Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - BREEZE-EASTERN CORP | Financial_Report.xls |
EX-31.1 - EX-31.1 - BREEZE-EASTERN CORP | bzc-ex311_201412317.htm |
EX-31.2 - EX-31.2 - BREEZE-EASTERN CORP | bzc-ex312_201412319.htm |
EX-32.1 - EX-32.1 - BREEZE-EASTERN CORP | bzc-ex321_201412318.htm |
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 2014
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)
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Delaware |
95-4062211 |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification no.) |
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35 Melanie Lane |
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Whippany, New Jersey |
07981 |
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(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 |
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¨ |
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Accelerated filer |
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¨ |
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Non-accelerated filer |
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¨ |
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Smaller reporting company |
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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 26, 2015, the total number of outstanding shares of common stock was 9,815,793.
INDEX
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Page |
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PART 1 |
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Item 1. |
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3 |
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Condensed Consolidated Balance Sheets as of December 31, 2014 (Unaudited) and March 31, 2014 |
4 |
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5 |
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6 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
6 - 17 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
17 - 24 |
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Item 3. |
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25 |
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Item 4. |
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25 |
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PART II. |
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Item 1. |
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25 |
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Item 1A. |
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25 |
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Item 2. |
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25 |
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Item 3. |
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26 |
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Item 4. |
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26 |
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Item 5. |
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26 |
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Item 6. |
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26 |
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27 |
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EXHIBITS |
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2
The results reflected in the unaudited Condensed Consolidated Statements of Operations for the three and nine month periods ended December 31, 2014 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 consolidated financial statements and related notes thereto contained in the Company’s Annual Report on Form 10-K filed on June 5, 2014 with the Securities and Exchange Commission (“SEC”) for the fiscal year ended March 31, 2014. Certain information and note disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to these rules.
When the Company refers to its fiscal year in this Quarterly Report on Form 10-Q, the Company is referring to the fiscal year ended on March 31. Presently the Company is operating in its fiscal year 2015, which commenced on April 1, 2014 and will end on March 31, 2015. 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)
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ASSETS |
(Unaudited) |
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(Audited) |
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CURRENT ASSETS: |
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Cash |
$ |
15,736 |
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$ |
6,021 |
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Accounts receivable (net of allowance for doubtful accounts of $213 at December 31, 2014 and $323 at March 31, 2014) |
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15,281 |
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24,191 |
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Inventories – net |
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24,451 |
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18,909 |
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Income taxes receivable |
|
435 |
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— |
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Prepaid expenses and other current assets |
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1,589 |
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1,868 |
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Deferred income taxes |
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5,085 |
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4,608 |
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Total current assets |
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62,577 |
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55,597 |
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PROPERTY: |
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Property and equipment |
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20,062 |
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19,767 |
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Less accumulated depreciation and amortization |
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14,477 |
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13,435 |
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Property – net |
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5,585 |
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6,332 |
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OTHER ASSETS: |
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Deferred income taxes – net |
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8,031 |
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4,197 |
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Goodwill |
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402 |
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402 |
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Real estate held for sale |
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3,800 |
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3,800 |
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Qualification units and pre-qualification assets – net |
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3,718 |
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4,385 |
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Other |
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4,945 |
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5,080 |
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Total other assets |
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20,896 |
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17,864 |
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TOTAL ASSETS |
$ |
89,058 |
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$ |
79,793 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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Revolving credit facility |
$ |
— |
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$ |
— |
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Current portion of long-term debt |
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— |
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— |
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Accounts payable – trade |
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5,354 |
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7,442 |
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Accrued compensation |
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1,972 |
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2,875 |
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Accrued income taxes |
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2,258 |
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358 |
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Other current liabilities |
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5,869 |
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5,214 |
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Total current liabilities |
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15,453 |
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15,889 |
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LONG-TERM DEBT, NET OF CURRENT PORTION |
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— |
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— |
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OTHER LONG-TERM LIABILITIES |
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12,102 |
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13,420 |
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COMMITMENTS AND CONTINGENCIES (Note 14) |
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— |
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— |
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TOTAL LIABILITIES |
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27,555 |
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29,309 |
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STOCKHOLDERS’ EQUITY |
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Preferred stock – authorized, 300,000 shares; none issued |
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— |
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— |
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Common stock – authorized, 100,000,000 shares of $.01 par value; issued, 10,265,707 shares at December 31, 2014 and 10,148,944 shares at March 31, 2014 |
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102 |
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101 |
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Additional paid-in capital |
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100,252 |
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98,707 |
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Accumulated deficit |
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(31,822 |
) |
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(41,344 |
) |
Accumulated other comprehensive income |
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3 |
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3 |
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68,535 |
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57,467 |
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Less treasury stock, at cost – 449,914 shares at December 31, 2014 and 445,067 shares at March 31, 2014 |
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(7,032 |
) |
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(6,983 |
) |
Total stockholders’ equity |
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61,503 |
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50,484 |
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TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY |
$ |
89,058 |
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$ |
79,793 |
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See notes to condensed consolidated financial statements.
4
BREEZE-EASTERN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In Thousands of Dollars, Except Share and Per Share Data)
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Three Months Ended |
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Nine Months Ended |
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December 31, |
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December 31, |
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December 31, |
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December 31, |
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Net sales |
$ |
23,239 |
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$ |
22,628 |
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$ |
58,829 |
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$ |
57,660 |
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Cost of sales |
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13,395 |
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14,189 |
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36,434 |
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37,003 |
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Gross profit |
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9,844 |
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8,439 |
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22,395 |
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20,657 |
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Selling, general, and administrative expenses |
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3,578 |
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3,198 |
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11,246 |
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9,739 |
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Engineering expense |
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1,071 |
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2,516 |
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5,117 |
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6,245 |
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Operating income |
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5,195 |
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2,725 |
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6,032 |
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4,673 |
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Interest expense |
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8 |
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8 |
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24 |
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41 |
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Other (income) expense – net |
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(1,200) |
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23 |
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(1,138) |
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74 |
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Income before incomes taxes |
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6,387 |
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2,694 |
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7,146 |
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4,558 |
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Income tax (benefit) provision |
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(2,657) |
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1,024 |
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(2,376) |
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1,732 |
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Net income |
$ |
9,044 |
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$ |
1,670 |
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$ |
9,522 |
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$ |
2,826 |
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Earnings per common share: |
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Basic net income per share |
$ |
0.92 |
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$ |
0.17 |
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$ |
0.98 |
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$ |
0.29 |
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Diluted net income per share |
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0.91 |
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0.17 |
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0.96 |
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0.29 |
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Weighted-average basic shares outstanding |
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9,816,000 |
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9,667,000 |
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9,766,000 |
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9,625,000 |
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Weighted-average diluted shares outstanding |
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9,963,000 |
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9,797,000 |
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9,945,000 |
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9,733,000 |
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See notes to condensed consolidated financial statements.
