to satisfactorily and timely meet customer obligations could be negatively impacted, which could result in reduced sales, termination of contracts, and damage to our reputation and customer relationships. We could also incur additional costs in addressing such a problem. Any of these events could have a negative impact on our results of operations and financial condition.

 

Our operating results and financial condition may be adversely impacted by the current worldwide economic conditions.

 

We currently generate operating cash flows, which combined with access to the credit markets, provides discretionary funding capacity. However, current uncertainty in the global economic conditions resulting from the recent disruption in credit markets poses a risk to the overall economy that could impact consumer and customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers, and creditors. If the current economic situation deteriorates significantly, our business could be negatively impacted, including such areas as reduced demand for our products from a slow-down in the general economy, or supplier or customer disruptions resulting from tighter credit markets.

 

Our future growth and continued success is dependent upon retaining key employees.

 

Our success is dependent upon the efforts of our senior management personnel and our ability to attract and retain other highly qualified management personnel. We face competition for management from other companies and organizations, and therefore may not be able to retain our existing management personnel or fill new management positions or vacancies created by expansion or turnover at existing compensation levels. We have entered into change of control agreements with some members of senior management and have made efforts to reduce the effect of the loss of senior management personnel through management succession planning. The loss of senior managers could have a material and adverse effect on our business. In addition, competition for qualified technical personnel in our industry is intense, and management believes that our future growth and success will depend upon the ability to attract, train, and retain such personnel.

 

Our profitability could be negatively affected if we fail to maintain satisfactory labor relations.

 

Approximately 30% of our workforce is employed under a collective bargaining agreement with the United Auto Workers (UAW), which from time to time is subject to renewal and negotiation. Although we have historically enjoyed satisfactory relations with both our unionized and non-unionized employees, if we are subject to labor actions, we may experience an adverse impact on our operating results.

 

Our failure to adequately protect our intellectual property could have an adverse effect on our business.

 

Intellectual property is important to our success. We rely upon confidentiality procedures and contractual provisions to protect our business and proprietary technology. Our general policy is to enter into confidentiality agreements with our employees and consultants, and nondisclosure agreements with all other parties to whom we

disclose confidential information. We may apply for legal protection for certain of our other intellectual property in the future. These patents, trademarks and any additional legal protection we may obtain in the future may be challenged by others or invalidated through administrative process or litigation. As a result, our means of protecting our proprietary technology and brands may be inadequate. Furthermore, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property. Any such infringement or misappropriation could have a material adverse effect on our business, financial condition and results of operations.

 

We use estimates when competing for contracts. Variances between actual and estimates could affect our profitability and overall financial position.

 

The competitive bidding process requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues and costs at completion is complicated and subject to many variables. For example, assumptions have to be made regarding the length of time to complete the contract because costs also include expected increases in wages and prices for materials. Similarly, assumptions have to be made regarding the future impact of efficiency initiatives and cost reduction efforts. Incentives, awards, price escalations, or penalties related to performance on contracts are considered in estimating revenue and profit rates and are recorded when there is sufficient information to assess anticipated performance. Because of the significance of the judgments and estimation processes described above, it is possible that materially different amounts could be obtained if different assumptions were used or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances, or estimates may have a material adverse effect upon future period financial reporting and performance.

 

Risks Related to our Common Stock

 

Our common stock is thinly traded and subject to volatility.

 

Although our common stock is traded on the NYSE Amex (formerly American Stock Exchange), it may remain relatively illiquid, or “thinly traded,” which can increase volatility in the share price and make it difficult for investors to buy or sell shares in the public market without materially affecting the quoted share price. Further, investors seeking to buy or sell a certain quantity of our shares in the public market may be unable to do so within one or more trading days. If limited trading in our stock continues, it may be difficult for holders to sell their shares in the public market at any given time at prevailing prices.

 

The prevailing market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including the following:

 

 

Our share ownership is highly concentrated.

 

Our directors, officers, and principal stockholders, and certain of their affiliates, beneficially own approximately 64% of our common stock and will continue to have significant influence over the outcome of all matters submitted to the stockholders for approval, including the election of our directors.

We do not anticipate paying dividends in the foreseeable future.

 

Any payment of cash dividends in the future will depend upon our earnings (if any), financial condition and capital requirements. We do not have any plans at this time to pay dividends in the foreseeable future. Accordingly, any potential investor who anticipates the need for current dividends from its investment should not purchase any of our securities.

 

 

None.

 

 

The following table sets forth certain information concerning our sole operating principal facility as of March 31, 2011:

 

 

In February, 2008, we sold our headquarters and manufacturing facility located in Union, New Jersey. The sale agreement and amended lease agreement permitted us to lease the facility through May 1, 2010, pending our relocation to a new site. In May, 2009, we executed a 10-year lease, at market terms, for a facility in Whippany, New Jersey, which is better suited to our current and expected future needs. We completed our relocation to the Whippany site in the first quarter of Fiscal 2011 and no longer maintain a facility in Union, New Jersey.

