10-K 1 bzc-10k_20140331.htm 10-K

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

x

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

For the fiscal year ended March 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)

 

 

Delaware

logo

95-4062211

(State or other jurisdiction of
incorporation or organization)

(I.R.S. employer
identification no.)

 

 

35 Melanie Lane Whippany, New Jersey

07981

(Address of principal executive offices)

(Zip Code)

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

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

 

Common Stock, par value $0.01

 

NYSE MKT

(Title of class)

 

(Name of Exchange on Which Registered)

Securities registered pursuant to Section 12(g) of the Act: NONE

 

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

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

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

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

 

Large accelerated filer

 

¨

  

 

Accelerated filer

 

¨

 

 

 

 

 

Non-accelerated filer

 

¨

  

 

Smaller reporting company

 

x

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

The aggregate market value of the voting common equity held by non-affiliates of the registrant on September 30, 2013 (the last business day of the registrant’s most recently completed second fiscal quarter), based on the closing price of the registrant’s common stock on the NYSE MKT (formerly NYSE Amex) on such date, was $25,802,151. Shares of common stock held by executive officers and directors have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not a determination for any other purpose.

As of May 27, 2014, the registrant had 9,703,877 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant’s Proxy Statement for the 2014 Annual Meeting of Stockholders is incorporated by reference into Part III of this Annual Report on Form 10-K. With the exception of those portions that are specifically incorporated by reference in this Annual Report on Form 10-K, such Proxy Statement shall not be deemed filed as part of this Report or incorporated by reference herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended March 31, 2014.

 

 

 

 

 

 


BREEZE-EASTERN CORPORATION

INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED MARCH 31, 2014

 

PART I

  

 

 

Item 1.

 

Business

 

3

Item 1A.

 

Risk Factors

 

6

Item 1B.

 

Unresolved Staff Comments

 

13

Item 2.

 

Properties

 

13

Item 3.

 

Legal Proceedings

 

13

Item 4.

 

Mine Safety Disclosures

 

14

 

PART II

  

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

 

15

Item 6.

 

Selected Financial Data

 

17

Item 7.

 

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

 

17

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

 

25

Item 8.

 

Financial Statements and Supplementary Data

 

26

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

51

Item 9A.

 

Disclosure Controls and Procedures

 

51

Item 9B.

 

Other Information

 

52

 

PART III

  

 

 

Item 10.

 

Directors and Executive Officers of the Registrant

 

53

Item 11.

 

Executive Compensation

 

53

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

53

Item 13.

 

Certain Relationships and Related Transactions; Director Independence

 

53

Item 14.

 

Principal Accountant Fees and Services

 

53

 

PART IV

  

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

54

 

 

 

2


($ in Thousands Except Share Amounts)

 

PART I

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, or continuation of the current sequestration, 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” beginning on page 6 of this report and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 16 of 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, as they speak only as of the date made. Except as required by law, we assume no duty to update or revise our forward-looking statements.

 

ITEM 1.

BUSINESS

Breeze-Eastern Corporation, a Delaware corporation, designs, develops, manufactures, sells and services sophisticated engineered mission equipment for specialty aerospace and defense applications. We were originally organized in 1962 as a California corporation and reincorporated in Delaware in 1986. Unless the context otherwise requires, references to the “Company,” the “Registrant,” “Breeze-Eastern,” “we” or “us” refer to Breeze-Eastern Corporation and its consolidated subsidiaries. All references to years in this report refer to the fiscal year ended March 31 of the indicated year unless otherwise specified. This report reflects all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for fair presentation of the results of operations for the periods reflected. Certain prior fiscal year amounts may have been reclassified to conform to the current fiscal year presentation.

CORE BUSINESS

Our core business is aerospace and defense products. We have long been recognized as a leading global designer, manufacturer, service provider, and supplier of mission-critical rescue hoists and cargo hook systems. We also manufacture weapons handling systems, cargo winches, and tie-down equipment. These products are sold primarily to military and civilian agencies and aerospace contractors. Our emphasis is on the engineering, assembly, testing, service, and support of our products.

PRODUCTS AND SERVICES

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

PRODUCTS

Products include new equipment and spare parts sales and represented approximately 72%, 75%, and 76% of our total revenues in fiscal 2014, fiscal 2013, and fiscal 2012, respectively.

3


($ in Thousands Except Share Amounts)

 

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. Sales of hoist and winch products accounted for approximately 55%, 54%, and 56% of our total revenues in fiscal 2014, fiscal 2013, and fiscal 2012, respectively.

Our external cargo hook systems are original equipment on leading military medium and heavy lift helicopters. These hook systems range from smaller 1,000-pound capacity models up to the largest 36,000-pound capacity hooks employed on the 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. Sales of cargo hook products accounted for approximately 15%, 16%, and 14% of our total revenues in fiscal 2014, fiscal 2013, and fiscal 2012, respectively.

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 supply this equipment for the United States, Japanese, and European Multiple-Launch Rocket Systems (MLRS) and the United States High Mobility Artillery Rocket System (HIMARS). We also provide actuators and specialty gear boxes for specialty weapons applications. Sales of weapons handling products accounted for approximately 2%, 5%, and 6% of our total revenues in fiscal 2014, fiscal 2013, and fiscal 2012, respectively.

SERVICES

Services include overhaul and repair and engineering sales and represented 28%, 25%, and 24% of our total revenues in fiscal 2014, fiscal 2013, and fiscal 2012, respectively.

We perform overhaul, repair, and maintenance services for all of our products. Most of these services are performed at our Whippany, New Jersey facility. We have also licensed third-party service centers around the world to perform these services. Overhaul and repair represented 25%, 24%, and 23% of our total revenues in fiscal 2014, fiscal 2013, and fiscal 2012, respectively.

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

We discuss segment information in Note 14 of our “Notes to Consolidated Financial Statements” contained elsewhere in this report.

MAJOR CUSTOMERS

We have three major customers: the U.S. Government, United Technologies Corporation, and Finmeccanica SpA, which accounted for 30%, 14%, and 13%, respectively, of the total consolidated net sales for fiscal 2014.

GOVERNMENT SALES

Our direct sales to the U.S. Government and sales for U.S. Government and foreign government end use represented 81%, 66%, and 76% of consolidated revenue during fiscal 2014, fiscal 2013, and fiscal 2012, respectively. U.S. Government sales, both direct and indirect, are generally procured using standard government fixed price or cost reimbursable contracts. As a U.S. Government contractor, we are subject to routine audits by U.S. Government agencies.

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

4


($ in Thousands Except Share Amounts)

 

BACKLOG

We measure backlog by the amount of products or services that customers committed by contract to purchase as of a given date. Backlog at March 31, 2014 was $119,464 as compared with $115,102 at March 31, 2013 as new orders exceeded shipments in fiscal 2014. Approximately $76,454 of our backlog at March 31, 2014 is not scheduled for shipment during the next twelve months. For additional discussion on our backlog, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

COMPONENTS, RAW MATERIALS, AND SEASONALITY

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

In recent years, our revenues in the second half of our fiscal year have generally exceeded revenues in the first half. The timing of U.S. Government awards, availability of U.S. Government funding, and product deliveries are among the factors affecting the periods in which revenues are recorded. Management expects this trend to continue in fiscal 2015.

EMPLOYEES

As of March 31, 2014, we had 181 salaried and hourly employees, and the United Auto Workers (UAW) represented 60 hourly employees at our facility. We reached a three-year collective bargaining agreement with the UAW effective October 1, 2013. We consider our relations, with both our union and non-union employees, to be generally satisfactory.

INTERNATIONAL OPERATIONS AND SALES

We currently have no operations based outside of the United States. We had export sales of $37,101, $28,936, and $31,212 in fiscal 2014, fiscal 2013, and fiscal 2012, respectively, representing 43%, 36%, and 37% of our consolidated net sales in each of those years. The risks and profitability of international sales are generally comparable with similar products sold by us in the United States. Net export sales by geographic area and customer domicile are set forth in Note 14 of our consolidated financial statements contained elsewhere in this report.