5
BREEZE-EASTERN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands of Dollars)
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Nine Months Ended |
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December 31, 2014 |
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December 31, 2013 |
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Cash flows from operating activities: |
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Net income |
$ |
9,522 |
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$ |
2,826 |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Write-off of engineering project development qualification units |
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81 |
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571 |
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Shipped qualification assets |
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142 |
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747 |
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Depreciation and amortization |
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1,537 |
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1,129 |
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Non-cash reserve accretion |
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221 |
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256 |
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Stock based compensation |
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849 |
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517 |
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Provision for losses on accounts receivable |
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13 |
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13 |
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Deferred taxes-net |
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(4,311) |
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90 |
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Changes in assets and liabilities: |
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(Increase) decrease in accounts receivable and other receivables |
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8,897 |
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251 |
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(Increase) decrease in inventories |
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(5,542 |
) |
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(6,134 |
) |
(Increase) decrease in income taxes receivable |
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(435) |
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— |
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(Increase) decrease in other assets |
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407 |
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(178 |
) |
Increase (decrease) in accounts payable |
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(2,088 |
) |
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|
784 |
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Increase (decrease) in accrued compensation |
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(917 |
) |
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(1,356 |
) |
Increase (decrease) in accrued income taxes |
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1,900 |
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|
662 |
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Increase (decrease) in other liabilities |
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(884 |
) |
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(2,010 |
) |
Net cash provided by (used in) operating activities |
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9,392 |
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(1,832 |
) |
Cash flows from investing activities: |
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Capital expenditures |
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(295 |
) |
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(742 |
) |
Capitalized qualification units and pre-qualification assets |
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(44 |
) |
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(1,349 |
) |
Net cash used in investing activities |
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(339 |
) |
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(2,091 |
) |
Cash flows from financing activities: |
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Payments on long-term debt |
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— |
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— |
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Net borrowings (repayments) of other debt |
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— |
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— |
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Payment of debt issue costs |
|
— |
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(33 |
) |
Exercise of stock options |
|
662 |
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|
|
677 |
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Net cash provided by financing activities |
|
662 |
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|
644 |
|
Increase (decrease) in cash |
|
9,715 |
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(3,279 |
) |
Cash at beginning of period |
|
6,021 |
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|
|
6,688 |
|
Cash at end of period |
$ |
15,736 |
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$ |
3,409 |
|
Supplemental information: |
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Interest payments |
$ |
19 |
|
|
$ |
33 |
|
Income tax payments |
|
258 |
|
|
|
980 |
|
See notes to condensed consolidated financial statements.
NOTE 1. Financial Presentation
The unaudited, Condensed Consolidated Balance Sheets, 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 financial statements 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.
6
NOTE 2. Earnings 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 components of the denominator for basic earnings per common share and diluted earnings per common share are reconciled as follows.
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Three Months Ended |
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Nine Months Ended |
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December 31, 2014 |
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December 31, 2013 |
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December 31, 2014 |
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December 31, 2013 |
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Basic earnings per Common Share: |
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Weighted-average common shares outstanding for basic earnings per share calculation |
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9,816,000 |
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9,667,000 |
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9,766,000 |
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9,625,000 |
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Diluted earnings per Common Share: |
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|
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|
|
|
|
|
|
|
|
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Weighted-average common shares outstanding |
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9,816,000 |
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9,667,000 |
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9,766,000 |
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|
9,625,000 |
Stock options (a) |
|
147,000 |
|
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|
130,000 |
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|
|
179,000 |
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|
|
108,000 |
Weighted-average common shares outstanding for diluted earnings per share calculation |
|
9,963,000 |
|
|
|
9,797,000 |
|
|
|
9,945,000 |
|
|
|
9,733,000 |
(a) |
During the three and nine month periods ended December 31, 2014, options to purchase 419,500 and 278,167 shares, respectively, of common stock and during the three and nine month periods ended December 31, 2013, options to purchase 99,000 and 214,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because the exercise process of these options were greater than the average market price of the common share and the effect of their conversion would be antidilutive. |
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, 2014, includes stock-based compensation expense of $158 net of tax, or $0.02 per diluted share, and $535 net of tax, or $0.05 per diluted share, respectively. Net income for the three and nine month periods ended December 31, 2013, includes stock- based compensation expense of $104 net of tax, or $0.01 per diluted share, and $320 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 stock-based grants are awarded.
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” and together with the 1999 Plan, the 2004 Plan and the 2006 Plan collectively, the “Plans”).
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. The 2004 Plan expired in September 2014, and the 1999 Plan expired in July 2009, and no further grants or awards may be made under these plans. Under the 2004 Plan, no unexercised options remain outstanding, and under the 1999 Plan, unexercised options granted in fiscal year 2006 remain outstanding.
Under each of the Plans, option exercise prices equal the fair market value of the common shares at their respective grant dates. Options granted to officers and employees expire no later than 10 years after the date of the grant. In most circumstances prior to fiscal year 2014, options granted to directors, officers, and employees generally 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.
Pursuant to the terms of an employment agreement, effective June 16, 2014, between the Company and Serge Dupuis, Chief Financial Officer and Treasurer of the Company, the Company granted to Mr. Dupuis an option to purchase 200,000 shares, which option has a weighted average grant date fair value equal to $12.78. This option was reported in the Company’s Current Report on Form 8-K filed on June 17, 2014.
7
As noted above, in connection with the hiring of Serge Dupuis as the Company’s Chief Financial Officer and Treasurer, the terms of the Company’s employment offer to Mr. Dupuis included a commitment to award him an option to purchase 200,000 shares of common stock of the Company (the “Dupuis Option”). At the time of the issuance of the award, the Company and Mr. Dupuis entered into an option grant agreement indicating that the option would be subject to, and the option shares would be allocated from, the Company’s 2012 Incentive Compensation Plan (the “2012 Plan”). On July 3, 2014, the Company determined that the allocation of that number of option shares from the 2012 Plan would be in excess of the 2012 Plan’s per person, per year share limit, and, therefore, 50,000 of the option shares would need to be allocated from the Company’s 2006 Incentive Compensation Plan or the Company would need to modify the grant to be an “inducement grant” in order for the Company to fulfill its obligations to Mr. Dupuis. As a result, on July 7, 2014 the Company and Mr. Dupuis agreed to modify the terms of his award such that the number of shares allocated from the 2012 Plan in respect of the Dupuis Option is 150,000 and the remaining 50,000 shares would be allocated from and subject to the Company’s 2006 Incentive Compensation Plan.
On August 18, 2014, in connection with the hiring of Bradley Repp, Vice President of Product Development, the Company granted to Mr. Repp an option to purchase 200,000 shares of our common stock, which option has a weighted average grant date fair value equal to $10.40. This award to Mr. Repp was made outside of the Company’s stockholder approved equity incentive plans and was approved by the Incentive and Compensation Committee of the Company’s Board of Directors, as an inducement material to Mr. Repp entering into employment with the Company pursuant to Section 711(a) of the NYSE MKT Company Guide. This option was reported in the Company’s Current Report on Form 8-K filed on August 18, 2014.