 

Our current business has only been conducted at our previous Union, New Jersey and current Whippany, New Jersey facilities. The properties in Pennsylvania, New York, and New Jersey were operated by one or more of our predecessor affiliates or parent company, TransTechnology Corporation. Our contingencies associated with environmental liabilities are discussed in Note 13 of “Notes to Consolidated Financial Statements” contained elsewhere in this report.

 

We also own properties in Saltzberg, Pennsylvania and Irvington, New Jersey that are carried on the books at zero value and are not used in operations.

 

We also own a property in Glen Head, New York which is not used in our operations and is subject to a sale agreement at a price of $4,000. This property is carried on our books as an asset held for sale for $3,800 which includes estimated disposal costs. Closing on the property is subject to the buyer receiving development approvals and us completing environmental obligations and reviews. The buyer has indicated to us its intent to build residential housing on the property and has been engaged in the lengthy process of securing the municipal approvals necessary to redevelop this industrial site for residential purposes.

 

 

We are engaged in various other legal proceedings incidental to our business. Our management believes that these matters will have no material effect on the Company’s consolidated financial position or the results of operations or cash flows in future periods.

 

We are subject to federal and state requirements for protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. As a result, we are a party to or have our former property subject to various lawsuits or proceedings involving environmental protection matters. Due in part to their complexity and pervasiveness, such requirements have resulted in us being involved with related legal proceedings, claims, and remediation obligations. The extent of our financial exposure cannot in all cases be reasonably estimated at this time. For information regarding these matters, including current estimates of the amounts that we believe are required for remediation or clean-up to the extent estimable, see Note 13 of our financial statements contained elsewhere in this report.

 

 

 

Our common stock, par value $0.01, is listed for trading on the NYSE Amex (formerly American Stock Exchange) under the trading symbol BZC. The following table sets forth the range of high and low sale prices of our common stock for the periods indicated.

 

 

Holders

 

As of May 2, 2011, the number of stockholders of record of the Company’s common stock was 1,339. On May 2, 2011, the closing sales price of a share of common stock was $8.45 per share.

 

Dividends

 

We have not paid any cash dividends on our common stock since Fiscal 2001. We currently intend to retain earnings, if any, to fund our operations and reduce debt. The payment of future cash dividends, if any, will be reviewed periodically by our Board of Directors and will depend upon the results of operations, financial condition, contractual and legal restrictions and other factors the board of directors deem relevant.

Stock Performance Graph

 

The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates such information by reference into such filing.

 

This stock performance graph compares the Company’s total cumulative stockholder return on its common stock during the period from April 1, 2006 through March 31, 2011, with the cumulative return on a Peer Issuer Group Index. The peer group consists of the companies identified below, which were selected on the basis of the similar nature of their business. The graph assumes that $100 was invested on April 1, 2006.

 

Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
March 2011

 

 

 

Companies in our Peer Group include Curtiss-Wright Corp., Ducommun Inc., HEICO Corp., Ladish Co. Inc., Moog Inc., SIFCO Industries Inc., and Triumph Group, Inc.

 

The following table sets forth selected financial data for each of the five years in the period ended March 31, 2011 (amounts in thousands, except per share amounts). This financial data should be read together with our consolidated financial statements and related notes, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other financial data appearing elsewhere in this report.

 

 

 

This Management’s Discussion and Analysis of Financial Condition And Results of Operation and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the caption “Risk Factors” beginning on page 6 of this report and elsewhere herein. The following should be read in conjunction with our annual financial statements, including the notes thereto, contained elsewhere in this report. All references to years in this Management’s Discussion and Analysis of Financial Condition and Results of Operations refer to the fiscal year ended March 31 of the indicated year unless otherwise specified.

 

OVERVIEW

 

We design, develop, manufacture, sell, and service sophisticated engineered mission equipment for specialty aerospace and defense applications. With over 50% of the global market, we have long been recognized as the world’s 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 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 new manufacturing and assembly facility in Whippany, New Jersey. Our new facility 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.

 

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.

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of our consolidated financial statements is in conformity with accounting principles generally accepted in the United States of America and requires us to make estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent that there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected. We believe the following critical accounting policies are affected by significant estimates, assumptions, and judgments used in the preparation of our consolidated financial statements.

 

Inventory.  We purchase parts and materials to assemble and manufacture components for use in our products and for use by our engineering and repair and overhaul departments. The decision to purchase a set quantity of a particular material is influenced by several factors including current and projected cost, future estimated availability, production lead time, existing and projected contracts to produce certain items, and the estimated needs for our overhaul and repair business.

