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EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - BREEZE-EASTERN CORPd458631dex321.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - BREEZE-EASTERN CORPd458631dex311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - BREEZE-EASTERN CORPd458631dex312.htm

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 1-7872

 

 

BREEZE-EASTERN CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   95-4062211

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification no.)

35 Melanie Lane

Whippany, New Jersey

  07981
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (973) 602-1001

 

 

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

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  x    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of January 18, 2013, the total number of outstanding shares of common stock was 9,522,526.

 

 

 


INDEX

 

         Page
No.
 
PART 1  

Financial Information

  
Item 1.  

Condensed Consolidated Financial Statements (Unaudited)

     3   
 

Condensed Consolidated Balance Sheets December 31, 2012 (Unaudited) and March 31, 2012

     4   
 

Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended December 31, 2012 and December 31, 2011 (Unaudited)

     5   
 

Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended December 31, 2012 and December 31, 2011 (Unaudited)

     6   
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

     7 - 18   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     19 - 27   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     28   
Item 4.  

Controls and Procedures

     29   
PART II.  

Other Information

  
Item 1.  

Legal Proceedings

     29   
Item 1A.  

Risk Factors

     29   
Item 6.  

Exhibits

     29   
SIGNATURES        30   
EXHIBITS     

 

2


PART I. FINANCIAL INFORMATION

 

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The results reflected in the unaudited Condensed Consolidated Statements of Operations for the three and nine month periods ended December 31, 2012 are not necessarily indicative of the results to be expected for the entire fiscal year. The following unaudited Condensed Consolidated Financial Statements should be read in conjunction with the notes thereto, Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2 of Part I of this report, as well as the audited financial statements and related notes thereto contained in the Breeze-Eastern Corporation (the “Company”) Annual Report on Form 10-K filed for the fiscal year ended March 31, 2012, as filed with the Securities and Exchange Commission (“SEC”) on June 12, 2012.

When the Company refers to its fiscal year in this Quarterly Report on Form 10-Q, the Company is referring to the fiscal year ended on March 31st of that year. Thus, the Company is currently operating in its fiscal year 2013, which commenced on April 1, 2012. Unless the context expressly indicates a contrary intention, all references to years in this filing are to the Company’s fiscal years. Figures in this Quarterly Report on Form 10-Q are in thousands, except for share amounts or where expressly noted.

[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

 

3


BREEZE-EASTERN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars, Except Share Data)

 

ASSETS

   (Unaudited)
December 31,  2012
    (Audited)
March 31,  2012
 

CURRENT ASSETS:

    

Cash

   $ 9,833      $ 12,683   

Accounts receivable (net of allowance for doubtful accounts of $288 at December 31, 2012 and $283 at March 31, 2012)

     10,004        19,403   

Inventories

     20,783        14,631   

Prepaid expenses and other current assets

     1,814        759   

Deferred income taxes

     6,339        8,861   
  

 

 

   

 

 

 

Total current assets

     48,773        56,337   
  

 

 

   

 

 

 

PROPERTY:

    

Property and equipment

     18,577        18,312   

Less accumulated depreciation and amortization

     11,725        10,692   
  

 

 

   

 

 

 

Property – net

     6,852        7,620   
  

 

 

   

 

 

 

OTHER ASSETS:

    

Deferred income taxes, net

     5,238        4,567   

Goodwill

     402        402   

Real estate held for sale

     3,800        3,800   

Qualification units-net

     1,591        1,775   

Other

     5,851        5,350   
  

 

 

   

 

 

 

Total other assets

     16,882        15,894   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 72,507      $ 79,851   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

CURRENT LIABILITIES:

    

Revolving credit facility

   $ —        $ —     

Current portion of long-term debt

     —          2,464   

Accounts payable – trade

     5,497        5,779   

Accrued compensation

     3,292        2,967   

Accrued income taxes

     214        343   

Other current liabilities

     5,993        4,979   
  

 

 

   

 

 

 

Total current liabilities

     14,996        16,532   
  

 

 

   

 

 

 

LONG-TERM DEBT, NET OF CURRENT PORTION

     —          8,215   
  

 

 

   

 

 

 

OTHER LONG-TERM LIABILITIES

     15,807        16,952   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 14)

     —          —     
  

 

 

   

 

 

 

TOTAL LIABILITIES

     30,803        41,699   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Preferred stock – authorized, 300,000 shares; none issued

     —          —     

Common stock – authorized, 100,000,000 shares of $.01 par value; issued, 9,966,204 at December 31, 2012 and 9,916,855 at March 31, 2012

     99        99   

Additional paid-in capital

     96,790        96,019   

Accumulated deficit

     (48,140     (51,061

Accumulated other comprehensive loss

     (74     (74
  

 

 

   

 

 

 
     48,675        44,983   

Less treasury stock, at cost – 443,678 shares at December 31, 2012 and 426,704 shares at March 31, 2012

     (6,971     (6,831
  

 

 

   

 

 

 

Total stockholders’ equity

     41,704        38,152   
  

 

 

   

 

 

 

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY

   $ 72,507      $ 79,851   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

4


BREEZE-EASTERN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In Thousands of Dollars, Except Share and Per Share Data)

 

     Three Months Ended      Nine Months Ended  
     December 31,
2012
     December 31,
2011
     December 31,
2012
     December 31,
2011
 

Net sales

   $ 20,170       $ 19,599       $ 58,004       $ 55,727   

Cost of sales

     11,540         11,644         34,034         32,429   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     8,630         7,955         23,970         23,298   

Selling, general, and administrative expenses

     3,910         3,883         10,945         11,638   

Engineering expense

     1,733         2,127         7,713         6,475   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     2,987         1,945         5,312         5,185   

Interest expense

     17         80         209         316   

Other expense – net

     22         39         68         89   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before incomes taxes

     2,948         1,826         5,035         4,780   

Income tax provision

     1,239         767         2,115         2,008   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 1,709       $ 1,059       $ 2,920       $ 2,772   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share:

           

Basic net income per share

   $ 0.18       $ 0.11       $ 0.31       $ 0.29   

Diluted net income per share

     0.18         0.11         0.31         0.29   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average basic shares outstanding

     9,518,000         9,489,000         9,503,000         9,468,000   

Weighted-average diluted shares outstanding

     9,592,000         9,598,000         9,563,000         9,597,000   

See notes to condensed consolidated financial statements.

 

5


BREEZE-EASTERN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In Thousands of Dollars)

 

     Nine Months Ended  
     December 31, 2012     December 31, 2011  

Cash flows from operating activities:

    

Net income

   $ 2,920      $ 2,772   

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

    

Write-off of engineering project development qualification units

     111        —     

Depreciation and amortization

     1,113        1,135   

Non-cash reserve accretion

     299        317   

Stock based compensation

     609        535   

Provision for losses on accounts receivable

     13        16   

Deferred taxes-net

     1,851        1,924   

Changes in assets and liabilities:

    

Decrease in accounts receivable and other receivables

     9,386        2,700   

Increase in inventories

     (6,152     (5,832

(Increase) decrease in other assets

     (1,563     496   

(Decrease) increase in accounts payable

     (282     634   

Increase (decrease) in accrued compensation

     306        (91

(Decrease) increase in accrued income taxes

     (129     19   

Decrease in other liabilities

     (429     (346
  

 

 

   

 

 

 

Net cash provided by operating activities

     8,053        4,279   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (265     (627

Capitalized qualification units

     —          (1,638
  

 

 

   

 

 

 

Net cash used in investing activities

     (265     (2,265
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Payments on long-term debt

     (10,679     (821

Net borrowings (repayments) of other debt

     —          —     

Exercise of stock options

     41        194   
  

 

 

   

 

 

 

Net cash used in financing activities

     (10,638     (627
  

 

 

   

 

 

 

(Decrease) increase in cash

     (2,850     1,387   

Cash at beginning of period

     12,683        6,381   
  

 

 

   

 

 

 

Cash at end of period

   $ 9,833      $ 7,768   
  

 

 

   

 

 

 

Supplemental information:

    

Interest payments

   $ 83      $ 253   

Income tax payments

     460        171   

Non-cash financing activity for stock option exercise

     122        82   

See notes to condensed consolidated financial statements.

 

6


Notes To Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

 

NOTE 1. Financial Presentation

The unaudited, Condensed Consolidated Balance Sheet, Condensed Consolidated Statements of Operations, and Condensed Consolidated Statements of Cash Flows are of Breeze-Eastern Corporation and its consolidated subsidiaries (collectively, the “Company”). These reports reflect all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods reflected therein. Certain prior year amounts may have been reclassified to conform to the current period presentation.

 

NOTE 2. Earnings (Loss) Per Share

The computation of basic earnings 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 as well as the exercise of all dilutive stock options using the treasury stock method. The diluted earnings per share is computed using the same weighted-average number of shares as the basic earnings per share computation.