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 55,000 of the total 440,000 options granted in fiscal 2015 and 19,000 of the total 158,000 options granted in fiscal 2014. The Black-Scholes weighted-average value at each grant date per option granted in fiscal 2015 was $4.61, $3.85, and $3.72 and in fiscal 2014 was $3.03 and $3.01. 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:
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Dividend |
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Volatility |
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Risk-free |
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Expected |
|
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Forfeiture |
|
||||||
2015 $4.61 value per option |
|
0.0 |
% |
|
30.0 |
% |
|
2.1 |
% |
|
7.0 |
|
|
0.0 |
% |
|||||
2015 $3.85 value per option |
|
0.0 |
% |
|
30.9 |
% |
|
2.2 |
% |
|
7.0 |
|
|
0.0 |
% |
|||||
2015 $3.72 value per option |
|
0.0 |
% |
|
30.9 |
% |
|
2.2 |
% |
|
7.0 |
|
|
0.0 |
% |
|||||
2014 $3.03 value per option |
|
0.0 |
% |
|
31.2 |
% |
|
1.3 |
% |
|
7.0 |
|
|
0.0 |
% |
|||||
2014 $3.01 value per option |
|
0.0 |
% |
|
31.2 |
% |
|
1.3 |
% |
|
7.0 |
|
|
0.0 |
% |
The remaining 385,000 options granted in fiscal 2015 had a weighted-average value per option of $3.05 and $2.49, and $2.49. The remaining 139,000 options granted in fiscal 2014 had a weighted-average value per option of $1.90 and $1.71 at the grant date. These valuations 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:
|
|
2015 $3.05 |
|
|
2015 $2.49 |
|
|
2015 $2.49 |
|
2014 $1.90 |
|
|
2014 $1.71 |
|
Dividend yield |
|
0.0 |
% |
|
0.0 |
% |
|
0.0 |
% |
0.0 |
% |
|
0.0 |
% |
Volatility |
|
32.3 |
% |
|
33.7 |
% |
|
33.7 |
% |
34.9 |
% |
|
34.9 |
% |
Risk-free interest rate |
|
2.6 |
% |
|
2.5 |
% |
|
2.5 |
% |
1.9 |
% |
|
1.9 |
% |
Expected term of options (in years) |
|
10.0 |
|
|
10.0 |
|
|
10.0 |
|
10.0 |
|
|
10.0 |
|
Forfeiture adjustment |
|
1.4 |
% |
|
1.2 |
% |
|
1.2 |
% |
1.1 |
% |
|
1.8 |
% |
Suboptimal behavior factor |
|
1.6 |
|
|
1.6 |
|
|
1.6 |
|
1.7 |
|
|
1.7 |
|
8
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 |
|
|
Approximate Remaining Contractual Term (Years) |
|
|
Weighted- Average Exercise Price |
|
|||
Outstanding at March 31, 2014 |
851,165 |
|
|
$ |
1,516 |
|
|
|
8 |
|
|
$ |
8.15 |
|
Granted |
440,000 |
|
|
|
— |
|
|
|
10 |
|
|
|
11.45 |
|
Exercised |
(88,833 |
) |
|
|
339 |
|
|
|
— |
|
|
|
7.46 |
|
Canceled or expired |
(10,332 |
) |
|
|
— |
|
|
|
— |
|
|
|
8.59 |
|
Outstanding at December 31, 2014 |
1,192,000 |
|
|
|
1,381 |
|
|
|
8 |
|
|
|
9.21 |
|
Options exercisable at December 31, 2014 |
597,000 |
|
|
|
1,022 |
|
|
|
8 |
|
|
|
8.60 |
|
Unvested options expected to become exercisable after December 31, 2014 |
595,000 |
|
|
|
407 |
|
|
|
9 |
|
|
|
10.04 |
|
Shares available for future option grants at December 31, 2014 (a) |
245,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
May be decreased by restricted stock grants. |
Cash received from stock option exercises during the first nine months of fiscal 2015 was approximately $662. The aggregate intrinsic value of options exercised during the first nine months of fiscal 2015 was approximately $339. 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 2015.
During the first nine months of fiscal 2015 and fiscal 2014, stock option compensation expense recorded in selling, general and administrative expenses was $681 and $362, respectively, before taxes of $252 and $138, respectively. As of December 31, 2014, there was $1,068 of unrecognized compensation cost related to stock options granted-but-not-yet-vested that are expected to become exercisable. This cost is expected to be recognized over a weighted-average period of approximately two years.
Except as otherwise authorized by the Board of Directors, it is the general policy of the Company that the stock underlying the option grants consists of authorized and unissued shares available for distribution under the applicable Plans. Under the 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.
A summary of restricted stock award activity under all Plans follows.
|
|
|
|
|
|
|
|
|
Number |
|
|
Weighted – |
|
||
Non-vested at March 31, 2014 |
|
29,807 |
|
|
$ |
8.93 |
|
Granted |
|
27,930 |
|
|
|
10.07 |
|
Vested |
|
(22,924 |
) |
|
|
9.11 |
|
Cancelled |
|
(3,761 |
) |
|
|
9.10 |
|
Non-vested at December 31, 2014 |
|
31,052 |
|
|
|
9.81 |
|
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 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 contained 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 2015 and fiscal 2014, compensation expense related to restricted stock awards recorded in selling, general and administrative expenses was $168 and $155,
9
respectively, before taxes of $62 and $59, respectively. As of December 31, 2014, there was approximately $231 of unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a period of approximately one year.
NOTE 4. Inventories
Inventories are summarized as follows:
|
December 31, |
|
|
March 31, |
|
||
Finished goods |
$ |
786 |
|
|
$ |
2,751 |
|
Work in process |
|
8,865 |
|
|
|
5,932 |
|
Purchased and manufactured parts |
|
17,753 |
|
|
|
13,155 |
|
|
|
27,404 |
|
|
|
21,838 |
|
Reserve for slow moving and obsolescence |
|
(2,953 |
) |
|
|
(2,929 |
) |
Total |
$ |
24,451 |
|
|
$ |
18,909 |
|
Inventory obsolescence is determined by identifying specific items based on the age of inventory and by establishing a general reserve based on annual purchases. Analyzing inventory by age showed little movement once items have aged five years, and historical trends showed that 1.1% of purchases would eventually be scrapped. Accordingly, the Company uses these two factors in determining the amount of the reserve.
NOTE 5. Property, Equipment, and Related Depreciation and Amortization |
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 amortized using the shorter of the estimated economic useful life or the term of the lease. Depreciation and amortization expense for the three month and nine month periods ended December 31, 2014 was $309 and $1,042, respectively, and for the three and nine month periods ended December 31, 2013 was $328 and $998, respectively.
Average estimated useful lives for property are as follows:
|
|
|
Machinery and equipment |
|
3 to 10 years |
Furniture and fixtures |
|
3 to 10 years |
Computer hardware and software |
|
3 to 5 years |
Leasehold improvements |
|
10 years |
The Company classified as real estate held for sale on the condensed consolidated balance sheets a property currently under sales contract owned in Glen Head, New York. The sale of the property is expected to be concluded upon completion of municipal approvals and soil remediation pursuant to the remediation plan approved by the New York Department of Environmental Conservation. The net sale proceeds are expected to be $3,800. See Note 14 for a discussion of environmental matters related to this site.