 

We value inventories using the lower of cost or market on a first-in, first-out (FIFO) basis. We reduce the carrying amount of these inventories to net realizable value based on our assessment of inventory that is considered excess or obsolete based on the backlog of sales orders and historical usage. Since all of our products are produced to meet specific customer requirements, the reserve focus is on purchased and manufactured parts. Inventories are discussed further in Notes 1 and 2 of “Notes to Consolidated Financial Statements” contained elsewhere in this report.

 

Revenue Recognition.  Revenue related to equipment sales is recognized when title and risk of loss have been transferred, collectability is reasonably assured, and pricing is fixed or determinable. Revenue related to repair and overhaul sales is recognized when the related repairs or overhaul are complete and the unit is shipped to the

customer. Revenue related to contracts in which we are reimbursed for costs incurred plus an agreed upon profit are recorded as costs are incurred.

 

Environmental Reserves.  We provide for a best estimate of environmental liability reserves when, after consultation with internal and external counsel and other environmental consultants, we determine that a liability is both probable and estimable. In many cases, we do not fix or cap the liability for a particular site when first recorded. Factors that affect the recorded amount of the liability in future years include our participation percentage due to a settlement by, or bankruptcy of, other potentially responsible parties, a change in the environmental laws resulting in more stringent requirements, a change in the estimate of future costs that will be incurred to remediate the site, and changes in technology related to environmental remediation. Current estimated exposures related to environmental claims are discussed further in Note 13 of our “Notes to Consolidated Financial Statements” contained elsewhere in this report.

 

Deferred Tax Asset.  See Note 5 of “Notes to Consolidated Financial Statements” contained elsewhere in this report.

 

Stock-Based Compensation.  See Note 9 of “Notes to Consolidated Financial Statements” contained elsewhere in this report.

 

RESULTS OF OPERATIONS

 

Fiscal 2011 Compared with Fiscal 2010

 

 

Net Sales.  Net sales of $78,200 in Fiscal 2011 grew by $9,173, or 13.3%, from net sales of $69,027 in Fiscal 2010. Fiscal 2011 product sales of $58,086 were $8,467, or 17.1%, above the prior year primarily due to increased spare parts sales of $8,514 resulting primarily from higher demand by the U.S. military and from increased sales to a Canadian third-party overhaul and repair center. New equipment volume was approximately equal to the prior year.

 

Fiscal 2011 services sales of $20,114 were $706, or 3.6%, above the prior year primarily due to overhaul and repair services increasing by $959, partly offset by lower engineering services.

 

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 2010 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.

 

Cost of Sales.  Cost of sales for products of $33,434 was 0.9% lower than the prior year primarily due to the prior-year increase in estimated inventory obsolescence reserves of $3,311, partly offset by increased volume in

Fiscal 2011. Cost of services provided of $13,814 was 5.6% lower than the prior year because the prior-year amount included $784 to accrue for estimated losses on engineering contracts, partly offset by increased volume in Fiscal 2011.

 

Our factory relocation in March 2010 resulted in a manufacturing ramp-up period early in the Fiscal 2011 first quarter. This resulted in under-absorbed manufacturing overhead, which for the full year was $1,039, with approximately 40% in products and 60% in services.

 

Gross profit.  Gross profit of $30,952 in Fiscal 2011 was 49.9% above $20,651 in Fiscal 2010. As a percent of sales, gross profit was 39.6% for Fiscal 2011 compared with 29.9% for Fiscal 2010. The dollar increase is due to higher sales volume as well as to $5,634 of cost adjustments incurred in the prior year. The increase as a percent of sales is due to a favorable mix of greater spare parts sales and to the prior-year cost adjustments.

 

The prior-year cost adjustments consisted of $3,311 (non-cash) for a change in estimate of the inventory obsolescence reserve, $1,539 of under-absorbed manufacturing overhead related to the relocation, and $784 (non-cash) to accrue for estimated losses on engineering contracts. Excluding these adjustments, gross profit as a percent of sales would have been 38.1% in Fiscal 2010.

 

In Fiscal 2011, the under-absorbed manufacturing overhead of $1,039, related primarily to carryover effects of the relocation, reduced gross profit as a percent of sales by 1.3% points. Gross profit as a percent of sales in Fiscal 2011 would have been 40.9% excluding under-absorbed manufacturing overhead.

 

Operating Expenses.  Total operating expenses were $21,495, or 27.5% of sales, in Fiscal 2011 compared with $27,374, or 39.7% of sales, in the prior year. The decrease is primarily due to a non-cash charge for estimated environmental liability reserves of $8,135 in Fiscal 2010, partly offset by increases in selling, general, and administrative (SG&A) expenses and engineering costs as well as lower relocation costs. Excluding the environmental charge in Fiscal 2010, operating expenses in Fiscal 2010 would have been $19,239, or 27.9% of sales.