The components of the denominator for basic earnings per common share and diluted earnings per common share are reconciled as follows.

 

     Three Months Ended      Nine Months Ended  
     December 31,
2012
     December 31,
2011
     December 31,
2012
     December 31,
2011
 

Basic Earnings per Common Share:

           

Weighted-average common shares outstanding for basic earnings per share calculation

     9,518,000         9,489,000         9,503,000         9,468,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Earnings per Common Share:

           

Weighted-average common shares outstanding

     9,518,000         9,489,000         9,503,000         9,468,000   

Stock options (a)

     74,000         109,000         60,000         129,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding for diluted earnings per share calculation

     9,592,000         9,598,000         9,563,000         9,597,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) During the three and nine month periods ended December 31, 2012, options to purchase 727,000 and 735,000 shares of common stock, respectively, and during the three and nine month periods ended December 31, 2011, options to purchase 376,000 and 264,000 shares of common stock, respectively, were not included in the computation of diluted earnings per share because the exercise prices of these options were greater than the average market price of the common share.

 

NOTE 3. Stock-Based Compensation

The Company follows guidance provided by Accounting Standards Codification (“ASC”) 718, “Accounting for Stock-Based Compensation”. Compensation cost is recognized for all awards granted and modified based on the grant date fair value of the awards. Net income for the three and nine month periods ended December 31, 2012, includes stock-based compensation expense of $84 net of tax, or $0.01 per diluted share, and $353 net of tax, or $0.04 per diluted share, respectively. Net income for the three and nine month periods ended December 31, 2011, includes stock-based compensation expense of $121 net of tax, or $0.01 per diluted share, and $311 net of tax, or $0.03 per diluted share, respectively. Stock based compensation expense is included in selling, general and administrative expenses. Additional compensation cost will be recognized as new restricted stock grants are awarded.

 

7


Notes To Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

 

The Company maintains the 1999 Long-Term Incentive Plan (the “1999 Plan”), the 2004 Long-Term Incentive Plan (the “2004 Plan”), the 2006 Long-Term Incentive Plan (the “2006 Plan”), and the 2012 Incentive Compensation Plan (the “2012 Plan”).

Under the terms of the 2012 Plan, 750,000 shares of the Company’s common stock may be granted as stock options or awarded as restricted stock to officers, non-employee directors, certain employees, and other key individuals of the Company through October 2022. Under the terms of the 2006 Plan, 500,000 shares of the Company’s common stock may be granted as stock options or awarded as restricted stock to officers, non-employee directors, and certain employees of the Company through July 2016. Under the terms of the 2004 Plan, 200,000 shares of the Company’s common stock may be granted as stock options or awarded as restricted stock to officers, non-employee directors, and certain employees of the Company through September 2014. The 1999 Plan expired in July 2009, and no further grants or awards may be made under this plan. Under the 1999 Plan, unexercised options granted in fiscal years 2004, 2006, 2007 and 2008 remain outstanding.

Under each of the 1999, 2004, 2006, and 2012 Plans, option exercise prices equal the fair market value of the common shares at their respective grant dates. Prior to May 1999, options granted to officers and employees and all options granted to non-employee directors expired if not exercised on or before five years after the date of the grant. Beginning in May 1999, options granted to officers and employees expire no later than 10 years after the date of the grant. Options granted to directors, officers, and employees vest ratably over three years beginning one year after the date of the grant. In certain circumstances, including a change of control of the Company (as defined in the various Plans), option vesting may be accelerated.

The Company entered into an employment agreement with Brad Pedersen, President and Chief Executive Officer of the Company, effective May 22, 2012, and granted Mr. Pedersen a stock option to purchase 400,000 shares of common stock at an exercise price equal to the stock price of $8.10 on that date. This stock option was reported in the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 22, 2012.

The Black-Scholes option-pricing model uses dividend yield, volatility, risk-free rate, expected term, and forfeiture assumptions to value stock options and was used to value 61,000 options granted in fiscal 2013 and all of the options granted in fiscal 2012. The Black-Scholes weighted-average value at each grant date per option granted in fiscal 2013 was $3.02 and $3.05 and was $2.75, $2.58, $2.72, $2.81, and $2.13 in fiscal 2012. Expected volatilities are based on historical volatility of the Company’s common stock and other factors, and the risk-free rate for periods within the option’s contractual life is based on the U.S. Treasury yield curve at the time of the grant. The Company uses historical data to estimate the expected option term and assumed no forfeitures because of the limited number of employees at the executive and senior management levels who receive stock options, past employment history, and current stock price projections. The Company used the following assumptions to estimate the fair value of option grants under the Black-Scholes method:

 

     2013
$3.02
value
per
option
    2013
$3.05
value
per
option
    2012
$2.75
value
per
option
    2012
$2.58
value
per
option
    2012
$2.72
value
per
option
    2012
$2.81
value
per
option
    2012
$2.13
value
per
option
 

Dividend yield

     0.0     0.0     0.0     0.0     0.0     0.0     0.0

Volatility

     35.5     34.0     25.6     25.8     25.8     25.4     25.3

Risk-free interest rate

     1.2     1.2     1.5     1.6     1.6     1.9     1.9

Expected term of options (in years)

     7.0       7.0       7.0       7.0       7.0       7.0       7.0  

The remaining 350,000 options granted in fiscal 2013 had a weighted-average value per option of $1.86 at the grant date. This valuation used a Monte Carlo simulation because the option vesting was based on service and market conditions. Expected volatilities are based on the historical volatility of the Company’s common stock and other factors and the risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The Company uses the option contractual life for the expected option term and assumes a forfeiture rate using historical data for Company officers who receive stock options. The Company used the following assumptions to estimate the fair value of option grants under the Monte Carlo simulation:

 

     2013 $1.86
value per
option
 

Dividend yield

     0.0

Volatility

     34.0

Risk-free interest rate

     1.8

Expected term of options (in years)

     10.0   

Forfeiture adjustment

     0.2

Suboptimal behavior factor

     1.9   

 

8


Notes To Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

 

The following table summarizes stock option activity under all plans and other grants authorized by the Board of Directors.

 

     Number
of Shares
    Aggregate
Intrinsic
Value
(in
thousands)
     Approximate
Remaining
Contractual
Term
(Years)
     Weighted-
Average
Exercise
Price
 

Outstanding at March 31, 2012

     759,577     $ 800         7       $ 8.17   

Granted

     411,000       —           10         8.09   

Exercised

     (25,415     162         —           6.39   

Canceled or expired

     (32,001     —           —           8.55   
  

 

 

         

Outstanding at December 31, 2012

     1,113,161       740         7         8.17   
  

 

 

         

Options exercisable at December 31, 2012

     607,159       625         6         8.20   

Unvested options expected to become exercisable after December 31, 2012

     506,002       114         9         8.14   

Shares available for future option grants at December 31, 2012 (a)

     641,357          

 

(a) May be decreased by restricted stock grants.

Cash received from stock option exercises during the first nine months of fiscal 2013 was approximately $41. In lieu of a cash payment for stock option exercises, the Company received 14,739 shares of common stock, which were retired into treasury, valued at the price of the common stock at the transaction date. The aggregate intrinsic value of options exercised during the first nine months of fiscal 2013 was approximately $35. The intrinsic value of stock options is the amount by which the market price of the stock on the date of exercise exceeded the market price of stock on the date of grant. There was no tax benefit generated to the Company from options granted prior to April 1, 2006 and exercised during fiscal 2013.

During the first nine months of fiscal 2013 and fiscal 2012, stock option compensation expense recorded in selling, general and administrative expenses was $468 and $237, respectively, before taxes of $196 and $99, respectively. As of December 31, 2012, there was $762 of unrecognized compensation cost related to stock options granted-but-not-yet-vested that are expected to become exercisable. This cost is expected to be recognized over a weighted-average period of approximately three years.

Except as otherwise authorized by the Board of Directors, it is the general policy of the Company that the stock underlying the option grants consists of authorized and unissued shares available for distribution under the applicable Plans. Under the 1999, 2004, 2006 and 2012 Plans, the Incentive and Compensation Committee of the Board of Directors (made up of independent directors) may at any time offer to repurchase a stock option that is exercisable and has not expired.

 

9


Notes To Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

 

A summary of restricted stock award activity under all plans follows.