NOTE 6. Product Warranty |
Generally all 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, 2014 are summarized as follows:
|
|
|
|
Balance at March 31, 2014 |
$ |
284 |
|
Warranty costs incurred |
|
(110 |
) |
Change in estimates to pre-existing warranties |
|
— |
|
Product warranty accrual |
|
141 |
|
Balance at December 31, 2014 |
$ |
315 |
|
10
NOTE 7. Other Current Liabilities |
Other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
December 31, |
|
|
March 31, |
|
||
Engineering project reserves |
$ |
1,572 |
|
|
$ |
1,530 |
|
Environmental reserves – Note 14 |
|
2,085 |
|
|
|
1,673 |
|
Accrued medical benefits cost |
|
798 |
|
|
|
621 |
|
Accrued commissions |
|
529 |
|
|
|
618 |
|
Other |
|
885 |
|
|
|
772 |
|
Total |
$ |
5,869 |
|
|
$ |
5,214 |
|
NOTE 8. Income Taxes |
Income taxes for the nine month period ended December 31, 2014 was computed on the pre-tax income 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, 2014, the Company has available an Alternative Minimum Tax Credit of approximately $517 and is available to reduce future federal taxes. A valuation allowance of $1,051 exists 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. An increase in the valuation allowance of $786, is a result of state tax carryforwards that have been determined to be not more likely than not realizable.
The Company completed its qualitative and quantitative analysis of the available federal and state research and experimental tax credit in the quarter ended December 31, 2014 in order to determine the amount of previously unclaimed credits. The Company recorded a net benefit associated with recognition of the federal and state research and experimental tax credit of $5,020, as reflected in the current fiscal year income tax benefit. With the recognition of the benefit, the Company also recorded a liability relating to uncertain tax positions of $212. At December 31, 2014, the Company does not expect the liability for uncertain tax positions to change in the next twelve months. The entire amount would be a benefit to the tax expense in the period in which the liability is reduced.
NOTE 9. Long-Term Debt Payable to Banks |
Revolving Credit Facility – The Company has a five-year Revolving Credit Facility (the “Revolving Credit Facility” or “Facility”),which provides the Company with a $20,000 unsecured revolving line of credit with an accordion feature that may increase the amount to 2.5 times EBITDA (as defined in the Facility) to a maximum of $35,000. The term of the Facility is through August 26, 2018.
The Company has the option, subject to bank approval, during the five-year term of the Revolving Credit Facility, to convert the Facility to a secured credit facility which increases the borrowing limit to 3.5 times EBITDA (as defined in the Facility) up to a maximum of $35,000. As of December 31, 2014, the Company has not exercised this option.
Amounts outstanding under the Revolving Credit Facility generally accrue interest at a floating rate, adjusted monthly. The floating rate is the then-current London Interbank Offered Rate (“LIBOR”) monthly floating rate plus an applicable margin based on the Company’s ratio of funded debt to EBITDA. The Company also must pay a quarterly unused commitment fee of 0.125%. Amounts outstanding under the Revolving Credit Facility are generally due and payable on the expiration date of the Facility (August 26, 2018), and the Company can elect to prepay some or all of the outstanding balance from time to time without penalty. Up to $8,000 of the available funds can be used to support the issuance of letters of credit. During the first nine months of fiscal 2015, the Revolving Credit Facility had a blended interest rate of approximately 0.125%, which represents a commitment fee on the average daily unused portion of the Facility.
The Revolving Credit Facility includes customary representations and warranties and requires the Company to comply with customary covenants, including, among other things, the following financial covenants: maintain at least a specified minimum level of tangible net worth; maintain a ratio of funded debt to EBITDA not exceeding a specified amount; and maintain a ratio of EBIT (as defined in the Facility) to cash interest expense not below a specified amount.
The Revolving Credit Facility does not restrict the Company’s ability to pay cash dividends on shares of its common stock, subject to maintaining $5,000 available under the Facility after the dividend payment and complying with the financial covenants included in the Facility. In addition, the Revolving Credit Facility does not restrict the Company’s ability to acquire or purchase other businesses or their assets provided that the businesses or assets are in a line of business which is substantially similar to the Company’s current business.
11
As of December 31, 2014, there were no outstanding borrowings under the Facility, $202 in outstanding (standby) letters of credit, and $19,798 in unsecured revolving line of credit availability. As of December 31, 2014, the Company was in compliance with the covenant provisions of the Facility.
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. |
For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company develops unobservable inputs based on the best information and analysis available. The source of this information may include internal Company functional experts and external sources. The analysis includes internal valuation input and judgments and the significance of any unobservable inputs and data.
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 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 $185 and $596, respectively, for the three and nine month periods ended December 31, 2014 and $234 and $760, respectively, for the three and nine month periods ended December 31, 2013.
The Company provides postretirement benefits to certain union employees. The Company funds these benefits on a pay-as-you-go basis. The measurement date is March 31.
In February 2002, the 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 $3,075 and $3,479 as of December 31, 2014 and March 31, 2014, 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.
12
The net periodic pension cost is based on estimated values provided by independent actuaries. The following tables provide the components of the net periodic benefit cost.
|
Postretirement Benefits |
|
|||||||||||||
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
||||
Interest cost |
$ |
6 |
|
|
$ |
7 |
|
|
$ |
17 |
|
|
$ |
22 |
|
Amortization of net (gain) loss |
|
— |
|
|
|
8 |
|
|
|
— |
|
|
|
23 |
|
Net periodic cost |
$ |
6 |
|
|
$ |
15 |
|
|
$ |
17 |
|
|
$ |
45 |
|
|
Pension Plan |
|
|||||||||||||
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
||||
Interest cost |
$ |
27 |
|
|
$ |
29 |
|
|
$ |
84 |
|
|
$ |
85 |
|
Amortization of net (gain) loss |
|
2 |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
Net periodic cost |
$ |
29 |
|
|
$ |
29 |
|
|
$ |
91 |
|
|
$ |
85 |
|
NOTE 12. Concentration of Credit Risk |
The Company is subject to concentration of credit risk primarily with its cash and accounts receivable. At times, the Company maintains its cash in bank deposit accounts in excess of the FDIC insured amount which is $250. 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, 2014, the Company had no other significant concentrations of credit risk.
NOTE 13. New Accounting Standards |
In June 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers: Topic 606. ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU.
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. An entity should apply the amendments in this ASU using one of the following two methods:1. Retrospectively to each prior reporting period 2. Retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. The Company is currently considering the impact that the adoption of this guidance will have 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 many 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
13
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 ASC 450 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, 2014 and March 31, 2014, the aggregate environmental liability was $9,431 and $10,323, respectively, included in other current liabilities and other long term liabilities on the condensed consolidated balance sheets, before cost-sharing of approximately $1,346 and $1,918 at December 31, 2014 and March 31, 2014, respectfully, that is included in other current assets and other long term assets, net of fees to be paid to a third party relating to this arrangement. The Company’s environmental liability reserves are not reduced for any potential cost-sharing reimbursements.
In the first nine months of fiscal 2015 and the first nine months fiscal 2014, the Company spent $701 and $1,039, respectively, on environmental costs, and for the entire fiscal 2014 the Company spent $1,487. These costs are charged against the environmental liability reserve and do not impact net 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 seven locations, including certain former facilities. Due to the nature of environmental remediation and monitoring work, such activities can extend for up to thirty 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 but not limited to the following: changes to federal and state environmental regulations or laws; changes in local construction costs and the availability of personnel and materials; unforeseen remediation requirements that are not apparent until the work actually commences; and actual remediation expenses that differ from those estimated. The Company does not include any unasserted claims that it might have against others in determining its potential liability for such costs, and, except as noted with 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.
