FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

For the quarterly period ended September 30, 2015

OR

For the transition period from                      to                     

Commission file number 1-7872

BREEZE-EASTERN CORPORATION

(Exact name of registrant as specified in its charter)

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

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):

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 October 26, 2015, the total number of outstanding shares of common stock was 9,914,242.

INDEX

PART I. FINANCIAL INFORMATION

The results reflected in the unaudited Condensed Consolidated Statements of Operations for the three and six month periods ended September 30, 2015 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 May 29, 2015 with the Securities and Exchange Commission (“SEC”) for the fiscal year ended March 31, 2015. 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 2016, which commenced on April 1, 2015 and will end on March 31, 2016. 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.

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BREEZE-EASTERN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars, Except Share Data) 

See notes to condensed consolidated financial statements.

BREEZE-EASTERN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

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

See notes to condensed consolidated financial statements.

BREEZE-EASTERN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In Thousands of Dollars)

See notes to condensed consolidated financial statements.

Notes to Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

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. These reclassifications had no effect on total net income or retained earnings as previously reported.

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. 

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 six month periods ended September 30, 2015, includes stock-based compensation expense of $143 net of tax, or $0.01 per diluted share, and $292 net of tax, or $0.03 per diluted share, respectively. Net income for the three and six month periods ended September 30, 2014, includes stock- based compensation expense of $179 net of tax, or $0.02 per diluted share, and $377 net of tax, or $0.04 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 2006 Long-Term Incentive Plan (the “2006 Plan”), and the 2012 Incentive Compensation Plan (the “2012 Plan” and together with 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.

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.

Notes to Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

In certain circumstances, including a change of control of the Company (as defined in the various Plans), option vesting may be accelerated.

The Black-Scholes option-pricing model uses dividend yield, volatility, risk-free rate, expected term, and forfeiture assumptions to value stock options and was used to value 15,000 of the total 120,000 options granted in fiscal 2016, 40,000 of which were granted to Serge Dupuis, CFO & Treasurer on May 28, 2015, and 50,000 of which were granted to Mark M. McMillin, General Counsel and Corporate Secretary on August 24, 2015 as reported in the Company’s Current Report on Form 8-K filed on August 26, 2015.

The Black-Scholes option-pricing model was used to value 55,000 of the total 440,000 options granted in fiscal 2015. The Black-Scholes weighted-average value at each grant date per option granted in fiscal 2016 was $3.66 and $4.91, and in fiscal 2015 was $4.61, $3.85 and $3.72. 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:

The remaining 105,000 options granted in fiscal 2016 had a weighted-average value per option of $2.49 and $2.49. The remaining 385,000 options granted in fiscal 2015 had a weighted-average value per option of $3.05, $2.49 and $2.49 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:

Notes to Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

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

Cash received from stock option exercises during the first six months of fiscal 2016 was approximately $643. The aggregate intrinsic value of options exercised during the first six months of fiscal 2016 was approximately $282. 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 2016.

During the first six months of fiscal 2016 and fiscal 2015, stock option compensation expense recorded in selling, general and administrative expenses was $325 and $487, respectively, before taxes of $115 and $180, respectively. As of September 30, 2015, there was $927 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 one year.

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.

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

Notes to Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

period with respect to unvested restricted stock awards granted. During the first six months of fiscal 2016 and fiscal 2015, compensation expense related to restricted stock awards recorded in selling, general and administrative expenses was $126 and $112, respectively, before taxes of $44 and $41, respectively. As of September 30, 2015, there was approximately $372 of unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a period of approximately two years.

NOTE  4.      Inventories

Inventories are summarized as follows:

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.

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 six month periods ended September 30, 2015 was $339 and $666, respectively, and for the three and six month periods ended September 30, 2014 was $383 and $733, respectively.

Average estimated useful lives for property are as follows:

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 parties are obligated to close under the sales contract upon receipt of the final governmental approvals, and the Company must provide the buyer with a funded remediation plan and environmental insurance at closing. The net sale proceeds are expected to be $3,800. See Note 14 for a discussion of environmental matters related to this site.

All equipment has a one to three year warranty for which a reserve is established using historical averages and specific program contingencies when considered necessary. Changes in the carrying amount of accrued product warranty costs for the six month period ended September 30, 2015 are summarized as follows:

Notes to Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

Other current liabilities consist of the following:

Income taxes for the six month period ended September 30, 2015 was computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management.