 

     Number
of Shares
    Weighted –
Average
Grant Date

Fair Value
 

Non-vested at March 31, 2012

     21,094     $ 8.54   

Granted

     23,934       7.52   

Vested

     (20,903     8.56   

Cancelled

     —          —     
  

 

 

   

Non-vested at December 31, 2012

     24,125       7.51   
  

 

 

   

Restricted stock awards are utilized both for director compensation and awards to officers and employees, and are distributed in a single grant of shares which are subject to forfeiture prior to vesting and have voting and dividend rights from the date of issuance. Other than the restricted stock granted in fiscal 2012 and the first nine months of fiscal 2013, outstanding restricted stock awards to officers and employees have forfeiture and transfer restrictions that lapse ratably over three years beginning one year after the date of the award. Restricted stock awards granted to officers and employees in fiscal 2012 contain forfeiture and transfer restrictions that lapse after six months.

Restricted stock awards granted to non-employee directors prior to fiscal 2012 contain forfeiture provisions that lapse after one year and transfer restrictions that lapse six months after the person ceases to be a director. In certain circumstances, including a change of control of the Company as defined in the various Plans, forfeiture lapses on restricted stock may be accelerated.

The fair value of restricted stock awards is based on the market price of the stock at the grant date and compensation cost is amortized to expense on a straight-line basis over the requisite service period as stated above. The Company expects no forfeitures during the vesting period with respect to unvested restricted stock awards granted. During the first nine months of fiscal 2013 and fiscal 2012, compensation expense related to restricted stock awards recorded in selling, general and administrative expenses was $141 and $299, respectively, before taxes of $59 and $125, respectively. As of December 31, 2012, there was approximately $181 of unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a period of less than one year.

 

NOTE 4. Inventories

Inventories are summarized as follows:

 

     December 31,
2012
    March 31,
2012
 

Finished goods

   $ 494      $ 512   

Work in process

     8,618        6,340   

Purchased and manufactured parts

     14,710        10,473   
  

 

 

   

 

 

 
     23,822        17,325   

Reserve for slow moving and obsolescence

     (3,039     (2,694
  

 

 

   

 

 

 

Total

   $ 20,783      $ 14,631   
  

 

 

   

 

 

 

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 have the potential to eventually be scrapped. Accordingly, the Company uses these two factors in determining the amount of the reserve.

 

10


Notes To Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

 

NOTE 5. Property, Equipment, and Related Depreciation

Property and equipment are recorded at cost, and equipment is depreciated on a straight-line basis over its estimated economic useful life. Leasehold improvements are depreciated using the shorter of the estimated economic useful life or the term of the lease. Depreciation expense for the three and nine month periods ended December 31, 2012 was $350 and $1,033, respectively, and for the three and nine month periods ended December 31, 2011 was $358 and $1,051, respectively.

The estimated useful lives for property are as follows:

 

Machinery and equipment

   3 to 10 years

Furniture and fixtures

   3 to 10 years

Computer hardware and software

   3 to 5 years

Leasehold improvements

   10 years

The Company classified as real estate held for sale on the condensed consolidated balance sheets a property owned in Glen Head, New York that is currently under sales contract. The sale of the property is expected to be concluded upon completion of municipal approvals and soil remediation pursuant to the remediation plan approved by the New York Department of Environmental Conservation. The net sale proceeds are expected to be $3,800. See Note 14 for a discussion of environmental matters related to this site.

 

NOTE 6. Product Warranty

Equipment has a one year warranty for which a reserve is established using historical averages and specific program contingencies when considered necessary. Changes in the carrying amount of accrued product warranty costs for the nine month period ended December 31, 2012 are summarized as follows:

 

Balance at March 31, 2012

   $ 318   

Warranty costs incurred

     (170

Change in estimates to pre-existing warranties

     (9

Product warranty accrual

     208   
  

 

 

 

Balance at December 31, 2012

   $ 347   
  

 

 

 

 

NOTE 7. Other Current Liabilities

Other current liabilities consists of the following:

 

     December 31,
2012
     March 31,
2012
 

Engineering project reserves

   $ 1,881       $ 1,637   

Environmental reserves – Note 14

     1,706         1,225   

Accrued medical benefits cost

     938         636   

Accrued commissions

     591         630   

Other

     877         851   
  

 

 

    

 

 

 

Total

   $ 5,993       $ 4,979   
  

 

 

    

 

 

 

 

11


Notes To Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

 

NOTE 8. Income Taxes

Income taxes for the nine month period ended December 31, 2012 was computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management.

At December 31, 2012, the Company has federal net operating loss carry forwards, or NOLs, of approximately $2,583, which are due to expire in fiscal 2030. These NOLs may be used to offset future taxable income through their respective expiration dates and thereby reduce or eliminate our federal income taxes otherwise payable. A valuation allowance of $265 was established in a prior year relating to other items, as it is management’s belief that it is more likely than not that a portion of this deferred asset is not realizable.

At December 31, 2012, the current deferred tax assets are $6,339, and non-current deferred tax assets are $5,238. If the Company does not generate adequate taxable earnings, some or all of our deferred tax assets may not be realized. Additionally, changes to the federal and state income tax laws also could impact our ability to use the NOLs. In such cases, the Company may need to revise the valuation allowance established related to deferred tax assets for federal and state purposes.

The Internal Revenue Code of 1986, as amended (the “Code”), imposes significant limitations on the utilization of NOLs in the event of an “ownership change” as defined under section 382 of the Code (the “Section 382 Limitation”). The Section 382 Limitation is an annual limitation on the amount of pre-ownership NOLs that a corporation may use to offset its post-ownership change income. The Section 382 Limitation is calculated by multiplying the value of a corporation’s stock immediately before an ownership change by the long-term tax-exempt rate (as published by the Internal Revenue Service). Generally, an ownership change occurs with respect to a corporation if the aggregate increase in the percentage of stock ownership by value of that corporation by one or more 5% shareholders (including specified groups of shareholders who, in the aggregate, own at least 5% of that corporation’s stock) exceeds 50 percentage points over a three-year testing period. The Company believes that it has not gone through an ownership change over the most recent three-year testing period that would cause the Company’s NOLs to be subject to the Section 382 Limitation. However, given the Company’s current ownership structure, the creation of one or more new 5% shareholders could result in the Company’s NOLs being subject to the Section 382 Limitation.

At December 31, 2012, the Company had no unrecognized tax benefits for uncertain tax positions.

 

NOTE 9. Long-Term Debt Payable to Banks

Long-term debt, including current maturities, consists of the following:

 

     December 31, 2012      March 31, 2012  

Senior Credit Facility

   $  —        $ 10,679  

Less current maturities

     —          2,464  
  

 

 

    

 

 

 

Total long-term debt, net of current maturities

   $  —        $ 8,215  
  

 

 

    

 

 

 

Senior Credit Facility - The Company has a 60-month, $33,000 senior credit facility consisting of a $10,000 revolving line of credit (the “Revolver”) and, at the inception of the credit agreement in August 2008, a term loan totaling $23,000 (the “Senior Credit Facility”). The term loan had quarterly principal payments of $821 over the life of the loan and $6,571 due at maturity in August 2013. In June of 2012, the Company paid in full the term loan by pre-paying the total amount remaining of $10,679.

The Senior Credit Facility bears interest at either the “Base Rate” or the London Interbank Offered Rate (“LIBOR”) plus applicable margins based on the Company’s leverage ratio. The leverage ratio is equal to consolidated total debt divided by consolidated EBITDA (the sum of net income, depreciation, amortization, other non-cash charges and credits to net income, interest expense, and income tax expense minus charges related to debt refinancing) for the most recent four quarters and is calculated at each quarter end. The Base Rate is the higher of the Prime Rate or the Federal Funds Open Rate plus 0.50%. The applicable margins for the Base Rate based borrowings are between 0% and 0.75%. The applicable margins for LIBOR-based borrowings are between 1.25% and 2.25%. During the first nine months of fiscal 2013, the Senior Credit Facility had a blended interest rate of approximately 1.5%, for debt of $10,500 tied to LIBOR and for debt of $179 tied to the Prime Rate before the

 

12


Notes To Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

 

term loan pre-payment of $10,679 discussed above. The Company also pays a commitment fee of 0.375% on the average daily unused portion of the Revolver. The Senior Credit Facility required the Company to enter into an interest rate swap through August 2011 (discussed below).

The Senior Credit Facility is secured by all of the Company’s assets and allows the Company to issue letters of credit against the total borrowing capacity of the facility. At December 31, 2012, there were no outstanding borrowings under the Revolver, $202 in outstanding (standby) letters of credit, and $9,798 in Revolver availability. The Senior Credit Facility contains certain financial covenants which require a minimum fixed charge coverage ratio that is not permitted to be less than 1.25 : 1.0 and a leverage ratio that is not permitted to be more than 2.5 : 1.0. The fixed charge coverage ratio is equal to consolidated EBITDA (as defined above) divided by fixed charges (the sum of cash interest expense, cash income taxes, dividends, cash environmental costs, scheduled principal installments on indebtedness adjusted for prepayments, capital expenditures, and payments under capitalized leases). The Company was permitted to exclude from fixed charges certain one-time capital expenditures of up to $5,500 related to the facility relocation in fiscal 2011. At December 31, 2012, the Company was in compliance with the covenant provisions of the Senior Credit Facility.