In addition, and as disclosed below, 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.
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 $3,154 for the Glen Head site at December 31, 2014. 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.
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
14
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.
In the second quarter of fiscal 2014, the Company and the PaDEP executed a first amendment to the 2003 Consent Order for additional remediation work within the site covered by the 2003 Consent Order. The Company submitted an environmental cleanup plan for this additional remediation work during the second quarter of fiscal 2014.
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 Federal Labs site subject to the 1999 Consent Order. The U.S. Government cost-sharing receivable is classified primarily as other assets on the condensed consolidated balance sheets.
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. In May 2014, the Pennsylvania Department of Environmental Protection (“PADEP”) approved the final remedial action report for the site subject to the 2001 Consent Order and as a result of this approval the Company believes that no further on-site work is required. The remaining technical fees from the Company’s technical advisors are not expected to exceed $10. Accordingly, the Company reduced the environmental reserve by $412 in June 2014.
Effective May 27, 2014, the Company reached an agreement in principle with the U.S. Government with respect to environmental response costs for the Fed Labs site subject to the 2003 Consent Order. Under this agreement, the U.S. Government pays an amount equal to approximately 26% of the environmental response costs incurred prior to December 31, 2012 and 33.5% of the ongoing environmental response costs incurred thereafter.
At December 31, 2014, the environmental liability reserve at Federal Labs was $4,264. The Company expects that remediation at this site, which is subject to the oversight of the Pennsylvania authorities, will not be completed for several years, and that monitoring costs, although expected to be incurred over twenty years, could extend for up to thirty years.
There are other properties that have a combined environmental liability of $2,013 at December 31, 2014.
The environmental activity is summarized as follows:
Balance at March 31, 2014 |
$ |
10,323 |
|
Environmental costs incurred |
|
(701 |
) |
Interest accretion |
|
221 |
|
Reduction of environmental reserve-Part of Federal Labs site subject to the 2001 Consent Order |
|
(412 |
) |
Balance at December 31, 2014 |
$ |
9,431 |
|
Litigation
Certain other claims, suits, and complaints arising in the ordinary course of business have been filed or are pending against us. We believe, after consultation with legal counsel handling these specific matters, all such matters are reserved for or adequately covered by insurance or, if not so covered, are without merit or are of such kind, or involve such amounts, as would not be expected to have a material effect on our financial position or results of operations if determined adversely against us.
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.
15
Net sales of 10% or more of total revenues derived from customers for the three and nine month periods ended December 31, 2014 and 2013 are summarized as follows.
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
||||
Customer A |
|
|
16 |
% |
|
|
14 |
% |
|
|
18 |
% |
|
|
16 |
% |
Customer B |
|
|
* |
|
|
|
* |
|
|
|
16 |
|
|
|
* |
|
Customer C |
|
|
20 |
|
|
|
39 |
|
|
|
15 |
|
|
|
32 |
|
Customer D |
|
|
14 |
|
|
|
12 |
|
|
|
12 |
|
|
|
16 |
|
Customer E |
|
|
11 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
* |
Represents less than 10% of net sales. |
As of December 31, 2014, 27%, 20% and 14% of net accounts receivable were derived from three major customers, respectively. As of December 31, 2013, 23%, 19% and 18% of net accounts receivable were derived from three major customers, respectively.
Net sales below show the geographic location of customers for the three and nine month periods ended December 31, 2014 and December 31, 2013:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
Location |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
||||
United States |
|
$ |
14,105 |
|
|
$ |
17,163 |
|
|
$ |
32,933 |
|
|
$ |
39,352 |
|
Germany |
|
|
2,057 |
|
|
|
956 |
|
|
|
8,457 |
|
|
|
1,282 |
|
Italy |
|
|
1,652 |
|
|
|
2,128 |
|
|
|
3,935 |
|
|
|
6,987 |
|
England |
|
|
957 |
|
|
|
654 |
|
|
|
2,060 |
|
|
|
2,643 |
|
Other European countries |
|
|
1,823 |
|
|
|
834 |
|
|
|
4,600 |
|
|
|
1,850 |
|
Pacific and Far East |
|
|
1,355 |
|
|
|
468 |
|
|
|
3,995 |
|
|
|
1,615 |
|
Other international |
|
|
1,290 |
|
|
|
425 |
|
|
|
2,849 |
|
|
|
3,931 |
|
Total |
|
$ |
23,239 |
|
|
$ |
22,628 |
|
|
$ |
58,829 |
|
|
$ |
57,660 |
|
NOTE 16. Subsequent Events |
Management has evaluated all events occurring through the date that the Condensed Consolidated Financial Statements have been issued, and has determined that all such events that are material to the Condensed Consolidated Financial Statements have been fully disclosed.
16
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 in this report to the “Company,” the “registrant” “we,” “us” or “our” and similar terms 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 “Item 1A. Risk Factors” contained in the Company’s Annual Report on Form 10-K filed with the SEC on June 5, 2014 for the fiscal year ended March 31, 2014, and under and Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report.
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. 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. United States defense spending reductions and redirections could have a material impact on our revenues and earnings in future periods. Similarly, European government military and spending reductions could have a material impact on revenues and earnings in future periods. However, we believe that the primary military 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.
We have experienced product development schedule delays and increased investment due to OEM customer extended development timetables and due to our own product development progress.
17
Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
CORE BUSINESS
Our core business is aerospace and defense products. We believe we are a world’s leading designer, manufacturer, service provider, and supplier of mission-critical rescue hoists and cargo hook systems. We also manufacture cargo winches, tie-down equipment and weapons handling systems. 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 Sikorsky H-60 Blackhawk and Naval Hawk, CH-53K King Stallion, Bell-Boeing V-22 Osprey, Boeing CH-47 Chinook, Eurocopter Ecureuil, Dolphin, EH-101 Merlin/Cormorant, Changhe Z-11, Agusta Westland A-W109, AW119 and 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 Sikorsky CH-53 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, CASA CN-235, CASA C-295, and Airbus A400M.
Once our products are qualified and approved for use with a particular aircraft model, sales of products and services generally continue for the life of the aircraft model, which can be for 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 also provide actuators and specialty gear boxes 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 service centers 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.
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. We are
18
Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
also accelerating the development of new innovative products with the addition of an Innovation Center in Virginia and new strategic partners.