 

SG&A expenses were $14,361 in Fiscal 2011 versus $20,554 in Fiscal 2010. Fiscal 2010 SG&A would have been $12,418 excluding the environmental charge, and the comparable increase in Fiscal 2011 is due to higher incentive compensation accruals based on the plan formula, outside consulting costs, and amortization related to the relocation.

 

Engineering expenses were $6,923 in Fiscal 2011 compared with $6,004 in Fiscal 2010. The increase is primarily due to product development for the Airbus A400M and was reduced by $734 in expense reimbursement from Airbus.

 

We relocated our headquarters and factory during the Fiscal 2010 fourth quarter and incurred $211 of expenses related to the move in Fiscal 2011, compared with $817 in Fiscal 2010.

 

Interest Expense.  Interest expense was $694 in Fiscal 2011, versus $891 in Fiscal 2010. The decline in interest expense is due to $6,572 lower total debt.

 

Net Income/(Loss).  Net income in Fiscal 2011 was $5,026, or $0.53 per diluted share, an increase of $11,069 versus a net loss of $6,043, or ($0.64) per diluted share, in Fiscal 2010. In Fiscal 2010, excluding the adjustments in gross profit of $5,634 and in SG&A of $8,135 discussed above, net income would have been $2,324, or $0.25 per diluted share, and the increase in Fiscal 2011 would have been $2,702, or $0.28 per diluted share.

 

The net income increase to $5,026 in Fiscal 2011, compared with the adjusted $2,324 in Fiscal 2010 is due to the increased sales volume and favorable product mix which improved gross profit and lower interest expenses, partly offset by higher operating expenses.

 

New Orders.  New product and services orders received during Fiscal 2011 totaled $79,207, an increase of $11,024 over $68,183 during Fiscal 2010. Most of this increase was due to spare parts with increases also coming from overhaul and repair and engineering. Orders for new equipment decreased by $560. Significant orders in Fiscal 2011 included $9,500 U.S. Military hoists and winches; $3,764 to upgrade the reactive overload clutch for the U.S. Coast Guard, $3,500 cargo hooks for Boeing’s Chinook helicopter, $2,280 for Lockheed Martin’s HIMARS or High Mobility Artillery Rocket System and $1,940 for Alenia’s C-27J fixed wing cargo aircraft.

New orders for services in overhaul and repair grew by $2,261 due to orders received from the U.S. Military. New orders for engineering increased by $1,061 due to weapons handling.

 

Backlog.  Backlog at March 31, 2010 was $131,151 compared with $130,144 at March 31, 2010 as new orders exceeded shipments by $1,007. Significant new orders are discussed in “New Orders.” The backlog at March 31, 2011 and 2010 includes approximately $71,343 and $69,463, 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 $43,516 at March 31, 2011 is scheduled for shipment during Fiscal 2012.

 

The book-to-bill ratio is computed by dividing the new orders received during a period by the sales for the same period. 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.

 

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 1.0 for Fiscal 2011 and Fiscal 2010.

 

Fiscal 2010 Compared with Fiscal 2009

 

 

Net Sales.  Net sales of $69,027 in Fiscal 2010 decreased by $6,400, or 8.5%, from net sales of $75,427 in Fiscal 2009. Fiscal 2010 product sales of $49,619 were $4,288, or 8.0%, lower than the prior year primarily due to lower spare parts sales of $3,415 resulting primarily from lower demand by the U.S. military and also due to lower new equipment volume of $873. Reduced spare parts demand from the U.S. military continued during Fiscal 2010 because of U.S. Government spending priorities of funding the war in Iraq and Afghanistan.

 

Fiscal 2010 services sales of $19,408 were $2,112, or 9.8%, lower than the prior year primarily due to engineering services. Engineering services were lower by $1,582 because the prior year contained a large contract to design and develop a recovery winch for the U.S. Army under the Future Combat Systems (FCS) program. The U.S. Army subsequently cancelled the FCS program in the Fiscal 2010 second quarter. Overhaul and repair sales were lower than last year by $530 due to reduced volume.

Our relocation in the Fiscal fourth quarter reduced new equipment and overhaul and repair volume because the factory was shut down during most of March 2010 for the relocation.

 

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 2010 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.

 

Cost of Sales.  Cost of sales for products of $33,740 was 9.6% higher than the prior year primarily due to the increase in estimated inventory obsolescence reserves of $3,311, partly offset by lower volume from the relocation. Cost of services provided of $14,636 was 0.6% higher than the prior year because the current-year amount included $784 to accrue for estimated losses on engineering contracts.