COMPETITION

We compete in some markets with the hoist and winch business unit of the Goodrich Corporation, which was acquired by United Technologies in calendar 2012, and is part of a larger corporation that has substantially greater financial and technical resources than us. United Technologies is also our second-largest customer. We also compete in some markets for cargo hooks with Onboard Systems. Generally, competitive factors include design capabilities, product performance, delivery, and price. Our ability to compete successfully in these markets depends on our ability to develop and apply technological innovations and to expand our customer base and product lines. Technological innovation, development, and application requires significant investment and capital expenditures. While we make each investment with the intent of getting a good financial return, in some cases we may not fully recover the full investment through future sales of products or services.

RESEARCH AND DEVELOPMENT

We conduct extensive research and development activities, primarily for developing new or improved products, under customer-sponsored contracts and for our own investment. Research and development costs, which are charged to Engineering expense when incurred, amounted to $6,916, $7,664, and $14,702 for the years ended March 31, 2014, 2013, and 2012, respectively. Customer-sponsored research and development costs are charged to cost of sales when the associated revenue is recognized and were $1,472, $2,119, and $1,744 in fiscal 2014, fiscal 2013, and fiscal 2012, respectively.

INTELLECTUAL PROPERTY

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

5


($ in Thousands Except Share Amounts)

 

REGULATORY MATTERS

Aircraft Regulation

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

Environmental Matters

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

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

Where appropriate, we have sought contribution to remediation costs from other potentially responsible parties and made claims under available insurance policies. We also periodically assess the amount of reserves held for environmental liabilities for these sites based upon current information. While there is an inherent uncertainty in assessing the potential total cost to investigate and remediate a given site, we make a determination as to the reasonable cost of investigation and remediation of each site based upon the information available to us at that time. Furthermore, the remediation efforts for a particular site may take place over a number of years and therefore a significant portion of the expenses represented by these reserves may not be incurred for some time. Factors that affect the actual liability for these sites include changes in federal and state environmental laws resulting in more stringent remediation requirements and actual operating results from remediation efforts which vary from estimated results.

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

ADDITIONAL INFORMATION

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

 

ITEM 1A.

RISK FACTORS

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

6


($ in Thousands Except Share Amounts)

 

Risks Associated with our Business and/or Industry

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

Approximately 30%, 14%, and 13% of our consolidated net sales in fiscal 2014 were to the U.S. Government (direct), United Technologies Corporation, and Finmeccanica SpA. Other than sales to Finmeccanica SpA, these sales are made principally for the benefit of the military services of the U.S. Department of Defense and defense organizations of other countries and are affected by, among other things, budget authorization and appropriation processes. In the event that defense expenditures are reduced for products we manufacture or services we provide and are not offset by revenues from additional foreign sales, new programs, or products or services that we currently manufacture or provide, we may experience a reduction in our revenues and earnings and a material adverse effect on our business, financial condition, and results of operations. Further, there can be no assurance that our significant customers will continue to buy our products and services at current or increased levels. Specifically, United Technologies Corporation recently acquired Goodrich Corporation which has a hoist & winch business unit, which might potentially have an impact on our sales to United Technology Corporation.

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

Sales to the U.S. Government and its prime contractors and subcontractors represent a significant portion of our business. In fiscal 2014, sales under U.S. Government contracts represented approximately 53% of our total sales, while sales to foreign governments represented approximately 28% of our total sales. We expect that the percentage of our revenues from government contracts will continue to be substantial in the future. Government programs can be structured into a series of individual contracts. The funding of these programs is generally subject to annual congressional appropriations, and congressional priorities are subject to change. In addition, Congress may reduce expenditures for defense programs or terminate such programs at any time. A decline in government expenditures or redirection of government funding may result in a reduction in the volume of contracts awarded to us. We have resources applied to specific government contracts and if any of those contracts were terminated, we may incur substantial costs redeploying those resources.

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

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

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

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

7


($ in Thousands Except Share Amounts)

 

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

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

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

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

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

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

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

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

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

We may be required to recognize a loss contract at a future date if certain events that we currently estimate are likely to occur do not, in fact, occur.

As more fully discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Critical Accounting Policies” and in the notes to our consolidated financial statements, the earnings or losses recognized on individual contracts and the timing thereof are based on multiple estimates, including the probability of negotiating future contracts, revenues from existing contracts, costs and profitability. Although we update these estimates regularly, estimates are inherently uncertain, and our ultimate profitability on a contract may not be fully known until completion. We recognize estimated contract losses when determined, regardless of where we are in the contract cycle, and adjust contract profit estimates based on ongoing contract profitability reviews. If the estimates noted above were to change significantly, requiring us to recognize unforeseen losses, our financial condition and results of operations could be materially adversely affected.

8


($ in Thousands Except Share Amounts)

 

During a period in which a contract loss is first recognized, or in a period when estimated contract profits become lower than previous estimates, income recorded on that contract in prior periods would be reversed. This could cause the profit or loss contribution from any given contract to fluctuate significantly from quarter to quarter.

Engineering product development delays or customer engineering product development contract cancellations may adversely affect our results of operations.

Our new product development requires up-front engineering research & development expenditures that impact current income and qualification units that are capitalized as intangible assets on the consolidated balance sheets if there is an existing contract or anticipated contract under a program. These engineering research & development expenditures may not result in future revenue-generating products or may not become technically viable as a result of pre-production qualification testing. These research & development expenditures are generally incurred as a part of awarded new product development for customers’ aerospace platforms. If the product being designed does not meet customer technical specifications or timely delivery needs, we may need to write-off capitalized qualification units and reimburse customers for their costs that result from our product delivery delay.

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

Backlog represents products or services that our customers have committed by contract to purchase from us. Backlog as of March 31, 2014 was $119,464. Backlog is subject to fluctuations and is not necessarily indicative of future sales. The U.S. Government may unilaterally modify or cancel its contracts with us. In addition, under certain of our commercial contracts, our customers may unilaterally modify or terminate their orders at any time for their convenience. Accordingly, certain portions of our backlog can be cancelled or reduced at the option of the U.S. Government and commercial customers. Our failure to replace cancelled or reduced backlog could negatively impact our revenues and results of operations.

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

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

We are subject to liability under environmental laws.

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

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

In fiscal 2014, 43% of our consolidated sales were to customers outside the United States. We expect international export sales to continue to contribute to our earnings for the foreseeable future. The export sales are subject in varying degrees to risks inherent in doing business outside the United States. Such risks include, without limitation:

·

The possibility of unfavorable circumstances arising from host country laws or regulations;

·

Potential negative consequences from changes to significant taxation policies, laws, or regulations;

·

Changes in tariff and trade barriers and import or export licensing requirements; and

9


($ in Thousands Except Share Amounts)

 

·

Political or economic instability, insurrection, civil disturbance, or war.

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

In fiscal 2014, approximately 35% of our sales were subject to compliance with the United States Export Administration regulations. Our failure to obtain the requisite licenses, meet registration standards or comply with other government export regulations would hinder our ability to generate revenues from the sale of our products outside the United States. Compliance with these government regulations may also subject us to additional fees and operating costs. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position. In order to sell our products in European Union countries, we must satisfy certain technical requirements. If we are unable to comply with those requirements with respect to a significant quantity of our products, our sales in Europe would be restricted. Doing business internationally also subjects us to numerous U.S. and foreign laws and regulations, including, without limitation, regulations relating to import-export control, technology transfer restrictions, foreign corrupt practices and anti-boycott provisions. Failure by us or our sales representatives or consultants to comply with these laws and regulations could result in administrative, civil or criminal liabilities and could, in the extreme case, result in suspension or debarment from government contracts or suspension of our export privileges, which would have a material adverse effect on us.