CRITICAL ACCOUNTING POLICIES
For information regarding our critical accounting policies, please refer to the discussion provided in our Annual Report on Form 10-K for our fiscal year ended March 31, 2014, as filed with the SEC on June 5, 2014, 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, 2014 Compared with Three Months Ended December 31, 2013
|
Three Months Ended |
|
|
Increase/(Decrease) |
|
||||||||||
|
December 31, |
|
|
December 31, |
|
|
$ |
|
|
% |
|
||||
Products |
$ |
18,159 |
|
|
$ |
17,058 |
|
|
$ |
1,101 |
|
|
|
6.5 |
% |
Services |
|
5,080 |
|
|
|
5,570 |
|
|
|
(490 |
) |
|
|
(8.8 |
) |
Net sales |
|
23,239 |
|
|
|
22,628 |
|
|
|
611 |
|
|
|
2.7 |
|
Products |
|
10,938 |
|
|
|
10,717 |
|
|
|
221 |
|
|
|
2.1 |
|
Services |
|
2,457 |
|
|
|
3,472 |
|
|
|
(1,015 |
) |
|
|
(29.2 |
) |
Cost of sales |
|
13,395 |
|
|
|
14,189 |
|
|
|
(794) |
|
|
|
(5.6) |
|
Gross profit |
|
9,844 |
|
|
|
8,439 |
|
|
|
1,405 |
|
|
|
16.7 |
|
As a % of net sales |
|
42.4 |
% |
|
|
37.3 |
% |
|
|
N/A |
|
|
|
5.1 |
%Pt |
Selling, general, and administrative expenses |
|
3,578 |
|
|
|
3,198 |
|
|
|
380 |
|
|
|
11.9 |
% |
Engineering expense |
|
1,071 |
|
|
|
2,516 |
|
|
|
(1,445) |
|
|
|
(57.4) |
|
Total operating expenses |
|
4,649 |
|
|
|
5,714 |
|
|
|
(1,065) |
|
|
|
(18.6) |
|
Operating income |
|
5,195 |
|
|
|
2,725 |
|
|
|
2,470 |
|
|
|
90.6 |
|
Other (income) expense-net |
|
(1,200) |
|
|
|
23 |
|
|
|
(1,223 |
) |
|
|
(5,317.4) |
) |
Income tax (benefit) provision |
|
(2,657) |
|
|
|
1,024 |
|
|
|
(3,681) |
|
|
|
(359.5) |
|
Effective tax rate |
|
(41.6) |
% |
|
|
38.0 |
% |
|
|
N/A |
|
|
|
(79.6 |
)%Pt |
Net income |
$ |
9,044 |
|
|
$ |
1,670 |
|
|
$ |
7,374 |
|
|
|
441.6 |
% |
Net Sales. Fiscal 2015 third quarter net sales of $23,239 were $611, or 2.7%, higher than net sales of $22,628 in the fiscal 2014 third quarter. Fiscal 2015 third quarter products sales of $18,159 were $1,101, or 6.5%, higher than prior year primarily due to higher spare sales of hoist & winch to the U.S. Government partly off-set by lower spare sales of hoist & winch to foreign commercial customers.
Fiscal 2015 third quarter services sales of $5,080 were lower by $490, or 8.8%, compared with the prior year primarily due to lower Overhaul & Repair volume and lower engineering billing.
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 2015 revenues will be consistent with this historical pattern.
Cost of Sales. Products cost of sales of $10,938 in the fiscal 2015 third quarter were $221, or 2.1%, higher than the same period in fiscal 2014 primarily due to spare sales volume. Cost of services provided of $2,457 in the fiscal 2015 third quarter was $1,015, or 29.2%, lower than the prior year due primarily to lower overhaul and repair volume and lower engineering volume.
Gross profit. Gross profit of $9,844 in the fiscal 2015 third quarter was $1,405, or 16.7%, higher than the same period in fiscal 2014. The increase is primarily due to increased spare parts volume and also to higher profitability for spare parts and overhaul & repair. As a percent of sales, the gross profit margin was 42.4% for the fiscal 2015 third quarter compared with 37.3% for the prior year.
19
Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
Operating Expenses. Total operating expenses were $4,649, or 20.0% of net sales, in the third quarter of fiscal 2015 compared with $5,714 or 25.3% of net sales in the comparable prior year period. Selling, general, and administrative (“SG&A”) expenses of $3,578 in the fiscal 2015 third quarter were higher than the $3,198 in the third quarter of fiscal 2014. As a percent of sales, SG&A was 15.4% in the fiscal 2015 third quarter versus 14.1% in the comparable period last year.
Engineering expenses were $1,071 in the third quarter of fiscal 2015 compared with $2,516 in the third quarter of fiscal 2014. The decrease results from lower expenses incurred for development programs.
Other (Income) expense-net. Other income was $1,200 during the third quarter of fiscal 2015 versus other expense of $23 for the same period last year. Fiscal 2015 other income represents a refund received from a real estate property tax review and assessment reduction for the Glen Head, New York property, classified on the condensed consolidated balance sheets as an asset for sale. The period covered by this refund is from 1997 to 2010.
Income tax (benefit) provision. Income tax benefit was $2,657 in the third quarter of fiscal 2015, compared with an income tax provision of $1,024 in the third quarter of fiscal 2014. The company recorded a research & development tax credit of $5,020 during the third quarter of fiscal year 2015. This tax credit is related to qualifying research & development expenses incurred during the period of 2001 to 2013. Notwithstanding the tax benefit for the research & development credit, income taxes for the three month periods ended December 31, 2014 and December 31, 2013 were computed on the pre-tax income using the effective tax rates of 37.0% and 38.0%, respectively, 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 $9,044, or a $0.91 per diluted share, in the third quarter of fiscal 2015, compared with net income of $1,670, or $0.17 per diluted share, in the fiscal 2014 third quarter. The significant improvement in net income for the third quarter resulted from improved margins (42.4% this quarter versus 37.3% in the same quarter last fiscal year), lower engineering expenses ($1,071 this fiscal year versus $2,516 for the same period last fiscal year), the $1,224 property tax refund and the recording of the $5,020 research & development tax credit.
New Orders. New products and services orders received during the three months ended December 31, 2014 decreased by 49.7% to $16,502 compared with $32,826 during the three months ended December 30, 2013. The orders received during last fiscal year included $8,454 of increased pricing and contract scope for the Airbus A400M military transport aircraft. When excluding this increased pricing and contract scope impact of $8,454, the decrease versus the three months ended December 31 2013 amounts to 32%. The decrease of 32% was due primarily to lower orders from the U.S. Government.
Backlog. We measure backlog by the amount of products or services that customers committed by contract to purchase as of a given date. Backlog may vary substantially over time due to the size and timing of orders. Backlog of approximately $59,408 at December 31, 2014 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.
Backlog at December 31, 2014 was $119,796, compared with $119,464 at March 31, 2014, and $128,038 at December 31, 2013. These figures include $67,498, $70,853, and $78,065, respectively, for the Airbus A400M military transport aircraft.
The book-to-bill ratio is computed by dividing the new orders received during a period by the sales for the same period. A book-to-bill ratio in excess of 1.0 is potentially indicative of continued overall growth in sales. The book to bill ratio was 0.7 for the fiscal 2015 third quarter and 1.5 for the fiscal 2014 third quarter. When excluding the increased pricing and contract scope impact of $8,454 for the Airbus A400M military transport aircraft included in the orders received during the three months ended December 31 2013, the book to bill ratio was 1.07.