Interest Rate Swap - The Senior Credit Facility required the Company to enter into an interest rate swap for at least three years in an amount not less than 50% of the term loan for the first two years and 35% of the term loan for the third year. An interest rate swap, a type of derivative financial instrument, is used to minimize the effects of interest rate fluctuations on cash flows. The Company does not use derivatives for trading or speculative purposes. In September 2008, the Company entered into a three year interest rate swap to exchange floating rate for fixed rate interest payments on the term loan as required by the Company’s Senior Credit Facility. The swap’s net effect of the spread between the floating rate (30 day LIBOR) and the fixed rate (3.25%), was settled monthly, and was reflected as an adjustment to interest expense in the period incurred. The adjustment to record the swap at its fair value was included in accumulated other comprehensive loss, net of tax. The Company reduced its existing unrealized loss on the interest rate swap during the first three months of fiscal 2012. The interest rate swap expired in August 2011.

 

NOTE 10. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price). The accounting guidance includes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as follows:

 

   

Level 1 - Unadjusted quoted prices for identical assets or liabilities in active markets;

 

   

Level 2 - Inputs other than quoted prices in active markets for identical assets or liabilities that are observable whether directly or indirectly for substantially the full term of the asset or liability; and

 

   

Level 3 - Unobservable inputs for the asset or liability, which include management’s own assumptions about what the assumptions market participants would use in pricing the asset or liability, including assumptions about risk.

The carrying amount reported in the Condensed Consolidated Balance Sheets for cash, accounts receivable, accounts payable and accrued expenses approximates fair value because of the short-term maturity of those instruments. The carrying amount for borrowings under the revolving portion of the Senior Credit Facility, if applicable, would approximate fair value because of the variable market interest rate charged to the Company for these borrowings.

 

NOTE 11. Employee Benefit Plans

The Company has a defined contribution plan covering all eligible employees. Contributions are based on certain percentages of an employee’s eligible compensation. Expenses related to this plan were $222 and $632, respectively, for the three and nine month periods ended December 31, 2012 and $215 and $620, respectively, for the three and nine month periods ended December 31, 2011.

The Company provides postretirement benefits to certain union employees. The Company funds these benefits on a pay-as-you-go basis. The measurement date is March 31.

 

13


Notes To Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

 

In February 2002, the Company’s subsidiary, Seeger-Orbis GmbH & Co. OHG, now known as TransTechnology Germany GmbH (the “Selling Company”), sold its retaining ring business in Germany to Barnes Group Inc. (“Barnes”). German law prohibits the transfer of unfunded pension obligations which have vested for retired and former employees, so the legal responsibility for the pension plan that related to the business (the “Pension Plan”) remained with the Selling Company. At the time of the sale and subsequent to the sale, that pension liability was recorded based on the projected benefit obligation since future compensation levels will not affect the level of pension benefits. The relevant information for the Pension Plan is shown below under the caption Pension Plan. The measurement date is December 31. Barnes has entered into an agreement with the Company whereby Barnes is obligated to administer and discharge the pension obligation as well as indemnify and hold the Selling Company and the Company harmless from these pension obligations. Accordingly, the Company has recorded an asset equal to the benefit obligation for the Pension Plan of $3,178 and $3,207 as of December 31, 2012 and March 31, 2012, respectively. This asset is included in other long-term assets and it is restricted in use to satisfy the legal liability associated with the Pension Plan.

The net periodic pension cost is based on estimated values provided by independent actuaries. The following tables provide the components of the net periodic benefit cost.

 

                                                                                           
     Postretirement Benefits  
     Three Months Ended      Nine Months Ended  
     December 31,
2012
     December 31,
2011
     December 31,
2012
     December 31,
2011
 

Interest cost

   $ 8       $ 9       $ 25       $ 28   

Amortization of net (gain) loss

     1        4        5        11  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic cost

   $ 9       $ 13       $ 30       $ 39   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                                           
     Pension Plan  
     Three Months Ended      Nine Months Ended  
     December 31,
2012
     December 31,
2011
     December 31,
2012
     December 31,
2011
 

Interest cost

   $ 36       $ 40       $ 105       $ 125   

Amortization of net (gain) loss

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic cost

   $ 36       $ 40       $ 105       $ 125   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

NOTE 12. Concentration of Credit Risks of Financial Instruments

The Company is subject to concentration of credit risk primarily with its cash and trade receivables. At times, the Company maintains its cash in bank deposit accounts in excess of the FDIC insured amount, which effective January 1, 2013 is $250,000. The Company grants credit to certain customers who meet pre-established credit requirements, and generally requires no collateral from its customers. Estimates of potential credit losses are provided for in the Company’s condensed consolidated financial statements and are within management’s expectations. As of December 31, 2012, the Company had no other significant concentrations of credit risk.

 

NOTE 13. New Accounting Standards

In October 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-04, Technical Corrections and Improvements. In November 2010, the FASB Chairman added a standing project to the FASB’s agenda to address feedback received from stakeholders on the Codification and to make other incremental improvements to U.S. GAAP. This perpetual project will facilitate Codification updates for technical corrections, clarifications, and improvements, and should eliminate the need for periodic agenda requests for narrow and incremental items. These amendments are referred to as Technical Corrections and Improvements. This ASU also includes amendments that identify

 

14


Notes To Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

 

when the use of fair value should be linked to the definition of fair value in Topic 820, Fair Value Measurement, and contains conforming amendments to the Codification to reflect the measurement and disclosure requirements of Topic 820. These amendments are referred to as Conforming Amendments. In addition, this ASU deletes the second glossary definition of fair value that originated from AICPA Statement of Position 92-6, Accounting and Reporting by Health and Welfare Benefit Plans. The first definition originating from FASB Statement No. 123 (revised 2004), Share-Based Payment, and the third definition originating from FASB Statement No. 157, Fair Value Measurements, remain.

The Conforming Amendments to U.S. GAAP included in this ASU are generally non-substantive in nature. Many of the amendments conform wording to be consistent with the terminology in Topic 820 (e.g., revising market value and current market value to fair value, or mark-to-market to subsequently measure at fair value). The FASB does not anticipate that the amendments in this ASU will result in pervasive changes to current practice. However, certain amendments may result in a change to existing practice. For those amendments which the FASB deemed to be more substantive, transition guidance and a delayed effective date accompany them.

The amendments in this ASU that will not have transition guidance will be effective upon issuance. The amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. The adoption of this guidance is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.

 

NOTE 14. Contingencies and Legacy Environmental Commitments

Environmental Matters

The Company is involved in environmental proceedings and potential proceedings relating to soil and groundwater contamination and other environmental matters at several former facilities that were never required for its current operations. These facilities were part of businesses disposed of by TransTechnology Corporation, the former parent Company. Environmental cleanup activities usually span several years, which make estimating liabilities a matter of judgment because of various factors, including changing remediation technologies, assessments of the extent of contamination, and continually evolving regulatory environmental standards. The Company considers these and other factors as well as studies and reports by external environmental consultants to estimate the amount and timing of any future costs that may be required for remediation actions. The Company follows Accounting Standards Codification (“ASC”) 450, “Contingencies”, in recording and disclosing environmental liabilities and records a liability for its best estimate of remediation costs. Because the Company believes it has a more-definitive best estimate of the environmental liability, the Company does not calculate a range in accordance with ASC 450.

At December 31, 2012 and March 31, 2012 the aggregate environmental liability was $12,896 and $13,535, respectively, included in other current liabilities and other long term liabilities on the balance sheet, before cost-sharing of approximately $1,472 and $1,500 at December 31, 2012 and March 31, 2012, respectfully, that is classified mostly as a non-current asset.

In the first nine months of fiscal 2013 and fiscal 2012, the Company spent $939 and $778, respectively, on environmental costs, and for the entire fiscal 2012, the Company spent $1,177. The Company has a detailed plan to manage its environmental exposure for each of its properties. Based on this plan, the Company anticipates spending $1,225 on environmental matters in fiscal 2013. These costs will be charged against the environmental liability reserve and will not impact income. The Company performs quarterly reviews of its environmental sites and the related liabilities.

The Company continues to participate in environmental assessments and remediation work at nine locations, including certain former facilities. Due to the nature of environmental remediation and monitoring work, such activities can extend for up to 30 years, depending upon the nature of the work, the substances involved, and the regulatory requirements associated with each site. The Company does not discount the recorded liabilities.