 

Gross profit.  Gross profit of $20,651 in Fiscal 2010 was 31.4% lower than the $30,090 in Fiscal 2009. As a percent of sales, gross profit was 29.9% for Fiscal 2010 compared with 39.9% for Fiscal 2009. The decrease is primarily due to lower sales volume in spare parts and engineering as well as the relocation (discussed in Net Sales above) and due to $5,634 in adjustments consisting of $3,311 (non-cash) for a change in estimate of the inventory obsolescence reserve, $1,539 of unabsorbed manufacturing overhead related to the relocation, and $784 (non-cash) to accrue for estimated losses on engineering contracts. Excluding these adjustments, gross profit as a percent of sales would have been 38.1% which is lower than the prior year due to lower new product profitability resulting from an unfavorable shift in mix and lower profit on engineering contracts, partly offset by higher margins on spare parts.

 

Operating Expenses.  Total operating expenses were $27,374, or 39.7% of sales, in Fiscal 2010 compared with $18,737, or 24.8% of sales, in the prior year. The increase is primarily due to a non-cash charge for estimated environmental liability reserves of $8,135. Excluding the environmental charge, operating expenses Fiscal 2010 would have been $19,239, or 27.9% of sales, and increased by $502. SG&A expenses were $20,554 in Fiscal 2010 versus $12,312 in Fiscal 2009. Fiscal 2010 SG&A would have been $12,418 excluding the environmental charge, an increase of $106. The small increase in operating expenses and SG&A represents cost-reduction initiatives taken in the second quarter of Fiscal 2010. Engineering expenses were $6,004 in Fiscal 2010 compared with $6,425 in Fiscal 2009, and reflect new product development for awarded aerospace platforms.

 

We relocated our headquarters and factory during the Fiscal 2010 fourth quarter and incurred $817 of expenses related to the move.

 

Interest Expense.  Interest expense was $891 in Fiscal 2010, versus $1,462 in Fiscal 2009. The decline in interest expense is due to $3,285 lower total debt and to lower interest rates.

 

Net Income/(Loss).  We reported a net loss of $6,043, or $0.64 per diluted share, in Fiscal 2010 compared with net income of $5,760, or $0.61 per diluted share in Fiscal 2009. Fiscal 2009 included a pretax charge of $551 related to refinancing our debt. In Fiscal 2010 excluding the adjustments in gross profit of $5,634 and in SG&A of $8,135 discussed above, net income would have been $2,324, or $0.25 per diluted share. This decrease in net income resulted from the lower sales volume and gross profit, partly offset by lower SG&A expenses discussed above.

 

New Orders.  New product and services orders received during Fiscal 2010 totaled $68,183 compared with $82,123 during Fiscal 2009. Most of this decrease was due to new equipment, partly offset by growth in overhaul and repair. Orders for new equipment decreased by $16,682, or 31.2%, primarily due to the comparison with large orders booked in Fiscal 2009 and to customers deferring expected releases resulting from their difficulty in getting funding approved. New equipment orders in Fiscal 2010 included $5,676 for Agusta’s A109 and AW139 helicopters, $2,442 for Alenia’s C-27J fixed wing cargo aircraft, and $3,883 for Lockheed Martin’s HIMARS or High Mobility Artillery Rocket System. New orders for spare parts were even with the prior year. Spare parts demand continued at a reduced level during Fiscal 2010 due to U.S. military procurement prioritization of funding the wars in Iraq and Afghanistan.

 

New orders for services in overhaul and repair grew by $2,762 due to orders received from the U.S. Navy. New orders for engineering were also even with prior year.

Backlog.  Backlog at March 31, 2010 was $130,144 compared with $130,988 at March 31, 2009 as new orders and shipments remained relatively constant. Significant new orders are discussed in “New Orders.” The backlog at March 31, 2010 and 2009 includes approximately $69,463 and $67,235, 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 $36,000 at March 31, 2010 is scheduled for shipment during Fiscal 2011.

 

The book-to-bill ratio is computed by dividing the new orders received during a period by the sales for the same period. 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.

 

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 1.0 for Fiscal 2010 and 1.1 for Fiscal 2009.

 

Liquidity and Capital Resources

 

During Fiscal 2011, our operating cash flow was strong and we were accumulating cash. With the current low interest rates producing negligible interest income, we accelerated our term-loan payments. We made four term-loan pre-payments totaling $3,286; thus our next required term-loan payment is due April 1, 2012. Accordingly, we show zero current debt on our balance sheet.

 

Also, as a result of our strong cash generation, our net debt, defined as total debt less cash, decreased by $9,582 to $5,119 at March 31, 2011 from $14,701 at March 31, 2010.

 

Our principal sources of liquidity are cash on hand, cash generated from operations, and the 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.