20
Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
Nine Months Ended December 31, 2014 Compared with Nine Months Ended December 31, 2013
|
Nine Months Ended |
|
|
Increase/(Decrease) |
|
||||||||||
|
December 31, |
|
|
December 31, |
|
|
$ |
|
|
% |
|
||||
Products |
$ |
45,101 |
|
|
$ |
40,486 |
|
|
$ |
4,615 |
|
|
|
11.4 |
% |
Services |
|
13,728 |
|
|
|
17,174 |
|
|
|
(3,446 |
) |
|
|
(20.1 |
) |
Net sales |
|
58,829 |
|
|
|
57,660 |
|
|
|
1,169 |
|
|
|
2.0 |
|
Products |
|
29,003 |
|
|
|
25,550 |
|
|
|
3,453 |
|
|
|
13.5 |
|
Services |
|
7,431 |
|
|
|
11,453 |
|
|
|
(4,022 |
) |
|
|
(35.1 |
) |
Cost of sales |
|
36,434 |
|
|
|
37,003 |
|
|
|
(569) |
|
|
|
(1.5) |
|
Gross profit |
|
22,395 |
|
|
|
20,657 |
|
|
|
1,738 |
|
|
|
8.4 |
|
As a % of net sales |
|
38.1 |
% |
|
|
35.8 |
% |
|
|
N/A |
|
|
|
2.3 |
%Pt |
Selling, general, and administrative expenses |
|
11,246 |
|
|
|
9,739 |
|
|
|
1,507 |
|
|
|
15.5 |
% |
Engineering expense |
|
5,117 |
|
|
|
6,245 |
|
|
|
(1,128) |
|
|
|
(18.1) |
|
Total operating expenses |
|
16,363 |
|
|
|
15,984 |
|
|
|
379 |
|
|
|
2.4 |
|
Operating income |
|
6,032 |
|
|
|
4,673 |
|
|
|
1,359 |
|
|
|
29.1 |
|
Other (income) expense-net |
|
(1,138) |
|
|
|
74 |
|
|
|
(1,212 |
) |
|
|
(1,637.8 |
) |
Income tax (benefit) provision |
|
(2,376) |
|
|
|
1,732 |
|
|
|
(4,108 |
) |
|
|
(237.2 |
) |
Effective tax rate |
|
(33.2) |
% |
|
|
38.0 |
% |
|
|
N/A |
|
|
|
(71.2 |
)%Pt |
Net income |
$ |
9,522 |
|
|
$ |
2,826 |
|
|
$ |
6,696 |
|
|
|
236.9 |
% |
Net Sales. Fiscal 2015 first nine months net sales of $58,829 increased by $1,169, or 2.0%, from net sales of $57,660 in the first nine months of fiscal 2014.
Product sales in the first nine months of fiscal 2015 were $45,101, an increase of $4,615 or 11.4%, from $40,486 in the corresponding prior year period. The increase is primarily due to higher new equipment winch volume to Airbus and higher spare parts volume to the US Government.
Service sales in the first nine months of fiscal 2015 were $13,728, a decrease of $3,446, or 20.1%, from $17,174 in the corresponding prior year period due to lower overhaul & repair volume to the U.S. Government and international OEM’s and lower engineering billing.
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 2014 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 2015 revenues will be consistent with this historical pattern.
Cost of Sales. Products cost of sales of $29,003 in the fiscal 2015 first nine months were 13.5% higher than the corresponding prior-year period primarily due to the increased new equipment volume. Cost of services provided of $7,431 in the fiscal 2015 first nine months were $4,022 lower than the corresponding prior-year period due to lower overhaul & repair volume and lower engineering billing.
Gross profit. Gross profit of $22,395 in the fiscal 2015 first nine months was $1,738, or 8.4% higher than the same period in fiscal 2014. Gross profit dollars improved primarily from the higher sales volume of new equipment to Airbus, significant reduction in engineering losses, and higher volume and margin of spare part sales. As a percent of sales, the gross profit margin was 38.1% for the fiscal 2015 first nine months compared with 35.8% for the prior year. Gross profit as a percent of sales improved primarily due to higher margins on spare part sales, overhaul & repair, and billable engineering.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
Operating Expenses. Total operating expenses were $16,363, or 27.8% of net sales, in the first nine months of fiscal 2015 compared with $15,984, or 27.7% of net sales, in the comparable prior-year period. SG&A expense were $11,246 in the fiscal 2015 first nine months compared with $9,739 in the first nine months of fiscal 2014, an increase of $1,507 partly explained by the significant reduction of the environmental liability experienced in the fiscal 2014 first quarter of $1,207 recorded for the previously-owned property in Wyoming, Illinois. A reduction of $412 in environmental liability was also recorded in the fiscal 2015 first quarter following the approval of the final remedial action plan for a portion of the Federal Labs Saltsburg, Pennsylvania site. Higher SG&A costs were also incurred during the first nine months of fiscal 2015 as a result of the CFO transition costs of $678, while $240 was incurred during the first nine months of fiscal 2014 for other executive transition costs. Excluding for both fiscal years the benefits from the environmental reserve reduction and the executive transition cost, SG&A expense increased by $274. As a percent of sales, SG&A expense was 19.1% (18.7% excluding the environmental reserve reversal benefit and executive transition costs) in the fiscal 2015 first nine months versus 16.9% in the comparable period last year (18.6% excluding the reserve reversal benefit and executive transition costs).
Engineering expenses were $5,117 in the first nine months of fiscal 2015 compared with $6,245 in the first nine months of fiscal 2014. The decrease primarily resulted from lower expenses incurred for development programs, partly off-set by expenses incurred of $288 for an internal re-organization in fiscal year 2015.
Other (Income) expense-net. Other income was $1,138 for the first nine months of fiscal 2015 versus other expense of $74 for the same period last year. Fiscal 2015 other income primarily represents a refund received from a real estate property tax review and assessment reduction for the Glen Head, New York property, classified on the condensed consolidated balance sheets as an asset for sale. The period covered by this refund is from 1997 to 2010.
Income tax (benefit) provision. Income tax benefit was $2,376 in the first nine months of fiscal 2015 versus an income tax provision of $1,732 in the first nine months of fiscal 2014. The company recorded a research & development tax credit of $5,020 during the third quarter of fiscal year 2015. This tax credit is related to qualifying research & development expenses incurred during the period of 2001 to 2013. Notwithstanding the tax benefit for the research & development credit, income taxes for the nine month periods ended December 31, 2014 and December 31, 2013 were computed using the effective tax rates of 37.0% and 38.0%, respectively, 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 $9,522 or $0.96 per diluted share, in the fiscal 2015 first nine months compared with $2,826 or $0.29 per diluted share, in the same period in fiscal 2014. The improvement in net income was mainly due to higher volume of new production and spare sales, higher margins on spares and overhaul & repair sales, lower engineering expenses, a property tax refund of $1,224 on the Glen Head, New York property and the recording of a research & development tax credit of $5,020. Excluding the research & development tax credit of $5,020, the executive transition costs, the environmental reserve reductions, the internal re-organization costs, and the real estate tax refund mentioned previously, net income for the first nine months of fiscal 2015 would have been $4,080 or $0.41 per diluted share versus net income of $2,226, or $0.23 per diluted share for the first nine months of fiscal 2014.
New Orders. New products and services orders received during the nine months ended December 31, 2014 decreased by 16.2% to $59,161 compared with $70,596 during the nine months ended December 31, 2013. The orders received during last fiscal year included $8,454 of increased pricing and contract scope for the Airbus A400M military transport aircraft. When excluding this increased pricing and contract scope impact of $8,454, the decrease versus the nine months ended December 31, 2013 amounts to 4.7%. The decrease was due primarily to lower orders from the U.S. Government.
Backlog
The book to bill ratio for the first nine months of fiscal 2015 was 1.0 compared with 1.2 for the first nine months of fiscal 2014. When excluding this increased pricing and contract scope impact of $8,454, the book to bill ratio was 1.08 for the nine months ended December 31, 2013. Cancellations of purchase orders or reductions of product quantities in existing contracts, although seldom occurring, could substantially and materially reduce our backlog. Therefore, the backlog may not represent the actual amount of shipments or sales for any future period.
Liquidity and Capital Resources
Our principal sources of liquidity are cash on hand, cash generated from operations, and our Revolving Credit Facility.
Our liquidity requirements depend on a number of factors, many of which are beyond our control, including the timing of production under contracts with the U.S. Government. Our working capital needs fluctuate between periods as a result of changes in program status and the timing of payments by program. Additionally, because sales are generally made on the basis of individual purchase orders,
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)
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 Revolving Credit Facility, we expect to have sufficient cash to meet liquidity requirements for the next twelve months. The Revolving 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.
Our cash was $15,736 on December 31, 2014, compared with $6,021 on March 31, 2014, an increase of $9,715. The increase in our cash is primarily the net result of positive cash flows provided by operating activities of $9,392.
Cash flows provided by operating activities during the first nine months of fiscal 2015 was $9,392 and is the result of a decrease in accounts receivable of $8,897 and an increase in accrued income taxes of $1,900. This was partially offset by an increase in inventory of $5,542 as we prepare for anticipated shipments in the last quarter of the fiscal year, a $4,311 increase in deferred taxes due to the recording of the research & development tax credit, a decrease in accounts payable of $2,088 and a decrease in accrued compensation of $917.
Cash flows used in investing activities in the first nine months of fiscal 2015 was $339, and was used for capital expenditures of $295 mainly for production test, barcoding equipment, and information technology equipment. Spending for capitalized qualification units was $44 as we are nearing the completion of this testing.
Cash flows provided by financing activities during the first nine months of fiscal 2015 were $662, and reflects cash received from the exercise of stock options.
Net working capital at December 31, 2014 was $47,124 versus $39,708 at March 31, 2014, an increase of $7,416. The ratio of current assets to current liabilities was 4.1:1.0 at December 31, 2014 compared with 3.5:1.0 at the beginning of fiscal 2015.
Accounts receivable days outstanding were 63 days at December 31, 2014 and 71 days at December 31, 2013. The decrease in days is due to customer sales mix and related payment terms. Inventory turnover was 2.2 turns at December 31, 2014 versus 2.0 turns at December 31, 2013. These accounts receivables and inventory measures are predicated on the prior twelve month historical data for sales and cost of sales.
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, 2014 and March 31, 2014, the aggregate environmental liability was $9,431 and $10,323, respectively. The liability is classified in other current liabilities and other long-term liabilities on the condensed consolidated balance sheets. Separately, environmental cost-sharing with third parties of approximately $1,346 and $1,918 at December 31, 2014 and March 31, 2014, respectfully, is included in other current assets and other long term assets, net of fees to be paid to a third party relating to this arrangement. The Company’s environmental liability reserves are not reduced for any potential cost-sharing reimbursements.
In the first nine months of fiscal 2015 and fiscal 2014, we spent $701 and $1,039, respectively, on environmental costs, and for the entire fiscal 2014, we spent $1,487. We have a detailed plan by property to manage our environmental exposure. Based on this plan, we anticipate spending approximately $1,326 on environmental matters in fiscal 2015. 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.
In May 2014, the PADEP approved the final remedial action report for the Fed Labs Saltsburg, Pennsylvania site subject to the 2001 Consent Order and as a result of this approval we believe that no further on-site work is required. The remaining technical fees from our technical advisors are not expected to exceed $10. Accordingly, we reduced the environmental reserve by $412 in the first quarter of fiscal 2015, as reflected in SG&A expense.
Environmental matters are discussed in Note 14 of the “Notes to Unaudited Condensed Consolidated Financial Statements” contained in Part 1, Item 1 of this report.
Litigation – Litigation is discussed in Note 14 of the “Notes to Unaudited Condensed Consolidated Financial Statements” contained in Part 1, Item 1 of this report.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ 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, 2014, 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.
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We are exposed to various market risks, primarily changes in interest rates associated with our Senior Credit Facility. At December 31, 2014, we had no borrowings under our Senior Credit Facility.
At times we maintain our cash in bank deposit accounts in excess of the FDIC insured amount which is $250.
Evaluation of Disclosure Controls and Procedures
In May 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released COSO 2013, an update of its Internal Control - Integrated Framework (1992). The COSO 2013 Internal Control-Integrated Framework formalizes the principles embedded in the original COSO 1992, incorporates business and operating environment changes over the past two decades, and improves the original 1992 framework’s ease of use and application. We completed our transition to COSO 2013 in the third quarter of fiscal 2015. The transition to COSO 2013 did not have a significant impact on our underlying compliance with the applicable provisions of the Sarbanes-Oxley Act of 2002, including internal control over financial reporting and 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 15d-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, 2014, 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 15d-15(f)) during the third quarter of fiscal 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
We are subject to federal and state requirements for protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. As a result, we are a party to or have our former property subject to various lawsuits or proceedings involving environmental protection matters. Due in part to their complexity and pervasiveness, such requirements have resulted in us being involved with related legal proceedings, claims, and remediation obligations. The extent of our financial exposure cannot in all cases be reasonably estimated at this time. For information regarding these matters, including current estimates of the amounts that we believe are required for remediation or clean-up to the extent estimable, see Note 14 in the “Notes to Unaudited Condensed Consolidated Financial Statements” contained elsewhere in this report.
In addition to the other information set forth in this report, the user/reader should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014, as filed with the SEC on June 5, 2014, and incorporated herein by reference, which factors could materially affect our business, financial condition, financial results or future performance.
None.
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None.
None.
None.
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10.1 |
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Amendment to Employment Letter by and between Breeze-Eastern Corporation and James D. Cashel dated October 10, 2014 (incorporated by reference to Exhibit 99.1 to the current report on Form 8-K, filed with the SEC on October 14, 2014). |
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31.1 |
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS* |
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XBRL Instance Document. |
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101.SCH* |
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XBRL Taxonomy Extension Schema Document. |
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101.CAL* |
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XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF* |
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XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB* |
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XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE* |
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XBRL Taxonomy Extension Presentation Linkbase Document. |
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We have attached the following documents formatted in XBRL (Extensible Business Reporting Language) as Exhibit 101 to this report: (i) the Condensed Consolidated Statements of Operations for the three month and nine month periods ended December 31, 2014 and December 31, 2013, respectively; (ii) the Condensed Consolidated Balance Sheets at December 31, 2014, and March 31, 2014; and (iii) the Condensed Consolidated Statements of Cash Flows for the nine month periods ended December 31, 2014, and December 31, 2013, respectively. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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BREEZE-EASTERN CORPORATION |
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(Registrant) |
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Dated: January 29, 2015
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By: |
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/s/ Serge Dupuis |
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Serge Dupuis |
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Chief Financial Officer and Treasurer * |
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On behalf of the Registrant and as Principal Financial and Accounting Officer. |
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