Although the Company takes great care in developing these risk assessments and future cost estimates, the actual amount of remediation costs may be different from those estimated as a result of a number of factors including: changes to federal and state environmental regulations or laws; changes in local construction costs and the availability of personnel and materials; unforeseen remediation requirements that are not apparent until the work actually commences; and actual remediation expenses

 

15


Notes To Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

 

that differ from those estimated. The Company does not include any unasserted claims that it might have against others in determining its potential liability for such costs, and, except as noted with specific cost sharing arrangements, has no such arrangements, nor has it taken into consideration any future claims against insurance carriers that the Company may have in determining its environmental liabilities. In those situations where the Company is considered a de minimis participant in a remediation claim, the failure of the larger participants to meet their obligations could result in an increase in the Company’s liability at such a site.

There are a number of former operating facilities that the Company is monitoring or investigating for potential future remediation. In some cases, although a loss may be probable, it is not possible at this time to reasonably estimate the amount of any obligation for remediation activities because of uncertainties assessing the extent of the contamination or the applicable regulatory standard. The Company is also pursuing claims for contribution to site investigation and cleanup costs against other potentially responsible parties (PRPs), including the U.S. Government.

There are other properties that have a combined environmental liability of $3,937 at December 31, 2012. In addition, the Company had accrued $100 in estimated costs related to four environmental proceedings in which the Company had been named as a potentially responsible party. The Company deemed that its potential liabilities related to these matters are now resolved and does not anticipate any future costs.

Glen Head, New York

In the first quarter of fiscal 2003, the Company entered into a consent order for a former facility in Glen Head, New York, which is currently subject to a contract for sale, pursuant to which the Company developed a remediation plan for review and approval by the New York Department of Environmental Conservation (NYDEC). The Company was advised in fiscal 2010 that the NYDEC required additional offsite groundwater delineation studies. Based upon the characterization work performed to date and this latest request, the Company’s reserve is $3,299 for the Glen Head site at December 31, 2012. The amounts and timing of payments are subject to the approved remediation plan and additional discussions with NYDEC.

The property is classified as “held for sale” for $3,800 after allowing for certain costs. In July 2001, the Company entered into a sales contract for the Glen Head, New York property for $4,000. The property’s appraised value was $3,300 in July 2001 and was $4,200 in 2005, the date of the last appraisal. These appraisals did not reflect the Company’s estimated remediation costs.

Neither the consent order nor the remediation plan affect the buyer’s obligation to close under the sales contract. The contract does not include a price adjustment clause and, although there are conditions precedent to the buyer’s obligation to close, the contract does not allow for termination. Thus, the buyer cannot unilaterally terminate the contract without liability, a buy-out, or some other settlement negotiated with the Company. There is no set date for closing, and the Company must provide the buyer with a funded remediation plan and environmental insurance prior to the buyer’s obligation to close. The buyer indicated its intent to build residential housing on this former industrial site and has been engaged in the lengthy process of securing the necessary municipal approvals.

Saltzburg, Pennsylvania (“Federal Labs”)

The Company sold the business previously operated at the property owned in Saltzburg, Pennsylvania. The Company presented an environmental cleanup plan during the fourth quarter of fiscal 2000 for a portion of Federal Labs site pursuant to a consent order and agreement with the Pennsylvania Department of Environmental Protection (“PaDEP”) in fiscal 1999 (“1999 Consent Order”). PaDEP approved the plan during the third quarter of fiscal 2004, and the Company paid $200 for past costs, future oversight expenses, and in full settlement of claims made by PaDEP related to the environmental remediation of the site with an additional $200 paid subsequently.

The Company concluded a second consent order with PaDEP in the third quarter of fiscal 2001 for a second portion of the Federal Labs site (“2001 Consent Order”), and concluded a third Consent Order for the remainder of the Federal Labs site in the third quarter of fiscal 2003 (“2003 Consent Order”). The Company submitted an environmental cleanup plan for the portion of the Federal Labs site covered by the 2003 Consent Order during the second quarter of fiscal 2004.

 

16


Notes To Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

 

The Company is administering a settlement, concluded in the first quarter of fiscal 2000, under which the U.S. Government pays 50% of the ongoing direct and indirect environmental costs for the Fed Labs site subject to the 1999 Consent Order. The U.S. Government cost-sharing receivable is classified primarily as other assets on the balance sheet. The Company also concluded an agreement in the first quarter of fiscal 2006, under which the U.S. Government paid an amount equal to 45% of the estimated environmental response costs for the Federal Labs site subject to the 2001 Consent Order. No future payments are due under this second agreement.

The Company is currently party to a tolling agreement with the Federal Government with the remainder of the Federal Labs site while negotiating a cost-sharing arrangement subject to the 2003 Consent Order. There can be no assurance the Company will be successful in these negotiations or any litigation seeking to enforce its rights to contribution or indemnification from the Federal Government. The Company’s environmental liability reserves are not reduced for any potential cost-sharing payments.

At December 31, 2012, the environmental liability reserve at Federal Labs was $5,660. The Company expects that remediation at this site, which is subject to the oversight of the Pennsylvania authorities, will not be completed for several years, and that monitoring costs, although expected to be incurred over twenty years, could extend for up to thirty years.

Litigation

The Company is also engaged in various other legal proceedings incidental to its business. It is the opinion of management that, after taking into consideration information furnished by its counsel, these matters will have no material effect on the Company’s financial position or the results of operations or cash flows in future periods.

 

NOTE 15. Segment, Geographic Location, and Customer Information

Our products and related services aggregate into one reportable segment - sophisticated mission equipment for specialty aerospace and defense applications. The nature of the production process (assemble, inspect, and test) is similar for all products, as are the customers and distribution methods.

Net sales of 10% or more of total revenues were derived from two and three customers for the three and nine month periods ended December 31, 2012 respectively, and four customers for the three and nine month periods ended December 31, 2011 are summarized as follows.

 

     Three Months Ended     Nine Months Ended  
     December 31,
2012
    December 31,
2011
    December 31,
2012
    December 31,
2011
 

Customer A

     43     29     25     29

Customer B

     18        20        21        23   

Customer C

              13        13        12   

Customer D

              15                 12   

 

* Represents less than 10% of net sales.

 

17


Notes To Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

 

Net sales below show the geographic location of customers for the three and nine month periods ended December 31, 2012 and December 31, 2011:

 

     Three Months Ended      Nine Months Ended  

Location

   December 31,
2012
     December 31,
2011
     December 31,
2012
     December 31,
2011
 

United States

   $ 14,730       $ 11,659       $ 37,792       $ 36,000   

England

     1,230         880         3,798         3,773   

Italy

     966         2,038         4,594         3,483   

Other European countries

     1,117         766         3,037         2,155   

Pacific and Far East

     603         1,872         2,161         3,400   

Other international

     1,524         2,384         6,622         6,916   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,170       $ 19,599       $ 58,004       $ 55,727   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

NOTE 16. Subsequent Events

On January 14, 2013, the Company announced it had entered into an amendment to the Company’s shareholder rights plan (the “Rights Plan”) increasing the threshold by which the rights are triggered from 10% to 12.5%. The Rights Plan was adopted to ensure the fair treatment of all shareholders in connection with any take-over bid for the common stock of the Company. The Rights Plan seeks to provide shareholders with adequate time to properly assess a take-over bid without undue pressure. It also is intended to provide the Company’s Board of Directors with time to fully consider an unsolicited take-over bid and, if appropriate, to take requisite action to maximize shareholder value.

The amendment to the Rights Plan was unanimously approved by the Board of Directors. It was not adopted in response to any proposal to acquire control of the Company. The Board of Directors has deemed the amendment to be in the best interests of the Company because it enables stockholders to acquire up to 12.5% of the Company’s outstanding shares without meaningfully diminishing the protections of the Rights Plan. In the event that the Company’s risk of an adverse take-over bid increases in the future, the Company will assess whether further modifications to the Rights Plan are in the best interests of the Company.

Management has evaluated all events occurring through the date that the unaudited Condensed Consolidated Financial Statements have been issued, and has determined that all such events that are material to the unaudited Condensed Consolidated Financial Statements have been fully disclosed.

 

18


Management’s Discussion and Analysis of Financial Condition and Results of Operations

($ In Thousands Except Share Amounts)

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Unless otherwise indicated or the context otherwise requires, all references to the “Company,” the “registrant” “we,” “us” or “our” and similar terms in this report refer to Breeze-Eastern Corporation and its subsidiaries. All dollar amounts stated herein are in thousands except per share amounts. All references to years in this report refer to the fiscal year ended March 31 of the indicated year unless otherwise specified. This report reflects all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for fair presentation of the results of operations for the periods reflected. Certain prior fiscal year amounts may have been reclassified to conform to the current fiscal year presentation.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” – that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” or “will.” 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.