 

During the second quarter of Fiscal 2009, we refinanced and paid in full our Former Senior Credit Facility with a new 60-month, $33,000 Senior Credit Facility consisting of a $10,000 revolving line of credit (“Revolver”) and term loans totaling $23,000. The Senior Credit Facility is secured by all of our assets and accrues interest at either the “Base Rate” (as defined) or the London Interbank Offered Rate (“LIBOR”) plus applicable margins based on our leverage ratio (as defined) for the most recent four quarters and is calculated at each quarter end. At March 31, 2011, the term loan balance was $11,500, there were no outstanding Revolver borrowings, there were $452 in outstanding (standby) letters of credit, and $9,548 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 6 of our financial statements included elsewhere herein. At March 31, 2011, and throughout Fiscal 2011, we were in compliance with all covenant provisions of the Senior Credit Facility.

 

Working Capital

 

Working capital at March 31, 2011 was $32,376 an increase of $7,188, versus $25,188 at March 31, 2010. Excluding increased cash of $3,010, working capital increased by $4,178 while sales increased by 13.3%. The ratio of current assets to current liabilities was 3.1:1.0 at March 31, 2011, compared with 2.7:1.0 at the beginning of Fiscal 2011. The working capital increase resulted primarily from a $3,010 increase in cash, a $2,614 decrease in inventory, a $1,689 increase in deferred income taxes, a $3,286 decrease in current portion of long-term debt, a $2,463 increase in accounts payable, and a $2,140 net decrease in other working capital items. Partly offsetting

these amounts was a $6,420 increase in accounts receivable. Our relocation and operations shutdown at the end of Fiscal 2010 resulted in a temporary dip in accounts receivable at March 31, 2010.

 

The accounts receivable days outstanding decreased to 62.7 days at March 31, 2011, from 74.0 days at March 31, 2010 as we collected over $3 million of past due accounts. Inventory turnover increased to 3.6 turns in Fiscal 2011 versus 3.1 turns in Fiscal 2010. The accounts receivables and inventory figures are based on the Fiscal year fourth quarter.

 

Capital Expenditures

 

Fiscal 2011 and Fiscal 2010 capital expenditures-operations were $787 and $438, respectively, and capitalized relocation expenditures in Fiscal 2011 were ($72), which includes a build-out credit of $233 received, and were $6,208, in Fiscal 2010. Fiscal 2011 and Fiscal 2010 capitalized project costs for engineering were $807 and $1,043, respectively.

 

Senior Credit Facility

 

The Senior Credit Facility is discussed in Note 6 of the “Notes to Consolidated Financial Statements” contained elsewhere in this report.

 

Interest Rate Swap

 

The Interest Rate Swap is discussed in Note 6 of the “Notes to Consolidated Financial Statements” contained elsewhere in this report.

 

Former Senior Credit Facility

 

The Former Senior Credit Facility is discussed in Note 6 of the “Notes to Consolidated Financial Statements” contained elsewhere in this report.

 

TAX BENEFITS FROM NET OPERATING LOSSES

 

The Tax Benefits from Net Operating Losses is discussed in Note 5 of the “Notes to Consolidated Financial Statements” contained elsewhere in this report.

 

CONTRACTUAL OBLIGATIONS

 

The following table summarizes our contractual obligations in future fiscal years:

 

 

 

 

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 Consolidated Financial Statements” contained elsewhere in this report.

 

Litigation — Litigation is discussed in Note 13 of the “Notes to Consolidated Financial Statements” contained elsewhere in this report.

 

RECENTLY ISSUED ACCOUNTING STANDARDS

 

The recent accounting pronouncements are discussed in Note 1 of the “Notes to Consolidated Financial Statements” contained elsewhere in this report.

 

 

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 swap’s 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, in Fiscal 2010.

 

At March 31, 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 $63 based on the debt outstanding under the facility at March 31, 2011.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

To the Audit Committee of the Board of Directors and Stockholders of

Breeze-Eastern Corporation

 

We have audited the accompanying consolidated balance sheets of Breeze-Eastern Corporation and subsidiaries as of March 31, 2011 and 2010, and the related statements of consolidated operations, stockholders’ equity and cash flows for the years then ended. Our audits also included the financial statement schedule as of and for the years ended March 31, 2011 and 2010 included on page 54. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Breeze-Eastern Corporation and subsidiaries as of March 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole presents fairly, in all material aspects, the information set forth therein.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Breeze-Eastern Corporation’s internal control over financial reporting as of March 31, 2011, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated, June 3, 2011, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

Bala Cynwyd, Pennsylvania

June 3, 2011

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Audit Committee of the Board of Directors and Stockholders of

Breeze-Eastern Corporation

 

We have audited the accompanying statements of consolidated operations, stockholders’ equity and cash flows of Breeze-Eastern Corporation and subsidiaries for the year ended March 31, 2009. Our audit also included the financial statement schedule as of and for the year ended March 31, 2009 included on page 54. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations, stockholder’s equity and cash flows of Breeze-Eastern Corporation and subsidiaries for the year ended March 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole presents fairly, in all material aspects, the information set forth therein.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Breeze-Eastern Corporation’s internal control over financial reporting as of March 31, 2009, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 1, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