At September 30, 2015, the Company has an Alternative Minimum Tax Credit of approximately $518 that is available to reduce future federal taxes. In addition, the Company has a Research & Development tax credit carryforward at the federal and state level of $1,380 and $1,744 respectively that is available to reduce federal and state taxes. A valuation allowance of $1,543 exists relating to the state tax credits and other items, as it is management’s belief that it is more likely than not that a portion of these deferred assets are not realizable.

The Company performed a qualitative and quantitative analysis of the available federal and state research and development tax credit during fiscal 2015 in order to determine the amount of previously unclaimed credits. With the recognition of the benefit, the Company also recorded a liability relating to uncertain tax positions of $255. The research and development credit has expired under the Federal statutes and no income tax benefits have been recorded as of September 30, 2015. If and when such credits are enacted, (either retroactively or prospectively) the impact will be favorable on the Company’s effective tax rate. During the previous quarter the State of New Jersey issued an information request for the details supporting the research and development credits claimed. During this quarter the Company provided support in connection with the credit and the State has finalized its audit and agreed with the Company’s refund claim.

At September 30, 2015, 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.

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 September 30, 2015, 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 six months of fiscal 2016, 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.

Notes to Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

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.

As of September 30, 2015, there were no outstanding borrowings under the Facility, $702 in outstanding (standby) letters of credit, and $19,298 in unsecured revolving line of credit availability. As of September 30, 2015, the Company was in compliance with the covenant provisions of the Facility.

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:

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.

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 $204 and $405, respectively, for the three and six month periods ended September 30, 2015 and $208 and $411, respectively, for the three and six month periods ended September 30, 2014.

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 $3,142 and $3,032 as of September 30, 2015 and March 31, 2015, 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.

Notes to Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

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

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 September 30, 2015, the Company had no other significant concentrations of credit risk.

In August 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This ASU adds SEC paragraphs pursuant to the SEC Staff Announcement at the June 18, 2015, Emerging Issues Task Force meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires the presentation of debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU 2014-09. The Company is still determining the impact of this guidance on the Company’s consolidated financial position, results of operations, and cash flows.

Notes to Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Topic 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments in this Update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

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 unrelated to its current operations. These facilities were part of businesses disposed of by TransTechnology Corporation, the Company’s 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 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 September 30, 2015 and March 31, 2015, the aggregate environmental liability was $9,086 and $9,255, respectively, included in other current liabilities and other long term liabilities on the condensed consolidated balance sheets, before a cost-sharing receivable of approximately $1,150 and $1,554 at September 30, 2015 and March 31, 2015, respectfully, that is included in other current assets and other long term assets, net of third-party fees. The Company’s environmental liability reserves are not reduced for any potential cost-sharing reimbursements.

In the first six months of fiscal 2016 and the first six months fiscal 2015, the Company spent $307 and $383, respectively, on environmental costs, and for the entire fiscal 2015 the Company spent $946. 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 six 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 other sites that the Company is monitoring or investigating for potential environmental liability. 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.

Notes to Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

In addition, and as disclosed below, the Company will, where supported by the evidence, pursue claims for contribution to site investigation and cleanup costs against other potentially responsible parties (PRPs).

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 $3,157 for the Glen Head site at September 30, 2015. The amounts and timing of payments are subject to the approved remediation plan and additional discussions with NYDEC.

The property is classified as “held for sale” for $3,800 after allowing for certain costs. In July 2001, the Company entered into a sales contract for the Glen Head, New York property for $4,000.  

The buyer has indicated that its intended plan is to build residential housing on this former industrial site and has been engaged in the lengthy process of securing the necessary governmental approvals. In March 2015, the Company and the buyer entered into an amendment to the sales contract. The amendment provides for a potential reduction in the purchase price of up to $1,000 if the final governmental approvals contain certain limitations on the buyer’s ability to implement its intended development plan. The parties are obligated to close under the sales contract upon receipt of the final governmental approvals, and the Company must provide the buyer with a funded remediation plan and environmental insurance at closing. However, the amendment further provides that if the governmental approvals are not secured by December 31, 2017, then at any time after that date either the Company or the buyer may elect to terminate the sales contract. If at any time after December 31, 2017, the Company terminates the sales contract for convenience, the Company must return to the buyer an additional liquidated amount of $750. Pursuant to the amendment to the sales contract the Company deposited into an escrow account $530, included in other long term assets on the condensed consolidated balance sheets, to secure the purchaser’s funding of certain estimated building demolition activities that will be conducted prior to the closing of the sale of the real estate. Additional amounts may be required to be deposited into escrow if the actual demolition costs exceed this estimate. The funds in escrow will be returned to the Company at the time of the sale, or if the if the sales contract is terminated the funds will be released to the buyer.    

Saltzburg, Pennsylvania (“Federal Labs”)

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

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

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. On May 6, 2014, the

Notes to Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

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.

In March 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, which was formally executed in the first quarter of fiscal 2015, the U.S. Government will pay 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. The U.S. Government cost-sharing receivable, net of third-party fees is included in other current assets and other long term assets on the condensed consolidated balance sheets.  

At September 30, 2015, the environmental liability reserve at Federal Labs was $4,029. 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.

Placerita, California

The Company successfully implemented a soil and groundwater remediation project and provided final investigation and cleanup reports to the California Department of Toxic Substances Control (“DTSC”) at its formerly-owned property in Placerita, California. In July 2015, the DTSC issued a No Further Action Determination Letter to the Company stating that all appropriate response actions have been completed, that all acceptable engineering practices were implemented, and that no further removal and remedial action is necessary thus releasing the Company from further obligations associated with the known contamination at the property.

The Company has no other known environmental obligations with respect to the Placerita California site. The remaining technical fees from the Company’s technical advisors and oversight fees from the DTSC are not expected to exceed $14. Accordingly, we reduced the environmental reserve by $430 in the second quarter of fiscal 2016.

There are other properties that have a combined environmental liability of $1,900 at September 30, 2015. After further assessment of the estimated amount and timing of any future costs that may be required for remediation actions, we had a change in estimate for two pre-existing sites and in the second quarter of fiscal 2016 recorded an additional environmental reserve for $430.

The environmental activity is summarized as follows:

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.

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.

Notes to Unaudited Condensed Consolidated Financial Statements

($ In Thousands Except Share Amounts)

(Unaudited)

Net sales of 10% or more of total revenues derived from customers for the three and six month periods ended September 30, 2015 and 2014 are summarized as follows.

As of September 30, 2015, 16%, 16% and 15% of net accounts receivable were derived from three major customers, respectively. As of September 30, 2014, 22%, 20% and 16% of net accounts receivable were derived from three major customers, respectively.

Net sales below show the geographic location of customers for the three and six month periods ended September 30, 2015 and September 30, 2014:

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.

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 May 29, 2015 for the fiscal year ended March 31, 2015, 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. Our engineering expense for the first six months of fiscal 2016 was reported net of reimbursements from Airbus, and we received no reimbursements in the first quarter of fiscal 2015.

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 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. 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, Airbus Helicopter Ecureuil, Dolphin, AgustaWestland AW-101 Merlin/Cormorant, Changhe Z-11, AgustaWestland 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 different 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 authorized 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

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

($ In Thousands Except Share Amounts)

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 are also seeking to accelerate the development of new products with the addition of a product development center in Virginia and new strategic partners. One of the projects under development is the MissionView^TM situational awareness system. The MissionView^TM system is designed to integrate one or more new components with a rescue hoist, such as sensor systems, a camera system, and a lighted hook, with a tablet computer to provide crew members with data and information critical to the mission such as, among other things, cable load and length of cable extended, while also recording data for post-mission training. Our new products typically take a significant amount of time to develop and to obtain necessary government and other approvals. Accordingly, at this time we cannot predict when we will complete the development of the components of the MissionView^TM system, when they will be available for sale, and if they will be commercially accepted. 

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, 2015, as filed with the SEC on May 29, 2015, 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 September 30, 2015 Compared with Three Months Ended September 30, 2014

Net Sales. Fiscal 2016 second quarter net sales of $23,897 were $6,226, or 35.2%, higher than net sales of $17,671 in the fiscal 2015 second quarter. Fiscal 2016 second quarter products sales of $19,697 were $6,463, or 48.8%, higher than the prior year period primarily due to higher new equipment hoist & winch volume to the U.S. Government and to foreign commercial customers and higher spare parts hoist & winch volume to foreign governments.

Fiscal 2016 second quarter services sales of $4,200 were lower by $237, or 5.3%, compared with the prior year period primarily due to lower overhaul & repair volume to foreign governments.

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 2016 revenues will be consistent with this historical pattern.

Cost of Sales. Products cost of sales of $11,939 in the fiscal 2016 second quarter were $3,566, or 42.6%, higher than the same period in fiscal 2015 primarily due to increased new production volume. Cost of services provided of $2,311 in the fiscal 2016 second quarter were at the same level as the prior year.

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

($ In Thousands Except Share Amounts)

Gross profit. Gross profit of $9,647 in the fiscal 2016 second quarter was $2,662, or 38.1%, higher than the same period in fiscal 2015. The increase is primarily due to increased volume and increased profitability on new production equipment and spare parts. As a percent of sales, the gross profit margin was 40.4% for the fiscal 2016 second quarter compared with 39.5% for the prior year.

Operating Expenses. Total operating expenses were $5,226, or 21.9% of net sales, in the second quarter of fiscal 2016 compared with $5,928 or 33.5% of net sales in the comparable prior year period. Selling, general, and administrative (“SG&A”) expenses of $3,311 in the fiscal 2016 second quarter were lower than the $3,707 in the second quarter of fiscal 2015. As a percent of sales, SG&A was 13.9% in the fiscal 2016 second quarter versus 21.0% in the comparable period last year. SG&A expenses for the second quarter of 2015 included executive transition costs of $59.

Engineering expenses were $1,915 in the second quarter of fiscal 2016 compared with $2,221 in the second quarter of fiscal 2015. Expenses incurred in 2015 included $288 for an internal re-organization.

Income tax provision. Income tax provision was $1,464 in the second quarter of fiscal 2016, compared with $376 in the second quarter of fiscal 2015. Income taxes for the three month periods ended September 30, 2015 and September 30, 2014 were computed using the effective tax rates of 33.4% and 37.0%, respectively, which is subject to ongoing review and evaluation. Income taxes and income tax rates are discussed further in Note 8 of the “Notes to Unaudited Condensed Consolidated Financial Statements” contained in Part I, Item 1 of this report.

Net Income. Net income was $2,923, or a $0.29 per diluted share, in the second quarter of fiscal 2016, compared with $640, or $0.06 per diluted share, in the fiscal 2015 second quarter. The increase is due to the higher gross profit resulting from higher sales, higher margins, and lower operating expenses. Excluding the costs associated with an internal re-organization of $288 and the executive transition costs of $59 recorded in the second quarter of fiscal 2015, and the related tax effects, the net income for the second quarter of fiscal 2015 would have been $859, or $0.09 per diluted share.

New Orders. New products and services orders received during the three months ended September 30, 2015 increased by 61.8% to $39,127 compared with $24,178 during the three months ended September 30, 2014. The increase was due primarily to higher 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 $56,182 at September 30, 2015 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 September 30, 2015 was $118,738, compared with $109,556 at March 31, 2015, and $126,532 at September 30, 2014. These figures include $58,790, $63,394 and $69,372, 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 1.6 for the fiscal 2016 second quarter compared with 1.4 for the corresponding period of 2015.

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

($ In Thousands Except Share Amounts)

Six Months Ended September 30, 2015 Compared with Six Months Ended September 30, 2014

Net Sales. Fiscal 2016 first six months net sales of $43,692 increased by $8,102, or 22.8%, from net sales of $35,590 in the first six months of fiscal 2015.

Product sales in the first six months of fiscal 2016 were $35,396, an increase of $8,454, or 31.4%, from $26,942 in the corresponding prior year period. The increase is primarily due to higher new equipment hoist and winch volume to the U.S. Government offset by lower volume to foreign governments and higher spare parts volume to the U.S. Government and to international customers.

Service sales in the first six months of fiscal 2016 were $8,296, a decrease of $352, or 4.1%, from $8,648 during the corresponding prior year period due to lower overhaul & repair volume to foreign Governments.

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 2015 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 2016 revenues will not follow this historical pattern with revenues ion the second half of fiscal 2016  be consistent with this historical pattern.

Cost of Sales. Products cost of sales of $20,873 in the fiscal 2016 first six months were 15.5% higher than the corresponding prior-year period primarily due to the increased new equipment volume. Cost of services provided of $4,146 in the fiscal 2016 first six months were $828 lower than the corresponding prior-year period due to lower engineering costs and to lower overhaul & repair volume.