For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include: 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 United States (“U.S.”) defense budget, the failure of Congress to approve a budget or continuing resolution, the termination of any contracts with the U.S. Government, changes in our sales strategy and product development plans, changes in the marketplace, developments in environmental proceedings that we are involved in, continued services of our executive management team, competitive pricing pressures, security breaches, market acceptance of our products under development, delays in the development of products, changes in spending allocation or the termination, postponement, or failure to fund one or more significant contracts by the U.S. Government or other customers, determination by us to dispose of or acquire additional assets, events impacting the U.S. and world financial markets and economies; and such other factors that may be identified from time to time in our Securities and Exchange Commission (“SEC”) filings and other public announcements including those set forth under the caption “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended March 31, 2012.

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. Readers are cautioned not to place undue reliance on our forward-looking statements, as they speak only as of the date made. Except as required by law, we assume no duty to update or revise our forward-looking statements.

OVERVIEW

We design, develop, manufacture, sell, and service sophisticated engineered mission equipment for specialty aerospace and defense applications. We have long been recognized as a leading global designer, manufacturer, service provider, and supplier of mission-critical rescue hoists. We also manufacture weapons-handling systems, cargo winches, cargo hook systems and tie-down equipment. Our products are designed to be efficient and reliable in extreme operating conditions and are used to complete rescue operations and military insertion/extraction operations, move and transport cargo, and load weapons onto aircraft and ground-based launching systems.

Our business is affected by global economic and geo-political conditions. In particular, as the U.S. military activity in Iraq and Afghanistan is reduced, reductions and redirection of United States defense spending could have a material impact on revenues and earnings in future periods. Similarly, if European governments significantly reduce their military and other government spending, that could have a material impact on revenues and earnings in future periods. However, we believe that the primary missions that drive procurement and the use of our equipment (search and rescue, special operations, and cargo delivery) will continue to get a relatively high funding priority.

As our original equipment manufacturer (“OEM”) customers’ development timetables have been extended, we have experienced corresponding product development schedule slippage and increased investment. In May 2012 a customer informed us that the customer would seek an alternative solution for a product we were developing. We continue to provide

 

19


Management’s Discussion and Analysis of Financial Condition and Results of Operations

($ In Thousands Except Share Amounts)

 

other products and services to this customer. Other than this, we have not seen any program cancellations. Developing the Airbus A400M military transport aircraft has taken longer than was originally expected, but flight testing is now underway, and we expect revenues related to this project starting in calendar 2013. Our engineering expense is reported net of reimbursements from Airbus, and we anticipate gross engineering costs to continue at a high level.

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 rescue hoists and cargo hook systems. We also manufacture weapons handling systems, cargo winches, and tie-down equipment. These products are sold primarily to military and civilian agencies and aerospace contractors. Our emphasis is on the engineering, assembly, testing, service, and support of our products.

PRODUCTS AND SERVICES

Our products and related services aggregate into one reportable segment. The nature of the production process (assemble, inspect, and test), customers, and product distribution are similar for all products. We sell our products through internal marketing representatives and independent sales representatives and distributors.

Products

As a pioneer of helicopter rescue hoist technology, we continue to develop sophisticated helicopter hoist and winch systems, including systems for the current generation of Blackhawk, Seahawk, Osprey, Chinook, Ecureuil, Dolphin, Merlin/Cormorant, Super Stallion, Changhe Z-11, Agusta A109, Agusta A119 and AgustaWestland AW139 helicopters. We also design, market, sell and service a broad line of hydraulic and electric aircraft cargo winch systems with capacities from 900 pounds to over 7,000 pounds.

Our external cargo hook systems are original equipment on leading military medium and heavy lift helicopters. These hook systems range from smaller 1,000-pound capacity models up to the largest 36,000-pound capacity hooks employed on the Super Stallion helicopter. Our latest designs incorporate load sensing and display technology and automatic load release features. We also manufacture cargo and aircraft tie-downs which are included in this product line.

We make static-line retrieval and cargo winches for military cargo aircraft including the Boeing C-17, Alenia C-27J, and CASA CN-235, and CASA C-295. In addition, we have a contract with Airbus to develop and produce three products for the new cargo positioning and restraint system for the A400M cargo aircraft and expect to be the sole supplier of these products. We anticipate delivery beginning in the later part of the 2013 calendar year.

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.

Services

We perform overhaul, repair, and maintenance services for all of our products. Most of these services are performed at our Whippany, New Jersey facility. We have also licensed third-party vendors around the world to perform these services.

In addition to performing research and development to design new products, improve existing products, and add new features to our product line, we also provide engineering services to adapt our products to customer specific needs and aircraft models on a fee-for-service basis.

We discuss segment information in Note 15 of our “Notes to Unaudited Condensed Consolidated Financial Statements” contained in Item 1 of Part I of this report.

 

20


Management’s Discussion and Analysis of Financial Condition and Results of Operations

($ In Thousands Except Share Amounts)

 

STRATEGY

Our primary strategy is to continue to expand our position as a market leader in the design, development, and service of sophisticated mission equipment for specialty aerospace and defense applications. We intend to maintain our position by continuing to focus on our principal customers and on geographic areas where we have developed our reputation as a premier provider of aircraft hoist and lift equipment, and by expanding both our customer base and product lines. We believe that continued spending on research and development to improve the quality of our product offerings and remaining on the leading edge of technological advances in our chosen markets is also crucial to our business. In this regard, we will continue to commit resources to product research and development.

CRITICAL ACCOUNTING POLICIES

Information regarding our critical accounting policies is provided in our Annual Report on Form 10-K for our fiscal year ended March 31, 2012, as filed with the SEC on June 12, 2012, under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” and our Notes to Consolidated Financial Statements included therein.

Results of Operations

Three Months Ended December 31, 2012 Compared with Three Months Ended December 31, 2011

 

     Three Months Ended     Increase/(Decrease)  
     December 31,
2012
    December 31,
2011
    $     %  

Products

   $ 15,494      $ 14,010      $ 1,484        10.6

Services

     4,676        5,589        (913     (16.3
  

 

 

   

 

 

   

 

 

   

Net sales

     20,170        19,599        571        2.9   
  

 

 

   

 

 

   

 

 

   

Products

     8,536        8,075        461        5.7   

Services

     3,004        3,569        (565     (15.8
  

 

 

   

 

 

   

 

 

   

Cost of sales

     11,540        11,644        (104     (0.9
  

 

 

   

 

 

   

 

 

   

Gross profit

     8,630        7,955        675        8.5   

As a % of net sales

     42.8     40.6     N/A        2.2 %Pt 

Selling, general, and administrative expenses

     3,910        3,883        27        0.7

Engineering expense

     1,733        2,127        (394     (18.5
  

 

 

   

 

 

   

 

 

   

Operating income

     2,987        1,945        1,042        53.6   

Interest expense

     17        80        (63     (78.8

Income tax provision

     1,239        767        472        61.5   

Effective tax rate

     42.0     42.0     N/A        0.0 %Pt 

Net income

   $ 1,709      $ 1,059      $ 650        61.4

Net Sales. Fiscal 2013 third quarter net sales of $20,170 were $571, or 2.9%, above net sales of $19,599 in the fiscal 2012 third quarter.

Fiscal 2013 third quarter products sales of $15,494 were $1,484, or 10.6%, above prior year due to greater new equipment hoist & winch and spare parts cargo hook volume to the U.S. military. Fiscal 2013 third quarter services sales of $4,676 were lower by $913, or 16.3%, compared with the prior year due to overhaul & repair for the US Military and engineering weapons handling.

 

21


Management’s Discussion and Analysis of Financial Condition and Results of Operations

($ In Thousands Except Share Amounts)

 

The timing of U.S. Government awards, availability of U.S. Government funding, and product delivery schedules are among the factors that affect the period of recording revenues. Over the past several years, revenues in the second half of the fiscal year exceeded revenues in the first half of the fiscal year. We expect fiscal 2013 revenues will be consistent with this pattern.

Cost of Sales. Products cost of sales of $8,536 in the fiscal 2013 third quarter were $461, or 5.7%, above the same period in fiscal 2012 due to higher new production and spare parts volume. Cost of services provided of $3,004 in the fiscal 2013 third quarter was $565, or 15.8%, lower than the prior year due to reduced overhaul & repair and engineering volume. In the fiscal 2013 third quarter, manufacturing overhead was over-absorbed by $201, or 1.0% of sales. In the prior year, under-absorbed overhead was $109, or 0.6% of sales. The absorption split between products and services was approximately 40% and 60%, respectively.

Gross profit. Gross profit of $8,630 in the fiscal 2013 third quarter was $675, or 8.5%, above the same period in fiscal 2012. The increase is due to higher products sales volume. As a percent of sales, the gross profit margin was 42.8% for the fiscal 2013 third quarter compared with 40.6% for the prior year. Gross profit as a percent of sales increased due to higher spare parts volume and margins and to over-absorbed manufacturing overhead, partially offset by lower overhaul & repair margins.