Bala Cynwyd, Pennsylvania

May 1, 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING

 

To the Audit Committee of the Board of Directors and Stockholders of

Breeze-Eastern Corporation

 

We have audited Breeze-Eastern Corporation’s (the “Company”) internal control over financial reporting as of March 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Breeze-Eastern Corporation maintained, in all material aspects, effective internal control over financial reporting as of March 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of March 31, 2011 and 2010, and the related statements of consolidated operations, stockholders’ equity, and cash flows and the related financial statement schedule for the years then ended of the Company, and our report dated June 3, 2011 expressed an unqualified opinion on those financial statements and the related financial statement schedule.

 

 

Bala Cynwyd, Pennsylvania

June 3, 2011

 

 

See notes to consolidated financial statements.

 

 

See notes to consolidated financial statements.

 

 

 

See notes to consolidated financial statements.

 

 

See notes to consolidated financial statements.

Notes To Consolidated Financial Statements

 

 

Business — Breeze-Eastern Corporation (the “Company”) has one manufacturing facility located in the United States, and it designs, develops, manufactures, sells, and services a complete line of sophisticated lifting and restraining products, principally mission-critical helicopter rescue hoist and cargo hook systems, winches, and hoists for aircraft and weapons systems.

 

The Company has a fiscal year ending March 31. Accordingly, all references to years in the Notes to Consolidated Financial Statements refer to the fiscal year ended March 31 of the indicated year unless otherwise specified.

 

Reclassifications — The classifications of certain prior period items in the consolidated balance sheets, statements of consolidated operations, and statements of consolidated cash flows, have been changed to conform to the classification used in the current period. These reclassifications had no effect on total net income or retained earnings as previously reported.

 

Use of Estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates, judgments, and assumptions. The Company believes that the estimates, judgments, and assumptions upon which it relies are reasonable based upon the information available to the Company at the time they are made. These estimates, judgments, and assumptions are based on historical experience and information that is available to management about current events and actions the Company may take in the future. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. Significant items subject to estimates and assumptions include the carrying value of long-lived assets; valuation allowances for receivables, inventories, and deferred tax assets; environmental liabilities; litigation contingencies; and obligations related to employee benefit plans. To the extent there are material differences between these estimates, judgments, and assumptions and actual results, the Company’s financial statements will be affected.

 

Principles of Consolidation — The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany balances and transactions are eliminated in consolidation. The consolidated financial statements include seven inactive subsidiaries which include TTERUSA, Inc., TT Connecticut Corporation, Rancho TransTechnology Corporation, Retainers, Inc., SSP Industries, TransTechnology International Corporation, and TransTechnology Germany GmbH.

 

Revenue Recognition — Revenue related to equipment sales is recognized when title and risk of loss have been transferred, collectability is reasonably assured, and pricing is fixed or determinable. Revenue related to repair and overhaul sales is recognized when the related repairs or overhaul are complete and the unit is shipped to the customer. Revenue related to contracts in which the Company is reimbursed for costs incurred plus an agreed upon profit are recorded as costs are incurred.

 

Cash — Cash includes all cash balances and highly liquid short-term investments which mature within three months of purchase. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts, and believes it is not exposed to any significant credit risk with cash.

 

Allowance for doubtful accounts — The allowance for doubtful accounts is based on our assessment of the collectability of customer accounts. The allowance is determined by considering factors such as historical experience, credit quality, age of the accounts receivable balances and current economic conditions that may affect a customer’s ability to pay.

 

Inventories — Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Cost includes material, labor, and manufacturing overhead costs.

Notes To Consolidated Financial Statements — (Continued)

 

Capitalized Qualification units — Capitalized project costs are production prototypes that are used for the aerospace qualification testing that is required for the product to become certified for use on an aircraft. These costs are charged to expense over the expected future shipments of the qualified product.

 

Property and Related Depreciation — Property is recorded at cost. Provisions for depreciation are made on a straight-line basis over the estimated useful lives of depreciable assets. Depreciation expense for the years ended March 31, 2011, 2010, and 2009 was $1,910, $1,587, and $1,359, respectively.

 

Average useful lives for property are as follows:

 

 

The Company classified as real estate held for sale on the consolidated balance sheets a property currently under sales contract owned in Glen Head, New York. 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 which the Company reduced by $200 in the fourth quarter of Fiscal 2010. See Note 13 for a discussion of environmental matters related to this site.

 

Environmental Reserve — The Company provides for a best estimate of environmental liability reserves upon a determination that a liability is both probable and estimable. In many cases, The Company does not fix or cap the liability for a particular site when first recorded. Factors that affect the recorded amount of the liability in future years include our participation percentage due to a settlement by, or bankruptcy of, other potentially responsible parties, a change in the environmental laws, a change in the estimate of future costs that will be incurred to remediate the site, and changes in technology related to environmental remediation.