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

We continue to take action to assure compliance with the internal controls, disclosure controls, and other requirements of the Sarbanes-Oxley Act of 2002. Our management, including our Chief Executive Officer and Chief Financial Officer, cannot guarantee that our internal controls and disclosure controls will prevent all possible errors or all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

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

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

·

not to spend or incur obligations to acquire fixed assets for more than $2,000 in any single fiscal year;

·

create, incur, assume or guarantee additional indebtedness;

·

create, incur, assume or permit any liens on any asset;

·

enter into sale and leaseback transactions;

·

change our organizational documents; and

·

change the nature of our business.

Our credit agreement also contains covenants that require us to:

·

maintain a tangible net worth equal to at least $22,500;

·

maintain a ratio of funded debt to EBITDA (a) at all times while EBITDA in said ratio exceeds $25,000, not exceeding 3.0:1.0, and (b) at all other times, not exceeding 2.5:1.0; and

·

maintain an interest coverage ratio of at least 3.0:1.0.

We may be unable to comply with the covenants under our credit agreement in the future. A failure to comply with the covenants under our credit agreement could result in an event of default. In the event of a default our lender could elect to declare all borrowings,

10


($ in Thousands Except Share Amounts)

 

accrued and unpaid interest and other fees outstanding, due and payable, and require us to apply all of our available cash to repay these borrowings.

We conduct operations at a single location.

All of our operations are conducted at our Whippany, New Jersey facility. Substantial impairment of this facility as a consequence of a natural disaster, work stoppage, or other event could have a material adverse effect on our operations.

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

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

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

We currently generate operating cash flows, which combined with access to the credit markets, provides discretionary funding capacity. However, current uncertainty in the global economic conditions could impact customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers, and creditors. If economic conditions deteriorate significantly, our business could be negatively impacted from reduced demand for our products or supplier or customer disruptions.

Our future growth and continued success depends upon retaining key employees.

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

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

Approximately 33% of our workforce is employed under a collective bargaining agreement with the United Auto Workers (UAW), which from time to time is subject to renewal and negotiation. Although we have historically enjoyed satisfactory relations with both our unionized and non-unionized employees, if we are subject to labor actions, including work stoppages or slowdowns, we may experience an adverse impact on our operating results.

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

Intellectual property is important to our success. We rely upon confidentiality procedures and contractual provisions to protect our business and proprietary technology. Our general policy is to enter into confidentiality agreements with our employees and consultants, and nondisclosure agreements with all other parties to whom we disclose confidential information. We may apply for legal protection for certain of our other intellectual property in the future. These patents, trademarks and any additional legal protection we may obtain in the future may be challenged by others or invalidated through administrative process or litigation. As a result, our means of protecting our proprietary technology and brands may be inadequate. Furthermore, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property. Any such infringement or misappropriation could have a material adverse effect on our business, financial condition and results of operations.

11


($ in Thousands Except Share Amounts)

 

Our business could be negatively impacted by security threats, including cyber security threats, and other disruptions.

As a defense contractor, we face various security threats, including cyber security threats to gain unauthorized access to sensitive information; threats to the security of our facility and infrastructure; and threats from terrorist acts. Although we utilize various procedures and controls to monitor these threats and mitigate our exposure to such threats, there can be no assurance that these procedures and controls will be sufficient in preventing security threats from materializing. If any of these events were to materialize, they could lead to losses of sensitive information, critical infrastructure, personnel or capabilities, essential to our operations and could have a material adverse effect on our reputation, financial position, results of operations, or cash flows.

Cyber security attacks in particular are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in mission critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. These events could damage our reputation and lead to financial losses from remedial actions, loss of business or potential liability.

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

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

Risks Related to our Common Stock

Our common stock is thinly traded and subject to volatility.

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

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

·

Actual or anticipated fluctuations in operating results;

·

Changes in market valuations of other similarly situated companies;

·

Announcements by us or our competitors of significant technical innovations, contracts, acquisitions, strategic partnerships, joint ventures, or capital commitments;

·

Additions or departures of key personnel;

·

Future sales of common stock;

·

Any deviations in net revenues or in losses from levels expected by the investment community;

·

Trading volume fluctuations; and

·

Business pressures on any of our large shareholders resulting from their holdings in other unrelated businesses.

Our share ownership is highly concentrated.

Our directors, officers, and principal stockholders, and certain of their affiliates, beneficially own approximately 80% of our common stock and will continue to have significant influence over the outcome of all matters submitted to the stockholders for approval, including the election of our directors.

12


($ in Thousands Except Share Amounts)

 

We have adopted a shareholder rights plan which could make it more difficult for a third-party to acquire the Company.

We adopted a shareholders rights plan intended to protect us from efforts to obtain control of the Company that are inconsistent with the best interests of the Company and its stockholders. The rights will be exercisable ten days following the earlier of the public announcement that a stockholder has acquired 15% or more of our common stock without Board approval or the announcement of a tender offer which results in the ownership of 15% or more of our common stock. The rights also become exercisable if a person or group that already owns 15% or more of the Company’s common stock acquires any additional shares (other than pursuant to the Company’s employee benefit plans) without Board of Directors approval. If the rights become exercisable, all rights holders (other than the person/entity triggering the rights) will be entitled to acquire Company securities at a substantial discount. The rights may substantially dilute the stock ownership of a person or group attempting to take over the Company without the approval of the Board of Directors, the rights plan could make it more difficult for a third-party to acquire the Company or a significant percentage of the outstanding capital stock, without first negotiating with the Board of Directors. The shareholder rights plan expires July 18, 2014.

We do not pay a dividend.

Cash dividend payments in the future may depend upon our earnings (if any), financial condition, and capital requirements. We do not have plans at this time to pay dividends.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2.

PROPERTIES

The following table sets forth certain information concerning our sole operating facility as of March 31, 2014:

 

Location

  

Use of Premises

 

Owned or
Leased

 

Sq. Ft

 

Whippany, New Jersey

  

Executive offices and manufacturing plant

  

Leased

  

115,335

  

In May, 2009, we executed a 10-year lease, at market terms, for our facility in Whippany, New Jersey.

Our current business is only conducted at our Whippany, New Jersey facility. Properties owned in Saltzburg, Pennsylvania; Glen Head, New York; and Irvington, New Jersey were operated by one or more of our predecessor affiliates or parent company, TransTechnology Corporation, and are not used in our operations. The Saltzburg and Irvington properties have a zero book value. Our contingencies associated with environmental liabilities are discussed in Note 13 of the “Notes to Consolidated Financial Statements” contained elsewhere in this report.

The Glen Head, New York property is subject to a sale agreement at a price of $4,000. This property is carried on our books as an asset held for sale for $3,800, which includes estimated disposal costs. Closing on the property is subject to the buyer receiving development approvals and us completing environmental obligations and reviews. The buyer has indicated to us its intent to build residential housing on the property and has been engaged in the lengthy process of securing the municipal approvals necessary to redevelop this industrial site for residential use.

 

ITEM 3.

LEGAL PROCEEDINGS

We are engaged in various legal proceedings incidental to our business. Our management, after taking into consideration information provided by our legal counsel, believes that these matters will have no material effect on our consolidated financial position or the results of operations or cash flows in future periods.

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

 

13


($ in Thousands Except Share Amounts)

 

ITEM 4.

MINE SAFETY DISCLOSURES

None.

 

 

 

14


($ in Thousands Except Share Amounts)

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock, par value $0.01, is listed for trading on the NYSE MKT under the trading symbol BZC. The following table sets forth the range of high and low sale prices of our common stock as reported on the NYSE MKT for the periods indicated.