Gross profit. Gross profit of $18,673 in the fiscal 2016 first six months was $6,122, or 48.8% higher than the same period in fiscal 2015. Gross profit dollars improved primarily from higher sales volume of new equipment to the US Government and higher volume of spare parts to international customers and to the U.S. Government.  As a percent of sales, the gross profit margin was 42.7% for the fiscal 2016 first six months compared with 35.3% for the prior year. Gross profit as a percent of sales improved across all categories of sales.

Operating Expenses. Total operating expenses were $10,369, or 23.7% of net sales, in the first six months of fiscal 2016 compared with $11,714, or 32.9% of net sales, in the comparable prior-year period. Selling, general, and administrative (“SG&A”) expenses were $6,627 in the fiscal 2016 first six months compared with $7,668 in the first six months of fiscal 2015, a reduction of $1,041. Higher SG&A expenses were incurred during the first six months of fiscal 2015 as a result of executive transition costs of $593. In addition, 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 the Fed Lab Saltsburg, Pennsylvania site subject to the 2001 Consent order.

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

($ In Thousands Except Share Amounts)

Engineering expenses were $3,742 in the first six months of fiscal 2016 compared with $4,046 in the first six months of fiscal 2015. Fiscal 2015 included to one-time costs of $288 associated with an internal reorganization.

Income tax provision. Income tax expense was $2,885 in the first six months of fiscal 2016 versus $281 in the first six months of fiscal 2015. The increase is due to higher pre-tax income due primarily to higher gross profit and lower SG&A and engineering expenses. Income taxes for the six month periods ended September 30, 2015 and September 30, 2014 were computed using the effective tax rates of 35.2% and 37.0%, 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 $5,309, or $0.53 per diluted share, in the fiscal 2016 first six months compared with $478, or $0.05 per diluted share, in the same period in fiscal 2015.  The increase in net income is mainly due to higher volume and margins of new production and spare parts and lower operating expenses. Excluding the executive transition costs of $593, the costs associated with an internal re-organization of $288 and the benefit from the environmental reserve reduction of $412 recorded during the first six months of fiscal 2015, and the related tax effects, the net income would have been $774, or $0.08 per diluted share.

New Orders. New products and services orders received during the six months ended September 30, 2015 increased 23.9% to $52,874 compared with $42,658 during the six months ended September 30, 2014. The increase was due primarily to higher orders from the U.S. Government.

Backlog

The book to bill ratio for the first six months of fiscal 2016 was 1.2, same as for the first six months of fiscal 2015. 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, 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 and foreseeable future.

Our Revolving Credit Facility provides us with a $20,000 unsecured revolving line of credit with an accordion feature that, under certain conditions and circumstances may increase to $35,000. We believe we have adequate cash flow and debt availability to meet our operating needs. 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.

We are involved in environmental proceedings and potential proceedings relating to soil and groundwater contamination and other environmental matters at several of our former parent company’s facilities that were never required for our current operations. In fiscal 2016, we anticipate spending approximately $2,387 on environmental characterization and remediation costs. These costs will be charged against our environmental liability reserve and will not impact income.

Our cash was $23,809 on September 30, 2015, compared with $22,806 on March 31, 2015, an increase of $1,003. The increase in our cash is primarily the net result of positive cash flows provided by operating activities of $1,139.

Cash flows provided by operating activities during the first six months of fiscal 2016 amounted to $1,139 and is mainly the result of net income of $5,309, a decrease in accounts receivable of $3,999 due to the collection of receivables resulting from high fiscal 2015 fourth quarter sales, a decrease in deferred taxes of $981 due to utilization of the research and development tax credit, depreciation and amortization of $799, and stock based compensation of $451. This was partially offset by an increase in inventory of $6,672 that was purchased for forecasted shipments of equipment, a decrease in accrued income taxes of $2,124 and a decrease in accrued compensation of $1,001 due to the payment of incentives.

Cash flows used in investing activities in fiscal 2016 was $779, and was used for capital expenditures mainly for equipment and the office space build-out in our product development center in Fredericksburg, Virginia.

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

($ In Thousands Except Share Amounts)

Cash flows provided by financing activities during fiscal 2016 were $643, and reflects cash received from the exercise of stock options.

Other Information

Net working capital at September 30, 2015 was $61,862, versus $56,474 at March 31, 2015, an increase of $5,388. The ratio of current assets to current liabilities was 5.0:1.0 at September 30, 2015 compared with 4.1:1.0 at the beginning of fiscal 2016.