Operating Expenses. Total operating expenses were $5,643, or 28.0% of net sales, in the third quarter of fiscal 2013 compared with $6,010 or 30.7% of net sales in the comparable prior-year period. Selling, general, and administrative (“SG&A”) expenses were $3,910 in the fiscal 2013 third quarter compared with $3,883 in the third quarter of fiscal 2012, essentially even. As a percent of sales, SG&A was 19.4% in the fiscal 2013 third quarter versus 19.8% in the comparable period last year.

Engineering expenses were $1,733 in the third quarter of fiscal 2013 compared with $2,127 in the third quarter of fiscal 2012. The decrease is due primarily to development programs that ended since last year, partly offset by not receiving any Airbus cost reimbursement. Reimbursements from Airbus reduced engineering expenses in last year’s fiscal third quarter by $1,050. The current dollar level of engineering expenses reflects continued new product development for awarded aerospace platforms, primarily the Airbus A400M and Sikorsky CH-53K, and we anticipate total gross engineering costs to continue at a high level through fiscal 2013 and into fiscal 2014.

Interest Expense. Interest expense was $17 during the third quarter of fiscal 2013 versus $80 in the third quarter of fiscal 2012. We pre-paid our $10,679 term loan in full during the fiscal 2013 first quarter which significantly reduced interest expense. Interest expense in the third quarter of fiscal 2013 primarily reflects unused revolver fees and capitalized debt acquisition cost amortization for the revolver debt availability.

Income tax provision. Income tax expense was $1,239 in the third quarter of fiscal 2013 versus $767 in the third quarter of fiscal 2012, reflecting higher pretax income in the current quarter. Income taxes for the three month periods ended December 31, 2012 and December 31, 2011 were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation. Income taxes and income tax rates are discussed further in Note 8 of the “Notes to Unaudited Condensed Consolidated Financial Statements” contained in Part I, Item 1 of this report.

Net Income. Net income was $1,709, or $0.18 per diluted share, in the fiscal 2013 third quarter compared with $1,059, or $0.11 per diluted share, in the same period in fiscal 2012. The increase is due to the higher gross profit resulting from sales growth and margin improvements plus lower SG&A and net engineering costs.

New Orders. New products and services orders received during the three months ended December 31, 2012 increased by 50.7% to $21,109 compared with $14,006 during the three months ended December 31, 2011. The increase was due primarily to new equipment for the U.S. Military, along with increases in overhaul & repair and spare parts.

Backlog. 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 $43,738 at December 31, 2012 is scheduled for shipment during the next twelve months. Although significant cancellations of purchase orders or substantial reductions of product quantities in existing contracts seldom occur, such cancellations or reductions could substantially and materially reduce backlog. Therefore, backlog information may not represent the actual amount of shipments or sales for any future period.

 

22


Management’s Discussion and Analysis of Financial Condition and Results of Operations

($ In Thousands Except Share Amounts)

 

Backlog at December 31, 2012 was $119,691 compared with $111,184 at March 31, 2012, and $118,639 at December 31, 2011. The backlog at December 31, 2012, March 31, 2012, and December 31, 2011 includes $71,238, $71,343, and $71,343, 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 2013.

The book-to-bill ratio is computed by dividing the new orders received during a period by the sales for the same period. A book-to-bill ratio in excess of 1.0 is potentially indicative of continued overall growth in sales. The book to bill ratio was 1.0 for the fiscal 2013 third quarter and 0.7 for the fiscal 2012 third quarter.

Nine Months Ended December 31, 2012 Compared with Nine Months Ended December 31, 2011

 

     Nine Months Ended     Increase/(Decrease)  
     December 31,
2012
    December 31,
2011
    $     %  

Products

   $ 44,648      $ 41,376      $ 3,272        7.9

Services

     13,356        14,351        (995     (6.9
  

 

 

   

 

 

   

 

 

   

Net sales

     58,004        55,727        2,277        4.1   
  

 

 

   

 

 

   

 

 

   

Products

     25,663        23,106        2,557        11.1   

Services

     8,371        9,323        (952     (10.2
  

 

 

   

 

 

   

 

 

   

Cost of sales

     34,034        32,429        1,605        4.9   
  

 

 

   

 

 

   

 

 

   

Gross profit

     23,970        23,298        672        2.9   

As a % of net sales

     41.3     41.8     N/A        (0.5 )%Pt 

Selling, general, and administrative expenses

     10,945        11,638        (693     (6.0 )% 

Engineering expense

     7,713        6,475        1,238        19.1   
  

 

 

   

 

 

   

 

 

   

Operating income

     5,312        5,185        127        2.4   

Interest expense

     209        316        (107     (33.9

Income tax provision

     2,115        2,008        107        5.3   

Effective tax rate

     42.0     42.0     N/A        0.0 %Pt 

Net income

   $ 2,920      $ 2,772      $ 148        5.3

Net Sales. Fiscal 2013 first nine months net sales of $58,004 increased by $2,277, or 4.1%, from net sales of $55,727 in the first nine months of fiscal 2012.

Product sales in the first nine months of fiscal 2013 were $44,648, an increase of $3,272, or 7.9%, from $41,376 in the corresponding prior year period. The increase is primarily due to increased new equipment volume to the U.S. military, partially offset by a slight decrease in spare parts volume, because the prior year included large U.S. Government spare parts re-stocking purchases.

Service sales in the first nine months of fiscal 2013 were $13,356, a decrease of $995, or 6.9%, from $14,351 in the corresponding prior year period. The decrease is primarily due to lower engineering weapons handling services, partly offset by higher overhaul & repair volume.

The timing of U.S. Government awards, availability of U.S. Government funding, and product delivery schedules are among the factors that affect the period of recording revenues. Fiscal 2012 was consistent with recent years with revenues in the second half of the fiscal year exceeding revenues in the first half of the fiscal year; we believe fiscal 2013 revenues will be consistent with this pattern.

 

23


Management’s Discussion and Analysis of Financial Condition and Results of Operations

($ In Thousands Except Share Amounts)

 

Cost of Sales. Products cost of sales of $25,663 in the fiscal 2013 first nine months were 11.1% higher than the prior year primarily due to higher new equipment sales. Cost of services provided of $8,371 in the fiscal 2013 first nine months were $952 lower than the prior year due to lower engineering services.

Manufacturing overhead was under-absorbed by $56, or 0.1% of sales, in the first nine months of fiscal 2013. This under-absorption was approximately split between products at 63% and services at 37%. The prior year included over-absorbed overhead of $187, or 0.3% of sales. This over-absorption was approximately split between products at 40% and services at 60%.

Gross profit. Gross profit of $23,970 in the fiscal 2013 first nine months was $672, or 2.9% higher, from $23,298 in the corresponding prior year period. As a percent of sales, the gross profit margin was 41.3% for the fiscal 2013 first nine months compared with 41.8% for the corresponding prior year period. Gross profit as a percent of sales declined due to the unfavorable mix in new production sold to the U.S. Government and large OEMs in hoist & winch and weapons handling, partially offset by improved overhaul & repair and spare parts margins.

Operating Expenses. Total operating expenses were $18,658, or 32.2% of net sales, in the first nine months of fiscal 2013 compared with $18,113 or 32.5% of net sales in the comparable prior year period. Selling, general, and administrative (“SG&A”) expenses were $10,945 in the fiscal 2013 first nine months compared with $11,638 in the first nine months of fiscal 2012, a decrease of $693. The decrease is primarily due to business strategy development costs incurred during the first three months of fiscal 2012 that were not incurred during the first three months of fiscal 2013, lower medical costs and lower information technology costs from last year’s insourcing transition. These decreases were partly offset by CEO transition costs in fiscal 2013. As a percent of sales, SG&A was 18.9% in the fiscal 2013 first nine months versus 20.9% in the comparable period last year.

Engineering expenses were $7,713 in the first nine months of fiscal 2013 compared with $6,475 in the first nine months of fiscal 2012. The increase is due to not receiving any Airbus cost reimbursement, partly offset by lower spending on development programs that ended since last year. Reimbursements from Airbus reduced engineering expenses in last fiscal year’s first nine months by $2,366. The dollar level of engineering expenses reflects continued new product development for awarded aerospace platforms, primarily the Airbus A400M and Sikorsky CH-53K, and we anticipate total gross engineering costs to continue at a high level through fiscal 2013 and into fiscal 2014.

Interest Expense. Interest expense was $209 in the fiscal 2013 first nine months versus $316 in the corresponding period in fiscal 2012. We pre-paid our $10,679 term loan in full during the fiscal 2013 first quarter which resulted in expensing $95 of deferred debt acquisition costs in the fiscal 2013 first quarter.