 

 

  

High

 

  

Low

 

Fiscal 2013

 

 

 

 

 

 

 

 

First Quarter

 

$

8.55

 

 

$

6.03

 

Second Quarter

 

 

7.90

 

 

 

6.41

 

Third Quarter

 

 

8.35

 

 

 

7.50

 

Fourth Quarter

 

 

8.26

 

 

 

7.90

 

Fiscal 2014

 

 

 

 

 

 

 

 

First Quarter

 

$

9.30

 

 

$

8.13

 

Second Quarter

 

 

9.92

 

 

 

8.65

 

Third Quarter

 

 

9.88

 

 

 

9.00

 

Fourth Quarter

 

 

9.90

 

 

 

9.16

 

Holders

As of May 27, 2014, the number of stockholders of record of the Company’s common stock was 1,258. On May 27, 2014, the closing sales price of a share of common stock was $9.58 per share.

Dividends

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

15


($ in Thousands Except Share Amounts)

 

Stock Performance Graph

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

This stock performance graph compares the Company’s total cumulative stockholder return on its common stock during the period from April 1, 2009 through March 31, 2014, with the cumulative return on a Peer Issuer Group Index. The graph assumes a $100 investment on March 31, 2009.

 

logo

 

 

  

Years Ended March 31,

 

 

  

2009

 

  

2010

 

  

2011

 

  

2012

 

  

2013

 

  

2014

 

Breeze-Eastern Corporation

 

$

100.00

 

 

$

104.70

 

 

$

129.99

 

 

$

127.27

 

 

$

124.99

 

 

$

149.68

 

Russell Microcap Index

 

 

100.00

 

 

 

165.14

 

 

 

206.95

 

 

 

202.68

 

 

 

237.00

 

 

 

315.77

 

Russell 2000 Index

 

 

100.00

 

 

 

162.76

 

 

 

204.75

 

 

 

204.37

 

 

 

237.69

 

 

 

296.87

 

Dow Jones Select Microcap Index

 

 

100.00

 

 

 

159.80

 

 

 

200.18

 

 

 

188.98

 

 

 

214.20

 

 

 

276.79

 

 

16


($ in Thousands Except Share Amounts)

 

ITEM 6.

SELECTED FINANCIAL DATA

The following table sets forth selected financial data for the most recent five year period ended March 31, 2014. This financial data should be read together with our consolidated financial statements and related notes, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other financial data appearing elsewhere in this report.

 

 

  

Years ended March 31,

 

 

  

2014

 

  

2013

 

  

2012

 

  

2011

 

  

2010

 

Results from Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

85,933

 

 

$

79,956

 

 

$

84,942

 

 

$

78,200

 

 

$

69,027

 

Gross profit

 

 

31,131

 

 

 

32,813

 

 

 

35,214

 

 

 

30,952

 

 

 

20,651

 

Operating income (loss)

 

 

9,089

 

 

 

8,190

 

 

 

7,022

 

 

 

9,457

 

 

 

(6,723

)

Interest expense

 

 

49

 

 

 

227

 

 

 

396

 

 

 

694

 

 

 

891

 

Net income (loss)

 

 

5,641

 

 

 

4,076

 

 

 

3,776

 

 

 

5,026

 

 

 

(6,043

)

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.58

 

 

$

0.43

 

 

$

0.40

 

 

$

0.53

 

 

$

(0.64

)

Diluted

 

 

0.58

 

 

 

0.43

 

 

 

0.39

 

 

 

0.53

 

 

 

(0.64

)

Approximate Shares outstanding at year-end

 

 

9,704,000

 

 

 

9,544,000

 

 

 

9,490,000

 

 

 

9,429,000

 

 

 

9,397,000

 

Financial Position

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

79,793

 

 

$

73,413

 

 

$

79,851

 

 

$

78,148

 

 

$

76,108

 

Working capital

 

 

39,708

 

 

 

34,034

 

 

 

39,148

 

 

 

32,376

 

 

 

25,188

 

Long-term debt

 

 

 

 

 

 

 

 

8,215

 

 

 

11,500

 

 

 

14,786

 

Stockholders’ equity

 

 

50,484

 

 

 

43,072

 

 

 

38,152

 

 

 

33,433

 

 

 

27,820

 

Book value per share at year end

 

 

5.20

 

 

 

4.51

 

 

 

4.02

 

 

 

3.55

 

 

 

2.96

 

Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current ratio

 

 

3.50

 

 

 

3.32

 

 

 

3.37

 

 

 

3.11

 

 

 

2.72

 

 

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

OVERVIEW

We design, develop, manufacture, sell, and service sophisticated engineered mission equipment for specialty aerospace and defense applications. 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 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.

17


($ in Thousands Except Share Amounts)

 

Our business is affected by global economic and geo-political conditions. As U.S. military activity in Iraq and Afghanistan declines, 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. The Airbus A400M military transport aircraft development has taken longer than originally anticipated, but we commenced shipping in the third quarter of fiscal 2014 and we expect to complete engineering qualification in the next several months. Our engineering expense in fiscal 2012 was reported net of reimbursements from Airbus, and we received no reimbursements in fiscal 2013 and fiscal 2014.

CRITICAL ACCOUNTING POLICIES

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

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

We value inventories using the lower of cost or market on a first-in, first-out (FIFO) basis. We reduce the carrying amount of these inventories to net realizable value based on our assessment of inventory that is considered excess or obsolete based on the historical usage. Since all of our products are produced to meet specific customer requirements, the reserve focus is on purchased and manufactured parts.

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. Therefore, each $1,000 of inventory purchased will result in an increase of $11 in inventory reserves. Management periodically reviews this methodology to ensure it is reasonably accurate and will make future adjustments as necessary through current earnings.   In fiscal 2014, 2013, and 2012, we increased the inventory obsolescence reserve by $291, $540, and $496, respectively.

Inventories are discussed further in Notes 1 and 2 of the “Notes to Consolidated Financial Statements” contained elsewhere in this report.

Qualification Units and Analysis of Contract Profitability. We capitalize as intangible assets engineering qualification units, which are pre-production product assets that are tested as part of qualifying production units for use on an aircraft. Prior to qualification testing, the pre-qualification units (materials and external testing costs) are also classified with qualification units. Engineering qualification units are ultimately expensed, as the Company amortizes qualification unit costs to expense over future equipment unit shipments.

We review qualification units and pre-qualification assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We test qualification units and pre-qualification assets for impairment two ways. The first test is for technical obsolescence. If product development or product testing results in a design or technical change, qualification units and pre-qualification assets that become obsolete are expensed in the current period.

Secondly, we analyze contracts to ensure their profitability, comparing undiscounted future cash flows of existing and anticipated production contracts to the ultimate cost of production and development, including qualification units and pre-qualification assets. If the test indicates a contract was not going to produce sufficient profits to cover the cost of qualification units and pre-qualification assets, these assets would become impaired. This impairment loss would reduce the carrying amount of the related assets and we would accrue any additional losses on the contract.

18


($ in Thousands Except Share Amounts)

 

In assessing anticipated production contracts, we evaluate undiscounted future cash flows that may include revenue from anticipated price increases of un-priced change orders. These revenues are included when price recovery is probable, which is based on the likelihood that the customer will qualify the unit for production, and the related production costs are identifiable and reasonable. We may also estimate the number of production units in continuing long-term production for delivery under existing or anticipated contracts.

As indicated above, the process of analyzing contracts may involve an assessment of the likelihood of our negotiating either future production contracts or future sales price increases. If we determine that it is probable such events will occur, the related production volume or increased pricing is included in the contract analysis. If the probable event were ultimately not to occur, a loss would be recognized at the time such determination is made which could significantly affect our results from operations.

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

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

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

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

RESULTS OF OPERATIONS

Fiscal 2014 Compared with Fiscal 2013

 

 

  

Fiscal Year Ended

 

 

Increase/
(Decrease)

 

 

  

March 31,
2014

 

 

March 31,
2013

 

 

$

 

 

%

 

Products

 

$

62,234

 

 

$

59,765

 

 

$

2,469

 

 

 

4.1

%

Services

 

 

23,699

 

 

 

20,191

 

 

 

3,508

 

 

 

17.4

 

Net sales

 

 

85,933

 

 

 

79,956

 

 

 

5,977

 

 

 

7.5

 

Products

 

 

39,585

 

 

 

34,255

 

 

 

5,330

 

 

 

15.6

 

Services

 

 

15,217

 

 

 

12,888

 

 

 

2,329

 

 

 

18.1

 

Cost of sales

 

 

54,802

 

 

 

47,143

 

 

 

7,659

 

 

 

16.2

 

Gross profit

 

 

31,131

 

 

 

32,813

 

 

 

(1,682

)

 

 

(5.1

)

As a % of net sales

 

 

36.2

%

 

 

41.0

%

 

 

N/A

 

 

 

(4.8

)%Pt.

Selling, general, and administrative expenses

 

 

13,880

 

 

 

15,246

 

 

 

(1,366

)

 

 

(9.0

)

Engineering expense

 

 

8,162

 

 

 

9,377

 

 

 

(1,215

)

 

 

(13.0

)

Operating income

 

 

9,089

 

 

 

8,190

 

 

 

899

 

 

 

11.0

 

Interest expense

 

 

49

 

 

 

227

 

 

 

(178

)

 

 

(78.4

)

Income tax provision

 

 

3,310

 

 

 

3,794

 

 

 

(484)

 

 

 

(12.8)

 

Effective tax rate

 

 

37.0

%

 

 

48.2

%

 

 

N/A

 

 

 

(11.2)

%Pt.

Net income

 

$

5,641

 

 

$

4,076

 

 

$

1,565

 

 

 

38.4

%

Net Sales. Fiscal 2014 net sales of $85,933 increased by $5,977, or 7.5%, from net sales of $79,956 in fiscal 2013.

Product sales in fiscal 2014 were $62,234, an increase of $2,469, or 4.1%, from $59,765 in fiscal 2013. The increase was primarily due to higher new equipment volume for hoists & winches to international OEMs, as we began shipping product for the Airbus

19


($ in Thousands Except Share Amounts)

 

A400M in the third quarter of the 2014 fiscal year. This was partly offset by lower spare parts revenue due to terminating the services of a distributor which resulted in sales returns totaling $1,538 of spare parts. Excluding this sales return, spare parts volume increased.  

Service sales in fiscal 2014 were $23,699, an increase of $3,508, or 17.4%, from $20,191 in fiscal 2013. The increase was due to higher overhaul & repair volume of hoists & winches for the U.S. Military and higher billable engineering services.

The timing of U.S. Government awards, availability of U.S. Government funding, and product delivery schedules are among the factors that affect the period of recording revenues. Recent years reported revenues in the second half of the fiscal year exceeding revenues in the first half of the fiscal year. Fiscal 2014 continued that pattern.

Cost of Sales. Products cost of sales of $39,585 in fiscal 2014 increased 15.6% from $34,255 in the prior fiscal year primarily due to greater new equipment sales.  Services costs of sales of $15,217 in fiscal 2014 were $2,329 above the prior fiscal year due to greater billable engineering services costs and to higher O&R volume.

Gross profit. Gross profit of $31,131 in fiscal 2014 was $1,682, or 5.1%, lower than $32,813 in the prior fiscal year. The reduced gross profit was due to losses on billable engineering; terminating services of a distributor, as noted above, which resulted in sales returns and related reduction in gross profit of $1,033; and a greater proportion of sales of new equipment sold to large domestic and international OEMs.

As a percent of sales, the gross profit margin was 36.2% for fiscal 2014 compared with 41.0% for fiscal 2013. Product gross profit as a percent of sales declined primarily due to a greater proportion of sales of new equipment to large OEM’s and some newly-developed products which have lower profitability.  Spare parts had slightly lower margins.  Services gross profit as a percent of sales declined from losses on billable engineering and a greater proportion of U.S. government volume in overhaul & repair.   

Operating Expenses. Total operating expenses were $22,042 or 25.7% of net sales, in fiscal 2014 compared with $24,623, or 30.8% of net sales in the prior fiscal year. The $2,581 decrease was primarily due to $1,215 in lower engineering costs and a $1,207 environmental liability reduction in the first fiscal quarter from ending our involvement with a previously-owned property in Wyoming, Illinois.

Selling, general, and administrative (“SG&A”) expenses were $13,880 in fiscal 2014 compared with $15,246 in fiscal 2013, a decrease of $1,366. The decrease was primarily due to the environmental liability reduction in the fiscal first quarter and other general reductions.  Lower general and administrative costs were partly offset by spending investments in customer service and marketing and higher medical benefits costs.  As a percent of sales, SG&A was 16.2% in fiscal 2014 versus 19.1% in fiscal 2013. The environmental liability reduction accounted for 1.4% of sales.

Engineering expenses were $8,162 in fiscal 2014 compared with $9,377 in fiscal 2013. The $1,215 decrease was due to lower spending on product programs that are nearing the end of their development stage such as the Sikorsky CH-53K and Airbus A400M.

Interest Expense. Interest expense was $49 in fiscal 2014 versus $227 in fiscal 2013.  Prior-year interest included expensing deferred debt acquisition costs after pre-paying our term loan early in fiscal 2013.

Income tax provision. Income tax expense was $3,310 in fiscal 2014 versus $3,794 in fiscal 2013. The decrease was due to a lower effective tax rate, partly offset by higher pre-tax income from lower general & administrative and engineering expenses.  Our effective tax rate decreased to 37.0% in fiscal 2014 from 48.2% in fiscal 2013. The effective tax rate in fiscal 2013 was higher due to an increase in the valuation allowance for state deferred tax assets resulting from a lower state tax rate in New Jersey.  Income taxes for fiscal 2014 and fiscal 2013 were computed using the effective tax rate estimated to be applicable for the full fiscal year. Income taxes and income tax rates are discussed further in Note 5 of the “Notes to Consolidated Financial Statements” contained elsewhere in this report.

Net Income. Net income was $5,641, or $0.58 per diluted share, in fiscal 2014 compared with $4,076, or $0.43 per diluted share, in fiscal 2013. The increase resulted primarily from higher pre-tax income from lower general & administrative and engineering expenses and a lower effective tax rate.

New Orders. New products and services orders received during fiscal 2014 increased 7.7% to $90,295 compared with $83,874 during fiscal 2013. The increase was due primarily to new equipment orders, partly offset by lower spare parts orders.

Orders for new equipment increased by $13,174. Significant orders received in fiscal 2014 included renegotiating the Airbus A400M military transport aircraft contract and hoist & winch for international customers.

20


($ in Thousands Except Share Amounts)

 

Backlog. Backlog at March 31, 2014 was $119,464 compared with $115,102 at March 31, 2013 as new orders exceeded shipments by $4,362. Significant new orders are discussed in “New Orders” above. The backlog at March 31, 2014 and 2013 includes approximately $70,853 and $71,070, respectively, for the Airbus A400M military transport aircraft which commenced shipping in the third quarter of fiscal 2014.

We measure backlog by the amount of products or services that customers committed by contract to purchase as of a given date. Backlog may vary substantially over time due to the size and timing of orders. Backlog of approximately $43,010 at March 31, 2014 is scheduled for shipment during fiscal 2015.

The book-to-bill ratio equals new orders received during a period divided by sales for the same period. Although significant cancellations of purchase orders or substantial reductions of product quantities in existing contracts seldom occur, such cancellations or reductions could substantially and materially reduce backlog. Therefore, backlog information may not represent the actual amount of shipments or sales for any future period.

A book-to-bill ratio in excess of 1.0 is potentially indicative of continued overall growth in sales. The book to bill ratio was 1.1 for fiscal 2014 and 1.0 for fiscal 2013.

Fiscal 2013 Compared with Fiscal 2012

 

 

  

Fiscal Year Ended

 

 

Increase/
(Decrease)

 

 

  

March 31,
2013

 

 

March 31,
2012

 

 

$

 

 

%

 

Products

 

$

59,765

 

 

$

64,147

 

 

$

(4,382

)

 

 

(6.8

)%

Services

 

 

20,191

 

 

 

20,795

 

 

 

(604

)

 

 

(2.9

)

Net sales

 

 

79,956

 

 

 

84,942

 

 

 

(4,986

)

 

 

(5.9

)

Products

 

 

34,255

 

 

 

36,488

 

 

 

(2,233

)

 

 

(6.1

)

Services

 

 

12,888

 

 

 

13,240

 

 

 

(352

)

 

 

(2.7

)

Cost of sales

 

 

47,143

 

 

 

49,728

 

 

 

(2,585

)

 

 

(5.2

)

Gross profit

 

 

32,813

 

 

 

35,214

 

 

 

(2,401

)

 

 

(6.8

)

As a % of net sales

 

 

41.0

%

 

 

41.5

%

 

 

N/A

 

 

 

(0.5

)%Pt.

Selling, general, and administrative expenses

 

 

15,246

 

 

 

15,661

 

 

 

(415

)

 

 

(2.6

)

Engineering expense

 

 

9,377

 

 

 

12,531

 

 

 

(3,154

)

 

 

(25.2

)

Operating income

 

 

8,190

 

 

 

7,022

 

 

 

1,168

 

 

 

16.6

 

Interest expense

 

 

227

 

 

 

396

 

 

 

(169

)

 

 

(42.7

)

Income tax provision

 

 

3,794

 

 

 

2,741

 

 

 

1,053

 

 

 

38.4

 

Effective tax rate

 

 

48.2

%

 

 

42.1

%

 

 

N/A

 

 

 

6.1

%Pt.

Net income

 

$

4,076

 

 

$

3,776

 

 

$

300

 

 

 

7.9

%

Net Sales. Fiscal 2013 net sales of $79,956 decreased by $4,986, or 5.9%, from net sales of $84,942 in fiscal 2012.

Product sales in fiscal 2013 were $59,765, a decrease of $4,382, or 6.8%, from $64,147 in fiscal 2012. The decrease was primarily due to lower new equipment and spare parts volume for hoists & winches and weapons handling, partly offset by higher cargo hook volume. The decreased volume was the result of lower orders booked in the prior fiscal year because the prior fiscal year had record sales volume and included some large infrequent U.S. Government and international purchases that were not replicated in fiscal 2013.

Service sales in fiscal 2013 were $20,191, a decrease of $604, or 2.9%, from $20,795 in fiscal 2012. The decrease was due to lower engineering weapons handling services, partly offset by higher overhaul & repair volume.

The timing of U.S. Government awards, availability of U.S. Government funding, and product delivery schedules are among the factors that affect the period of recording revenues. Recent years reported revenues in the second half of the fiscal year exceeding revenues in the first half of the fiscal year. Fiscal 2013 continued that pattern but to a lesser extent.

Cost of Sales. Products cost of sales of $34,255 in the fiscal 2013 declined 6.1% from $36,488 in the prior fiscal year primarily due to lower product sales. Cost of services provided of $12,888 in fiscal 2013 was $352 lower than the prior fiscal year due to decreased engineering services.

21


($ in Thousands Except Share Amounts)

 

Gross profit. Gross profit of $32,813 in fiscal 2013 was $2,401, or 6.8%, lower from $35,214 in the prior fiscal year. The reduced gross profit reflects the lower sales volume. As a percent of sales, the gross profit margin was 41.0% for fiscal 2013 compared with 41.5% for fiscal 2012. Gross profit as a percent of sales declined primarily due to a greater proportion of sales of new equipment, partially offset by improved spare parts margins.

Operating Expenses. Total operating expenses were $24,623, or 30.8% of net sales, in fiscal 2013 compared with $28,192, or 33.2% of net sales in the prior fiscal year. The decrease was primarily due to lower engineering costs.

Selling, general, and administrative (“SG&A”) expenses were $15,246 in fiscal 2013 compared with $15,661 in fiscal 2012, a decrease of $415. The decrease was primarily due to business strategy development costs incurred during the first quarter of fiscal 2012 that were not incurred during fiscal 2013, lower medical costs, and lower information technology costs from last year’s insourcing transition. These decreases were partly offset by CEO transition costs in fiscal 2013. As a percent of sales, SG&A was 19.1% in fiscal 2013 versus 18.4% in fiscal 2012.

Engineering expenses were $9,377 in fiscal 2013 compared with $12,531 in fiscal 2012. The $3,154 decrease was due to not repeating fiscal 2012’s $4,429 for product development discontinuance and qualification unit obsolescence costs and lower spending on development programs that ended since last year, partly offset by higher Sikorsky CH53K product development spending and by not receiving any Airbus cost reimbursement this year. Reimbursements from Airbus reduced engineering expenses in fiscal 2012 by $3,366; thus before reimbursement engineering expenses were $15,897 in fiscal 2012.

The dollar level of engineering expenses reflects continued new product development for awarded aerospace platforms, primarily the Airbus A400M and Sikorsky CH-53K.

Interest Expense. Interest expense was $227 in fiscal 2013 versus $396 in fiscal 2012. We pre-paid our $10,679 term loan in full during the fiscal 2013 first quarter which resulted in expensing $95 of deferred debt acquisition costs in the fiscal 2013 first quarter. Amortization of original debt acquisition costs was $55 during fiscal 2013.

Income tax provision. Income tax expense was $3,794 in fiscal 2013 versus $2,741 in fiscal 2012. The increase was due to higher pre-tax income due primarily to lower engineering expenses more than offsetting lower gross profit. Our effective tax rate increased primarily from establishing a valuation allowance for state deferred tax assets. Income taxes for fiscal 2013 and fiscal 2012 were computed using the effective tax rate estimated to be applicable for the full fiscal year. Income taxes and income tax rates are discussed further in Note 5 of the “Notes to Consolidated Financial Statements” contained elsewhere in this report.

Net Income. Net income was $4,076, or $0.43 per diluted share, in fiscal 2013 compared with $3,776, or $0.39 per diluted share, in fiscal 2012. The increase resulted primarily from lower engineering expenses more than offsetting lower gross profit.

New Orders. New products and services orders received during fiscal 2013 increased 29.1% to $83,874 compared with $64,975 during fiscal 2012. The increase was due primarily to new equipment from booking H-60 Multi-Year VIII from Sikorsky as well as Boeing and U.S. Military orders plus increases in overhaul & repair, spare parts, and engineering.

Orders for new equipment increased by $14,972. Significant orders received in fiscal 2013 included $25,400 from the U.S. Government, $12,500 for Sikorsky hoist and winch equipment and spare parts as well as cargo hooks, and $8,000 for Transaero hoist and winch spare parts and equipment.

Backlog. Backlog at March 31, 2013 was $115,102 compared with $111,184 at March 31, 2012 as new orders exceeded shipments by $3,918. Significant new orders are discussed in “New Orders” above. The backlog at March 31, 2013 and 2012 includes approximately $71,070 and $71,343, respectively, for the Airbus A400M military transport aircraft that began shipping in calendar 2013.

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 $35,824 at March 31, 2013 was scheduled for shipment during fiscal 2014.

The book-to-bill ratio equals new orders received during a period divided by sales for the same period. Although significant cancellations of purchase orders or substantial reductions of product quantities in existing contracts seldom occur, such cancellations or reductions could substantially and materially reduce backlog. Therefore, backlog information may not represent the actual amount of shipments or sales for any future period.

22


($ in Thousands Except Share Amounts)

 

A book-to-bill ratio in excess of 1.0 is potentially indicative of continued overall growth in sales. The book to bill ratio was 1.0 for fiscal 2013 and 0.8 for fiscal 2012.

Liquidity and Capital Resources

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

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

On August 26, 2013, we refinanced the Former Senior Credit Facility with a new five-year Revolving Credit Facility. The 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.