 

Earnings (Loss) Per Share (“EPS”) — The computation of basic earnings (loss) per share is based on the weighted-average number of common shares outstanding during the period. The computation of diluted earnings per share assumes the foregoing and, in addition, the exercise of all dilutive stock options using the treasury stock method. The diluted loss per share is computed using the same weighted-average number of shares as the basic earnings (loss) per share computation.

 

The components of the denominator for basic earnings (loss) per common share and diluted earnings (loss) per common share are reconciled as follows:

 

 

During the years ended March 31, 2011, 2010 and 2009, options to purchase 320,620 shares, 443,465 shares and 237,333 shares of common stock, respectively, were not included in the computation of diluted EPS because the options exercise prices were greater than the average market price of the common shares.

Notes To Consolidated Financial Statements — (Continued)

 

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 years ended March 31, 2010 and 2011 are summarized as follows:

 

 

Research, Development, and Engineering Costs — Research and development costs, which are charged to SG&A expense when incurred, amounted to $1,347, $1,848, and $1,689 for the years ended March 31, 2011, 2010, and 2009, respectively.

 

Shipping and Handling Costs — Costs for shipping and handling incurred by the Company for third party shippers are included in general, administrative and selling expense. These expenses for the years ended March 31, 2011, 2010 and 2009 were $173, $145, and $156, respectively.

 

Income Taxes — The Company applies guidance issued by Financial Accounting Standards Board (“FASB”), codified as Accounting Standards Codification (“ASC”) 740, “Income Taxes”. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. The Company periodically assesses recoverability of deferred tax assets and provisions for valuation allowances are made as required.

 

The Company adopted guidance issued by FASB, codified as ASC 740, formerly FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes”, on April 1, 2007, that required recognizing the financial statement benefit of a tax position only after determining that the relevant tax authority more-likely-than-not would sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

 

Financial Instruments — The Company does not hold or issue financial instruments for trading purposes.

 

Stock-Based Compensation — See Note 9.

 

Impairment of Goodwill and Other Long-Lived Assets — Long-lived assets and certain identifiable intangibles to be held and used are reviewed by the Company for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment reviews for goodwill are performed by comparing the fair value to the reported carrying amount. If the carrying amount exceeds fair value, an impairment loss is recognized. Fair value is determined using quoted market prices when available or present value techniques. At March 31, 2011, the Company tested its goodwill for impairment and determined that it did not have an impairment.

 

New Accounting Standards — In March 2010, the FASB issued ASU No. 2010-17, Revenue Recognition — Milestone Method (Topic 605): Milestone Method of Revenue Recognition.  This standard provides that the milestone method is a valid application of the proportional performance model for revenue recognition if the milestones are substantive and there is substantive uncertainty about whether the milestones will be achieved. Determining whether a milestone is substantive requires judgment that should be made at the inception of the

Notes To Consolidated Financial Statements — (Continued)

 

arrangement. To meet the definition of a substantive milestone, the consideration earned by achieving the milestone (1) would have to be commensurate with either the level of effort required to achieve the milestone or the enhancement in the value of the item delivered, (2) would have to relate solely to past performance, and (3) should be reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement. The new standard is effective for interim and annual periods beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows.

 

In July 2010, the FASB issued ASU 2010-20, which amends ASC 310 by requiring more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The objective of enhancing these disclosures is to improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The guidance is effective for the first reporting period beginning after December 15, 2010. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows.

 

 

Inventories at March 31 consisted of the following:

 

 

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.

 

Schedule II, Consolidated Valuation and Qualifying Accounts, shows changes in inventory reserves. In the fourth quarter of Fiscal 2010, the Company reviewed its inventory and identified approximately $2,198 of items that would cost more to relocate and restock than their current or projected future market value. These items were physically scrapped before the end of Fiscal 2010. Because this amount was higher than expected, the Company reassessed the methodology previously used for estimating inventory obsolescence and determined that a modification was warranted. The previous method for estimating inventory obsolescence was based on estimates of future potential usage. Including the $2,198 amount above, the change in methodology resulted in a non-cash adjustment to increase the inventory reserves by $3,311 during the fourth quarter of Fiscal 2010. The total amount of the inventory reserve change for Fiscal 2010 was $3,533 which included increases to the inventory reserve in earlier quarters.

Notes To Consolidated Financial Statements — (Continued)

 

 

Other assets at March 31 consisted of the following:

 

 

 

 

 

Other current liabilities at March 31 consisted of the following:

 

 

 

The provision for income taxes is summarized below:

 

 

The consolidated effective tax rates differ from the federal statutory rates as follows: