e10vq

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2010


o		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 (State or other jurisdiction of incorporation or organization)		95-4062211 (I.R.S. employer identification no.)

35 Melanie Lane Whippany, New Jersey (Address of principal executive offices)		07981 (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company þ

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

As of October 15, 2010, the total number of outstanding shares of common stock was 9,429,036.

PART I. FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The results reflected in the unaudited condensed consolidated Statement of Operations for the period ended September 30, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year. The following unaudited Condensed Consolidated Financial Statements should be read in conjunction with the notes thereto, Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2 of Part I of this report, as well as the audited financial statements and related notes thereto contained in the Company’s Annual Report on Form 10-K filed for the fiscal year ended March 31, 2010.

When the Company refers to its fiscal year in this Quarterly Report on Form 10-Q, the Company is referring to the fiscal year ended on March 31^st of that year. Thus the Company is currently operating in its fiscal year 2011, which commenced on April 1, 2010. Unless the context expressly indicates a contrary intention, all references to years in this filing are to the Company’s fiscal years. Figures in this Quarterly Report on Form 10-Q are in thousands, except for share amounts or where expressly noted.

[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

BREEZE-EASTERN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Data)


	(Unaudited)			(Audited)
	September 30, 2010			March 31, 2010

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	4,887		$	3,371
Accounts receivable (net of allowance for doubtful accounts of $156 at September 30, 2010 and $150 at March 31, 2010)		10,787			12,102
Tax refund receivable		904			904
Inventories		17,908			17,365
Prepaid expenses and other current assets		715			423
Deferred income taxes		5,541			5,686

Total current assets		40,742			39,851

PROPERTY:
Property and equipment		17,301			20,323
Less accumulated depreciation and amortization		8,363			10,748

Property — net		8,938			9,575

OTHER ASSETS:
Deferred income taxes		13,066			13,718
Goodwill		402			402
Real estate held for sale		3,800			3,800
Other		8,916			8,762

Total other assets		26,184			26,682



TOTAL ASSETS	$	75,864		$	76,108


LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITES:
Revolving credit facility	$	—		$	—
Current portion of long-term debt		2,464			3,286
Accounts payable — trade		6,295			5,578
Accrued compensation		2,492			2,286
Accrued income taxes		200			114
Other current liabilities		3,016			3,399

Total current liabilities		14,467			14,663

LONG-TERM DEBT, NET OF CURRENT PORTION		13,143			14,786

OTHER LONG-TERM LIABILITIES		18,965			18,839

COMMITMENTS AND CONTINGENCIES (Note 13)		—			—

TOTAL LIABILITIES		46,575			48,288


STOCKHOLDERS’ EQUITY
Preferred stock — authorized, 300,000 shares; none issued		—			—
Common stock — authorized, 14,700,000 shares of $.01 par value; issued, 9,846,003 at September 30, 2010 and 9,813,097 at March 31, 2010		98			98
Additional paid-in capital		94,810			94,612
Accumulated deficit		(58,630	)		(59,863	)
Accumulated other comprehensive loss		(240	)		(285	)

		36,038			34,562
Less treasury stock, at cost — 416,967 at September 30, 2010 and 416,147 at March 31, 2010		(6,749	)		(6,742	)

Total stockholders’ equity		29,289			27,820


TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	75,864		$	76,108

See notes to condensed consolidated financial statements.

BREEZE-EASTERN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands of Dollars)


	Six Months Ended
	September 30, 2010			September 27, 2009

Cash flows from operating activities:
Net income	$	1,232		$	1,012
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Loss on disposal of property and equipment		29			—
Depreciation and amortization		998			740
Non-cash reserve accretion		218			16
Stock based compensation		195			356
Provision for losses on accounts receivable		6			3
Deferred taxes-net		764			627

Changes in assets and liabilities:
Decrease in accounts receivable and other receivables		1,310			4,021
(Increase) decrease in inventories		(543	)		(6,194	)
(Increase) decrease in other assets		(277	)		(427	)
Increase (decrease) in accounts payable		717			(209	)
Increase (decrease) in accrued compensation		202			390
Increase (decrease) in accrued income taxes		86			(12	)
Increase (decrease) in other liabilities		(396	)		(369	)