Income tax provision. Income tax expense was $2,115 in the first nine months of fiscal 2013 versus $2,008 in the first nine months of fiscal 2012. The increase is due to higher pre-tax income due primarily to higher gross profit and lower SG&A expenses partly offset by higher net engineering costs. Income taxes for the nine month periods ended December 31, 2012 and December 31, 2011 were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation. Income taxes and income tax rates are discussed further in Note 8 of the “Notes to Unaudited Condensed Consolidated Financial Statements” contained in Part I, Item 1 of this report.

Net Income. Net income was $2,920, or $0.31 per diluted share, in the fiscal 2013 first nine months compared with $2,772, or $0.29 per diluted share, in the same period in fiscal 2012. The increase in net income resulted primarily from the higher gross profit and lower SG&A expenses partly offset by higher net engineering costs.

New Orders. New products and services orders received during the nine months ended December 31, 2012 increased 53.9% to $66,511 compared with $43,215 during the nine months ended December 31, 2011. The increase was due primarily to new equipment from booking Multi-Year VIII from Sikorsky and U.S. Military orders plus increases in overhaul & repair, spare parts, and engineering.

 

24


Management’s Discussion and Analysis of Financial Condition and Results of Operations

($ In Thousands Except Share Amounts)

 

Backlog. The book to bill ratio for the first nine months of fiscal 2013 was 1.1 compared with 0.8 for the first nine months of fiscal 2012. Cancellations of purchase orders or reductions of product quantities in existing contracts, although seldom occurring, could substantially and materially reduce our backlog. Therefore, the backlog may not represent the actual amount of shipments or sales for any future period.

Liquidity and Capital Resources

Our principal sources of liquidity are cash on hand, cash generated from operations, and our Senior Credit Facility. At times, we maintain our cash in bank deposit accounts in excess of the FDIC insured amount, which effective January 31, 2013 is $250,000.

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. The Senior Credit Facility is discussed in Note 9 of the “Notes to Unaudited Condensed Consolidated Financial Statements” contained in Item I, Part 1, of this report.

The Senior Credit Facility expires in August, 2013, and we are currently evaluating debt financing and capital structure options including a new senior credit facility.

In fiscal 2011 and fiscal 2012 we accelerated term-loan payments by making a total of five quarterly term-loan pre-payments totaling $4,107. During the first quarter of fiscal 2013 due to our strong cash position and to gain additional flexibility on our fixed-charge debt covenant, we pre-paid our entire term loan balance of $10,679, of which $6,571 would become due when the term loan expired in August, 2013. We believe we have adequate cash flow and revolver debt availability to meet our operating needs.

We are involved in environmental proceedings and potential proceedings relating to soil and groundwater contamination and other environmental matters at several of our former parent company’s facilities that were never required for our current operations. In fiscal 2013, we anticipate spending approximately $1,225 on environmental characterization and remediation costs. These costs will be charged against our environmental liability reserve and will not impact income.

Working Capital

Net working capital at December 31, 2012 was $33,777, a decrease of $6,028, versus $39,805 at March 31, 2012. The ratio of current assets to current liabilities was 3.3:1.0 at December 31, 2012 compared with 3.4:1.0 at the beginning of fiscal 2013. During the first quarter of fiscal 2013, we pre-paid the term loan balance of $10,679 remaining under our Senior Credit Facility, of which $8,215 was classified as long-term debt as of March 31, 2012, using the cash on hand at the end of fiscal 2012. Other significant working capital changes were decreases in accounts receivable of $9,399, cash of $2,850, and deferred income taxes from NOL utilization of $2,601. Inventory increased by $6,152 to prepare for shipments scheduled in the fourth quarter of fiscal 2013 and to improve customer service with better overhaul & repair turnaround time and product delivery.

Accounts receivable days outstanding decreased to 48.0 days at December 31, 2012, from 61.2 days at December 31, 2011. Inventory turns increased slightly to 2.1 at December 31, 2012 versus 2.0 turns at December 31, 2011.

Capital Expenditures

Capital expenditures for the nine months ended December 31, 2012 and 2011 were $265 and $627, respectively. Spending for the first nine months of both fiscal 2013 and fiscal 2012 was for production test equipment and information technology capital. Capitalized qualification units for the nine months ended December 31, 2011 was $1,638. We did not capitalize any qualification units for the nine-month period ended December 31, 2012.

 

25


Management’s Discussion and Analysis of Financial Condition and Results of Operations

($ In Thousands Except Share Amounts)

 

Senior Credit Facility

The Senior Credit Facility is discussed in Note 9 of the “Notes to Unaudited Condensed Consolidated Financial Statements” contained in Part I, Item 1 of this report.

Interest Rate Swap

The Interest Rate Swap is discussed in Note 9 of the “Notes to Unaudited Condensed Consolidated Financial Statements” contained in Part I, Item 1 of this report.

Tax Benefits from Net Operating Losses

The Tax Benefits from Net Operating Losses is discussed in Note 8 of the “Notes to Unaudited Condensed Consolidated Financial Statements” contained in Part I, Item 1 of this report.

Contractual Obligations

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

 

     Payments Due By Period  
     Total      Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 

Operating leases

   $ 6,738       $ 1,061      $ 1,976      $ 1,853      $ 1,848   

Purchase obligations (a)

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,738       $ 1,061       $ 1,976       $ 1,853      $ 1,848  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) 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 and Legacy Environmental Commitments

Environmental matters - At December 31, 2012 and March 31, 2012 the aggregate environmental liability was $12,896 and $13,535, respectively. The liability is classified in other current liabilities and other long-term liabilities on the balance sheet. Separately, environmental cost-sharing with third parties of approximately $1,472 and $1,500 at December 31, 2012 and March 31, 2012, respectfully, is classified mostly as a non-current asset.

In the first nine months of fiscal 2013 and fiscal 2012, we spent $939 and $778, respectively, on environmental costs, and for the entire fiscal 2012, we spent $1,177. We have a detailed plan to manage our environmental exposure on each of our properties. Based on this plan, we anticipate spending $1,225 on environmental matters in fiscal 2013. These costs will be charged against the environmental liability reserve and will not impact income. We perform quarterly reviews of our environmental sites and the related liabilities.

Environmental matters are discussed in Note 14 of the “Notes to Unaudited Condensed Consolidated Financial Statements” contained in Part 1, Item 1 of this report.

Litigation - Litigation is discussed in Note 14 of the “Notes to Unaudited Condensed Consolidated Financial Statements” contained in Part 1, Item 1 of this report.

 

26


Management’s Discussion and Analysis of Financial Condition and Results of Operations

($ In Thousands Except Share Amounts)

 

Recently Issued Accounting Standards

The recent accounting pronouncements are discussed in Note 13 of the “Notes to Unaudited Condensed Consolidated Financial Statements” contained in Part 1, Item 1 of this report.

Off-Balance Sheet Arrangements

As of December 31, 2012, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

27


($ In Thousands Except Share data)

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, primarily changes in interest rates associated with our Senior Credit Facility. The Senior Credit Facility required 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%), was settled monthly, and was reflected as an adjustment to interest expense in the period incurred. The adjustment to record the swap at its fair value was included in accumulated other comprehensive loss, net of tax. The Company reduced its existing unrealized loss on the interest rate swap during fiscal 2012. The interest rate swap expired in August 2011.

At December 31, 2012, we had no borrowings under our Senior Credit Facility.

At times, the Company maintains its cash in bank deposit accounts in excess of the FDIC insured amount, which effective January 31, 2013 is $250,000.

 

28


Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2012, our disclosure controls and procedures were effective to ensure (i) that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in order to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) during the first nine months of fiscal 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

We are engaged in various other legal proceedings incidental to the Company’s business. Management believes that, after taking into consideration information furnished by its counsel, these matters will not have a material effect on the financial position, results of operations, or cash flows in future periods.

 

Item 1A. RISK FACTORS

In addition to the other information set forth in this report, the reader should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2012 as filed with the SEC on June 12, 2012 and incorporated herein by reference, which factors could materially affect our business, financial condition, financial results or future performance.

 

Item 6. EXHIBITS

 

  10.1    Form of Indemnification Agreement between the Company and current and future board of directors and officers.
  31.1    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*    XBRL Instance Document.
101.SCH*    XBRL Taxonomy Extension Schema Document.
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document.

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      BREEZE-EASTERN CORPORATION
                            (Registrant)
Dated: January 31, 2013     By:  

/s/ Mark D. Mishler

      Mark D. Mishler, Senior Vice President,
      Chief Financial Officer, Treasurer, and Secretary *

 

* On behalf of the Registrant and as Principal Financial and Accounting Officer.

 

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