Accounts receivable days outstanding were 60 days at September 30, 2015 compared with 72 days at September 30, 2014. Inventory turnover was 2.3 turns at September 30, 2015 versus 2.5 turns at September 30, 2014. These accounts receivables and inventory measures are predicated on the prior twelve month historical data for sales and cost of sales, and a twelve month average for accounts receivable and inventory.

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 September 30, 2015 and March 31, 2015, the aggregate environmental liability was $9,086 and $9,255, respectively. The liability is classified in other current liabilities and other long-term liabilities on the condensed consolidated balance sheets. Separately, an environmental cost-sharing receivable with third parties of approximately $1,150 and $1,554 at September 30, 2015 and March 31, 2015, respectfully, is included in other current assets and other long term assets, net of third party fees. The Company’s environmental liability reserves are not reduced for any potential cost-sharing reimbursements.

In the first six months of fiscal 2016 and fiscal 2015, we spent $307 and $383, respectively, on environmental costs, and for the entire fiscal 2015, we spent $946. We have a detailed plan by property to manage our environmental exposure. Based on this plan, we anticipate spending approximately $2,387 on environmental matters in fiscal 2016. 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 July, 2015, the DTSC issued a No Further Action Determination Letter for the formerly-owned property in Placerita, California stating that no further removal and remedial action is necessary at this site. The remaining technical fees from the Company’s technical advisors and oversight fees from the DTSC are not expected to exceed $14. Accordingly, we reduced the environmental reserve by $430 in the second quarter of fiscal 2016.

After further assessment of the estimated amount and timing of any future costs that may be required for remediation actions, we had a change in estimate for two pre-existing sites and in the second quarter of fiscal 2016 recorded an additional environmental reserve for $430.

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. 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.

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 September 30, 2015, 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

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

($ In Thousands Except Share Amounts)

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.

NON–U.S. GAAP FINANCIAL MEASURES

In addition to disclosing financial results that are determined in accordance with Accounting Principles Generally Accepted in the United States of America (“U.S. GAAP”), we also disclose comparisons to non-U.S. GAAP financial measures for net income excluding executive transition costs, the environmental reserve reduction and internal re-organization expenses (“Adjusted Net Income”).  The presentation of non-U.S. GAAP financial measures is intended to enhance the usefulness of financial information by providing measures which management uses internally to evaluate our expenses and operating performance. We believe excluding the costs and benefits from certain transactions not considered by management to be part of the underlying operating business of the Company improves comparability of results among financial periods and the assessment of financial and business trends. It should be noted that the determination of whether to exclude a transaction involves judgment by management.  A reconciliation of Adjusted Net Income to net income, the most directly comparable U.S. GAAP measure, for the three and six months ended September 30, 2015 and 2014 is shown in the tables below.

Non-U.S. GAAP financial measures, including Adjusted Net Income, should not be viewed in isolation, are not a substitute for U.S. GAAP measures, and have limitations which include but are not limited to, excluding certain disclosed items which we do not consider to be representative of underlying business operations, but which disclosed items represent costs (benefits) to the Company.

A reader may find any one or all of these items important in evaluating our performance. Management compensates for the limitations of using non-U.S. GAAP financial measures by using them only to supplement our U.S. GAAP results to provide a more complete understanding of the factors and trends affecting our business. In evaluating these financial measures, the reader should be aware that we may incur expenses or receive benefits similar to those excluded in this presentation in the future.

ADJUSTED NET INCOME RECONCILIATION

We are exposed to various market risks, primarily changes in interest rates associated with our Revolvong Credit Facility. At September 30, 2015, we had no borrowings under our Revolving Credit Facility.

At times we maintain our cash in bank deposit accounts in excess of the FDIC insured amount which is $250,000.

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 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 September 30, 2015, 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 first six months of fiscal 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

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, 2015, as filed with the SEC on May 29, 2015, and incorporated herein by reference, which factors could materially affect our business, financial condition, financial results or future performance.

None.

None.

None.

None.

* 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 and six month periods ended September 30, 2015 and September 30, 2014, respectively; (ii) the Condensed Consolidated Balance Sheets at September 30, 2015, and March 31, 2015; and (iii) the Condensed Consolidated Statements of Cash Flows for the six month periods ended September 30, 2015, and September 30, 2014, respectively.

SIGNATURES

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