Net cash provided by (used in) operating activities		4,541			(46	)


Cash flows from investing activities:
Capital expenditures		(386	)		(1,610	)
Capitalized project costs		(174	)		(382	)

Net cash (used in) investing activities		(560	)		(1,992	)


Cash flows from financing activities:
Payments on long-term debt		(2,465	)		(1,642	)
Net borrowings (repayments) of other debt		—			2,400

Net cash (used in) provided by financing activities		(2,465	)		758


Increase (decrease) in cash		1,516			(1,280	)
Cash at beginning of period		3,371			2,667

Cash at end of period	$	4,887		$	1,387


Supplemental information:
Interest payments	$	325		$	389
Income tax payments		42			117

See notes to condensed consolidated financial statements.

Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)

NOTE 1. Financial Presentation

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

NOTE 2. Earnings Per Share

The computation of basic earnings per share is based on the weighted-average number of common shares outstanding. The computation of diluted earnings per share assumes the foregoing as well as the exercise of all dilutive stock options using the treasury stock method.

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


	Three Months Ended				Six Months Ended
	September 30,		September 27,		September 30,		September 27,
	2010		2009		2010		2009

Basic Earnings per Common Share:
Weighted-average common shares outstanding for basic earnings per share calculation		9,400,000		9,389,000		9,398,000		9,377,000


Diluted Earnings per Common Share:
Weighted-average common shares outstanding		9,400,000		9,389,000		9,398,000		9,377,000
Stock options (a)		12,000		5,000		14,000		11,000


Weighted-average common shares outstanding for diluted earnings per share calculation		9,412,000		9,394,000		9,412,000		9,388,000


(a)		During the three and six month periods ended September 30, 2010, options to purchase 354,000 and 360,000 shares of common stock, respectively, and during the three and six month periods ended September 27, 2009, options to purchase 493,000 and 438,000 shares of common stock, respectively, were not included in the computation of diluted earnings per share because the exercise prices of these options were greater than the average market price of the common share.

NOTE 3. Stock-Based Compensation

The Company records stock-based compensation using a fair-value method in its condensed consolidated financial statements. Currently, the Company’s stock-based compensation relates to restricted stock awards and stock options.

Net income for the three and six month periods ended September 30, 2010, includes stock-based compensation expense of $44 net of tax, or $0.00 per diluted share, and $114 net of tax, or $0.01 per diluted share, respectively. Net income for the three and six month periods ended September 27, 2009, includes stock-based compensation expense of $104 net of tax, or $0.01 per diluted share, and $206 net of tax, or $0.02 per diluted share, respectively. Stock based compensation expense is included in selling, general and administrative expenses.

Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)

The Company maintains the Amended and Restated 1992 Long-Term Incentive Plan (the “1992 Plan”), the 1999 Long-Term Incentive Plan (the “1999 Plan”), the 2004 Long-Term Incentive Plan (the “2004 Plan”), and the 2006 Long-Term Incentive Plan (the “2006 Plan”).

Under the terms of the 2006 Plan, 500,000 shares of the Company’s common stock may be granted as stock options or awarded as restricted stock to officers, non-employee directors, and certain employees of the Company through July 2016. Under the terms of the 2004 Plan, 200,000 shares of the Company’s common stock may be granted as stock options or awarded as restricted stock to officers, non-employee directors, and certain employees of the Company through September 2014. The 1999 Plan expired in July 2009, and no further grants or awards may be made under this plan. Under the 1999 Plan, there remain outstanding unexercised options granted in Fiscal years 2001, 2004, 2006 and 2008. The 1992 Plan expired in September 2002, and no further grants or awards may be made under this plan. There remain outstanding unexercised options granted in Fiscal 2002 under the 1992 Plan.

Under each of the 1992, 1999, 2004, and 2006 Plans, option exercise prices equal the fair market value of the common shares at the respective grant dates. Prior to May 1999, options granted to officers and employees and all options granted to non-employee directors expired if not exercised on or before five years after the date of the grant. Beginning in May 1999, options granted to officers and employees expire no later than 10 years after the date of the grant. Options granted to directors, officers, and employees vest ratably over three years beginning one year after the date of the grant. In certain circumstances, including a change of control of the Company as defined in the various Plans, option vesting may be accelerated.

The Black-Scholes weighted-average value per option granted in Fiscal 2011 was $2.41. In Fiscal 2010, the Black-Scholes weighted-average values per option granted were $2.52, $2.55, and $2.63. The Black-Scholes option pricing model uses dividend yield, volatility, risk-free rate, expected term, and forfeiture assumptions to value options granted in Fiscal 2011 and Fiscal 2010. Expected volatilities are based on historical volatility of the Company’s common stock and other factors. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The Company uses historical data to estimate the expected option term. The Company assumed no forfeitures because of the limited number of employees at the executive and senior management levels who receive stock options, past employment history, and current stock price projections. The Company uses the following assumptions to estimate the fair value of option grants.


	2011 $2.41			2010 $2.52			2010 $2.55			2010 $2.63
	value per			value per			value per			value per
	option			option			option			option

Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Volatility		30.2	%		32.6	%		34.0	%		34.0	%
Risk-free interest rate		3.2	%		3.1	%		3.2	%		3.4	%
Expected term of options (in years)		7.0			7.0			7.0			7.0

Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)

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


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

Outstanding at March 31, 2010		624,911		$	198		7	$	8.38
Granted		26,000			—		—		6.20
Exercised		—			—		—		—
Canceled or expired		(63,000	)		—		—		9.07

Outstanding at September 30, 2010		587,911			232		6		8.21


Options exercisable at September 30, 2010		431,244			106		5		8.83
Unvested options expected to become exercisable after September 30, 2010		156,667			125		9		6.49
Shares available for future option grants at September 30, 2010 (a)		167,308


(a)		May be decreased by restricted stock grants.

No options were exercised during the first six months of Fiscal 2011.

During the first six months of Fiscal 2011 and Fiscal 2010, stock option compensation expense recorded in selling, general and administrative expenses was $120 and $206, respectively, before taxes of $50 and $87, respectively. As of September 30, 2010, there was $378 of unrecognized compensation cost related to stock options granted-but-not-yet-vested that are expected to become exercisable. This cost is expected to be recognized over a weighted-average period of 1.8 years.

Except as otherwise authorized by the Board of Directors, it is the general policy of the Company that the stock underlying the option grants consists of authorized and unissued shares available for distribution under the applicable Plan. Under the 1992, 1999, 2004, and 2006 Plans, the Incentive and Compensation Committee of the Board of Directors (made up of independent Directors) may at any time offer to repurchase a stock option that is exercisable and has not expired.

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


				Weighted-
				Average
	Number			Grant Date
	of Shares			Fair Value


Non-vested at March 31, 2010		37,984		$	6.43
Granted		32,906			6.85
Vested		(36,899	)		6.29
Cancelled		( 239	)		11.07

Non-vested at September 30, 2010		33,752			6.95

Restricted stock awards are utilized both for director compensation and awards to officers and employees, and are distributed in a single grant of shares which are subject to forfeiture prior to vesting and have voting and dividend rights from the date of distribution. Restricted stock awards to officers and employees have forfeiture and transfer restrictions that lapse ratably over three years beginning one year after the date of the award.

Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)

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

The fair value of restricted stock awards is based on the market price of the stock at the grant date, and compensation cost is expensed on a straight-line basis over the requisite service period as stated above. The Company expects no forfeitures during the vesting period with respect to unvested restricted stock awards granted. During the first six months of Fiscal 2011 and Fiscal 2010, compensation expense related to restricted stock awards recorded in selling, general and administrative expenses was $76 and $150, respectively, before taxes of $32 and $63, respectively. As of September 30, 2010 there was approximately $231 of unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a period of 1.1 years.

NOTE 4. Inventories

Inventories are summarized as follows:


	September 30,			March 31,
	2010			2010
Finished goods	$	979		$	1,985
Work in process		6,161			6,133
Purchased and manufactured parts		13,430			11,785

		20,570			19,903
Reserve for slow moving and obsolescence		(2,662	)		(2,538	)

Total	$	17,908		$	17,365

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.