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 2015, we anticipate spending approximately $1,673 on environmental characterization and remediation costs. These costs will be charged against our environmental liability reserve and will not impact income.

Working Capital

Working capital at March 31, 2014 was $39,708, an increase of $5,674 from $34,034 at March 31, 2013. The ratio of current assets to current liabilities was 3.5:1.0 at March 31, 2014 compared with 3.3:1.0 at the beginning of fiscal 2014. The increased working capital primarily resulted from higher accounts receivable of $8,236 due to fiscal fourth quarter sales being $6,321 higher than the prior-year fiscal fourth quarter. This was partially offset by a $2,149 net utilization and reclassification to long term of the current deferred tax asset.

Accounts receivable days outstanding were 60.4 days at March 31, 2014 and 51.1 days at March 31, 2013. Inventory turnover was 3.2 turns in fiscal 2014 and 2.7 turns in fiscal 2013. These accounts receivables and inventory velocity measures are based on fiscal fourth quarter averages.

Capital Expenditures

Fiscal 2014 and fiscal 2013 capital expenditures-operations were $997 and $458, respectively. Spending for fiscal 2014 was primarily for production test equipment and trade show equipment, and spending for fiscal 2013 was primarily for production test equipment and information technology.  Capitalized qualification units and pre-qualification assets spending in fiscal 2014 and 2013 were $1,520 and $2,513, respectively.  The decrease reflects us nearing the end of some significant new product development programs.

Revolving Credit Facility

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

Interest Rate Swap

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

23


($ in Thousands Except Share Amounts)

 

CONTRACTUAL OBLIGATIONS

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

 

 

  

Payments Due By Period

 

 

  

Total

 

  

Less Than
1 Year

 

  

1-3
Years

 

  

3-5
Years

 

  

More Than
5 Years

 

Operating leases

  

$

5,556

  

  

$

1,093

 

  

$

1,922

 

  

$

1,848

 

  

$

693

  

Purchase obligations (a)

  

 

  

  

 

  

  

 

  

  

 

  

  

 

  

Total

  

$

5,556

  

  

$

1,093

  

  

$

1,922

  

  

$

1,848

 

  

$

693

 

(a)

Our supplier purchase orders contain provisions allowing vendors to recover certain costs in the event of “cancellation for convenience” by us. We believe that we do not have ongoing purchase obligations with respect to our suppliers that are material in amount or that would result, individually or collectively, in a material loss exposure to us if cancelled for convenience. Furthermore, purchase obligations for capital assets and services historically have not been material in amount.

INFLATION

Neither inflation nor deflation has had, and we do not expect it to have, a material impact upon operating results. We cannot be certain that our business will not be affected by inflation or deflation in the future.

CONTINGENCIES AND LEGACY ENVIRONMENTAL COMMITMENTS

Environmental matters – At March 31, 2014 and March 31, 2013, the aggregate environmental liability was $10,323 and $12,684, respectively. The liability is classified in other current liabilities and other long-term liabilities on the consolidated balance sheets. Separately, environmental cost-sharing with third parties of approximately $1,918 and $1,472 at March 31, 2014 and March 31, 2013, 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 fiscal 2014 and fiscal 2013, we spent $1,487 and $1,245, respectively, on environmental costs. We have a detailed plan to manage our environmental exposure on each of our properties. Based on this plan, we anticipate spending approximately $1,673 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.

The aggregate environmental liability reduction was primarily due to implementing a more cost-effective solution at our previously-owned property in Wyoming, Illinois. In the fiscal first quarter of 2014, the Illinois Environmental Protection Agency issued a No Further Remediation Letter releasing us from further obligations associated with the known contamination at the property. We have no known environmental obligations with respect to the former Wyoming Illinois site. Accordingly, we reduced the remaining environmental liability for this site by $1,207 in the first quarter of fiscal 2014, as reflected in SG&A expense.

In March 2014, we 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 the 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 of $1,152, net of fees to be paid to a third party relating to this arrangement, recorded in March 2014, increased other current assets and other long term assets by $793 and $359, respectively, on the consolidated balance sheets.

Environmental matters are discussed in Note 13 of the “Notes to Consolidated Financial Statements” contained elsewhere in this report.

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

RECENTLY ISSUED ACCOUNTING STANDARDS

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

24


($ in Thousands Except Share Amounts)

 

OFF-BALANCE SHEET ARRANGEMENTS

As of March 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

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, primarily changes in interest rates associated with our Debt Facility. At March 31, 2014, 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 effective January 31, 2013 was $250.

 

 

 

25


 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

26


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the Board of Directors

and Stockholders of Breeze-Eastern Corporation

We have audited the accompanying consolidated balance sheets of Breeze-Eastern Corporation (the “Company”) as of March 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, cash flows and stockholders’ equity for each of the years in the three-year period ended March 31, 2014. Our audits also included the financial statement schedule as of and for the years listed in the index at Item 15(a) 2 on page 54. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Breeze-Eastern Corporation as of March 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Breeze-Eastern Corporation’s internal control over financial reporting as of March 31, 2014, based on the criteria established in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 5, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/  Marcum LLP

 

Marcum LLP

Bala Cynwyd, PA

June 5, 2014

 

 

 

27


 

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

To the Audit Committee of the

Board of Directors and Stockholders of

Breeze-Eastern Corporation

We have audited Breeze-Eastern Corporation’s (the “Company”) internal control over financial reporting as of March 31, 2014, based on criteria established in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, Breeze-Eastern Corporation maintained, in all material aspects, effective internal control over financial reporting as of March 31, 2014, based on criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of March 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, cash flows and stockholders’ equity, and the related financial statement schedule for each of the years in the three-year period ended March 31, 2014 of the Company, and our report dated June 5, 2014 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

/s/ Marcum LLP

Marcum LLP

Bala Cynwyd, PA

June 5, 2014

 

 

 

28


 

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

 

 

  

MARCH 31,

 

ASSETS

 

  

2014

 

 

2013

 

CURRENT ASSETS:

  

 

 

 

 

 

 

 

Cash

  

$

6,021

  

 

$

6,688

  

Accounts receivable (net of allowance for doubtful accounts of $323 and $292 in 2014 and 2013, respectively)

  

 

24,191

  

 

 

15,955

  

Inventories-net

  

 

18,909

  

 

 

17,790

  

Prepaid expenses and other current assets

  

 

1,868

  

 

 

1,506

  

Deferred income taxes

  

 

4,608

  

 

 

6,757

  

Total current assets

  

 

55,597

  

 

 

48,696

  

PROPERTY:

  

 

 

 

 

 

 

 

Machinery and equipment

  

 

5,749

  

 

 

4,967

  

Furniture, fixtures and information systems

  

 

8,008

  

 

 

7,978

  

Leasehold improvements

  

 

5,709

  

 

 

5,644

  

Construction in progress

  

 

301

  

 

 

181

  

Total

  

 

19,767

  

 

 

18,770

  

Less accumulated depreciation and amortization

  

 

13,435

  

 

 

12,084

  

Property – net

  

 

6,332

  

 

 

6,686

  

OTHER ASSETS:

  

 

 

 

 

 

 

 

Deferred income taxes

  

 

4,197

  

 

 

4,289

  

Goodwill

  

 

402

  

 

 

402

  

Real estate held for sale

  

 

3,800

  

 

 

3,800

  

Qualification units and pre-qualification assets – net

  

 

4,385

  

 

 

4,350

  

Other

  

 

5,080

  

 

 

5,190

  

Total other assets

  

 

17,864

  

 

 

18,031

  

TOTAL

  

$

79,793

  

 

$

73,413

  

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

  

 

 

 

 

 

 

 

CURRENT LIABILITES:

  

 

 

 

 

 

 

 

Revolving credit facility

  

$

 

 

$

 

Current portion of long-term debt

  

 

 

 

 

 

Accounts payable – trade

  

 

7,442

  

 

 

5,526

  

Accrued compensation

  

 

2,875

  

 

 

3,325

  

Accrued income taxes

  

 

358

  

 

 

741

  

Other current liabilities

  

 

5,214

  

 

 

5,070

  

Total current liabilities

  

 

15,889

  

 

 

14,662

  

LONG-TERM DEBT PAYABLE TO BANKS

  

 

  

 

 

  

OTHER LONG-TERM LIABILITIES

  

 

13,420

  

 

 

15,679

  

COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)

  

 

  

 

 

  

TOTAL LIABILITIES

  

 

29,309

  

 

 

30,341

  

 

STOCKHOLDERS’ EQUITY

  

 

 

 

 

 

 

 

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

  

 

 

 

 

 

Common stock – authorized, 100,000,000 shares of $.01 par value; issued, 10,148,944 and 9,987,200 shares in 2014 and 2013, respectively

  

 

101

  

 

 

100

  

Additional paid-in capital

  

 

98,707

  

 

 

97,113

  

Accumulated deficit

  

 

(41,344

 

 

(46,985

Accumulated other comprehensive income (loss)

  

 

3

 

 

 

(184

 

  

 

57,467

  

 

 

50,044

  

Less treasury stock, at cost – 445,067 and 443,678 shares in 2014 and 2013, respectively

  

 

(6,983

 

 

(6,972

Total stockholders’ equity

  

 

50,484

  

 

 

43,072

  

TOTAL

  

$

79,793

  

 

$

73,413

  

 

See notes to consolidated financial statements.

 

 

 

29


 

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Share Amounts)

 

 

  

Years ended March 31,

 

 

  

2014

 

  

2013

 

  

2012

 

Net sales

  

$

85,933

  

  

$

79,956

  

  

$

84,942

 

Cost of sales

  

 

54,802

  

  

 

47,143

  

  

 

49,728

 

Gross profit

  

 

31,131

  

  

 

32,813

  

  

 

35,214

 

Selling, general and administrative expenses

  

 

13,880

  

  

 

15,246

  

  

 

15,661

 

Engineering expense

  

 

8,162

  

  

 

9,377

  

  

 

12,531

  

Operating income

  

 

9,089

  

  

 

8,190

  

  

 

7,022

  

Interest expense

  

 

49

  

  

 

227

  

  

 

396

 

Other expense – net

  

 

89

  

  

 

93

  

  

 

109

 

Income before income taxes

  

 

8,951

  

  

 

7,870

  

  

 

6,517

  

Income tax provision

  

 

3,310

  

  

 

3,794

  

  

 

2,741

  

Net income

  

$

5,641

  

  

$

4,076

  

  

$

3,776

  

Earnings per common share:

  

 

 

 

  

 

 

 

  

 

 

 

Basic net income per share:

  

$

0.58

  

  

$

0.43

  

  

$

0.40

  

Diluted net income per share:

  

$

0.58

  

  

$

0.43

  

  

$

0.39

  

Weighted-average basic shares outstanding

  

 

9,643,000

 

  

 

9,511,000

 

  

 

9,473,000

 

Weighted-average diluted shares outstanding

  

 

9,757,000

 

  

 

9,573,000

 

  

 

9,593,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

30


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

 

 

  

Years ended March 31,

 

 

  

2014

 

 

2013

 

 

2012

 

Net income

  

$

5,641

 

 

4,076

 

 

$

3,776

 

 

Other comprehensive income (loss):

  

 

 

  

 

 

 

  

 

 

 

  

 

Change in funded status of the defined benefit post retirement plan, net of taxes

  

 

187

 

 

 

(110

 

 

38

  

Change in fair value of interest rate swap, net of taxes

  

 

  

 

 

  

 

 

35

  

 

Other comprehensive income (loss)

  

 

187

 

 

 

(110

 

 

73

  

 

Comprehensive income

  

$

5,828

  

 

$

3,966

  

 

$

3,849

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

31


 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

 

  

Years ended March 31,

 

 

  

2014

 

 

2013

 

 

2012

 

Cash flows from operating activities:

  

 

 

 

 

 

 

 

 

 

 

 

Net income

  

$

5,641

 

 

$

4,076

  

 

$

3,776

  

Adjustments to reconcile net income to net cash provided by operating activities:

  

 

 

 

 

 

 

 

 

 

 

 

Write-off of engineering project development qualification units

  

 

399

 

 

 

398

  

 

 

4,429

  

Shipped qualification assets

  

 

747

 

 

 

124

  

 

 

  

Depreciation and amortization

  

 

1,699

 

 

 

1,475

  

 

 

1,709

  

Non-cash interest expense

  

 

333

 

 

 

393

  

 

 

419

  

Stock based compensation

  

 

672

 

 

 

813

  

 

 

675

  

Provision for losses on accounts receivable

  

 

31

 

 

 

17

  

 

 

62

  

Deferred taxes-net

  

 

2,127

 

 

 

2,462

  

 

 

2,654

  

Changes in assets and liabilities:

  

 

 

 

 

 

 

 

 

 

 

 

(Increase) decrease in accounts receivable and other receivables

  

 

(8,267)

 

 

 

3,431

  

 

 

(943

(Increase) decrease in inventories

  

 

(1,119)

 

 

 

(3,816

 

 

430

  

(Increase) decrease in other assets

  

 

(228)

 

 

 

(597

 

 

511

  

Increase (decrease) in accounts payable

  

 

1,916

 

 

 

(253

 

 

(2,262

Increase (decrease) in other liabilities

  

 

(2,980)

 

 

 

(1,029

 

 

(1,151

Net cash provided by operating activities

  

 

971

 

 

 

7,494

  

 

 

10,309

  

 

Cash flows from investing activities:

  

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

  

 

(997

 

 

(458

 

 

(726

Capitalized qualification units and pre-qualification assets

  

 

(1,520

 

 

(2,513

 

 

(2,654

Net cash used in investing activities

  

 

(2,517

 

 

(2,971

 

 

(3,380

 

Cash flows from financing activities:

  

 

 

 

 

 

 

 

 

 

 

 

Payments on long-term debt

  

 

 

 

 

(10,679

 

 

(821

Net borrowings (repayments) of other debt

  

 

 

 

 

 

 

 

 

Payment of debt issue costs

  

 

(33)

 

 

 

 

 

 

 

Exercise of stock options

  

 

912

 

 

 

161

 

 

 

194

 

 

Net cash provided by (used in) financing activities

  

 

879

 

 

 

(10,518

 

 

(627

(Decrease) increase in cash

  

 

(667

)

 

 

(5,995

)

 

 

6,302

 

Cash at beginning of year

  

 

6,688

 

 

 

12,683

 

 

 

6,381

 

Cash at end of year

  

$

6,021

  

 

$

6,688

 

 

$

12,683

 

 

Supplemental information:

  

 

 

 

 

 

 

 

 

 

 

 

Interest payments

  

$

39

  

 

$

92

  

 

$

305

 

Income tax payments

  

 

1,909

  

 

 

806

  

 

 

176

 

Non-cash financing activity for stock option exercise

  

 

  

 

 

122

  

 

 

82

  

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

32


 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Amounts)

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Accumulated
Other
Comprehensive
Income

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

(Loss)

 

 

Total

 

BALANCE, MARCH 31, 2011

 

 

9,846,003

  

 

 $

98

  

 

 

(416,967

 

(6,749

 

 $

95,068

  

 

 $

(54,837

 

 $

(147

 

 $

33,433

  

Net income

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

3,776

  

 

 

  

 

 

3,776

  

Issuance of stock under stock option plan

 

 

37,500

  

 

 

1

  

 

 

(9,592

 

 

(82

 

 

276

  

 

 

  

 

 

  

 

 

195

  

Issuance of stock under compensation and bonus plan

 

 

33,352

  

 

 

  

 

 

(145