NOTE 5. Property, Equipment, and Related Depreciation

Property and equipment are recorded at cost, and equipment is depreciated on a straight-line basis over its estimated economic useful life. Depreciation expense for the three and six month periods ended September 30, 2010 was $528 and $998, respectively, and for the three and six month periods ended September 27, 2009 was $381 and $740, respectively.

Average estimated useful lives for property are as follows.


Machinery and equipment		3 to 10 years
Furniture and fixtures		3 to 10 years
Computer hardware and software		3 to 5 years
Leasehold improvements		10 years

The Company classified as real estate held for sale on the condensed consolidated balance sheets a property owned in Glen Head, New York that is currently under sales contract. The sale of the property is expected to be concluded upon completion of municipal approvals and soil remediation pursuant to the remediation plan approved by the New York Department of Environmental Conservation. The net sale proceeds are expected to be $3,800. See Note 13 for a discussion of environmental matters related to this site.

Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)

NOTE 6. Product Warranty Costs

Equipment has a one year warranty for which a reserve is established using historical averages and specific program contingencies when considered necessary. Changes in the carrying amount of accrued product warranty costs for the six month period ended September 30, 2010 are summarized as follows.


Balance at March 31, 2010	$	179
Warranty costs incurred		( 74	)
Change in estimates to pre-existing warranties		( 7	)
Product warranty accrual		85

Balance at September 30, 2010	$	183

NOTE 7. Income Taxes

Income taxes for the three and six month periods ended September 30, 2010 was computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management.

At September 30, 2010, the Company has federal and state net operating loss carry forwards, or NOLs, of approximately $22,292 and $10,625, respectively, which are due to expire in Fiscal 2022 through Fiscal 2030 and Fiscal 2011 through Fiscal 2017, respectively. These NOLs may be used to offset future taxable income through their respective expiration dates and thereby reduce or eliminate our federal and state income taxes otherwise payable. A valuation allowance of $265 has been established relating to other items, as it is management’s belief that it is more likely than not that a portion of this deferred asset is not realizable.

At September 30, 2010, the current deferred tax assets are $5,541, and non-current deferred tax assets are $13,066. If the Company does not generate adequate taxable earnings, some or all of our deferred tax assets may not be realized. Additionally, changes to the federal and state income tax laws also could impact its ability to use the NOLs. In such cases, the Company may need to revise the valuation allowance established related to deferred tax assets for state purposes.

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

In the second quarter of Fiscal 2011, the Internal Revenue Service (IRS) commenced an examination of the Company’s Federal income tax return for Fiscal 2009.

At September 30, 2010, the Company had no unrecognized tax benefits for uncertain tax positions.

Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)

NOTE 8. Long-Term Debt Payable to Banks

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


	September 30, 2010		March 31, 2010

Senior Credit Facility	$	15,607	$	18,072
Less current maturities		2,464		3,286

Total long-term debt	$	13,143	$	14,786

Senior Credit Facility -The Company has a 60-month, $33,000 senior credit facility consisting of a $10,000 revolving line of credit and, at the inception of the credit agreement in August 2008, term loans totaling $23,000 (the “Senior Credit Facility”). The term loan requires quarterly principal payments of $821 over the life of the loan and $6,571 due at maturity in August 2013. During the Fiscal 2011 second quarter, we made two $821 term loan repayments by pre-paying the amount due October 1, 2010. The Company made this accelerated term loan payment because of its strong cash position. Accordingly, the balance sheet reflects $2,464 of current maturities due under the term loan of the Senior Credit Facility as of September 30, 2010.

The Senior Credit Facility bears interest at either the “Base Rate” or the London Interbank Offered Rate (“LIBOR”) plus applicable margins based on the Company’s leverage ratio. The leverage ratio is equal to consolidated total debt divided by consolidated EBITDA (the sum of net income, depreciation, amortization, other non-cash charges and credits to net income, interest expense, and income tax expense minus charges related to debt refinancing) for the most recent four quarters and is calculated at each quarter end. The Base Rate is the higher of the Prime Rate or the Federal Funds Open Rate plus 0.50%. The applicable margins for the Base Rate based borrowings are between 0% and 0.75%. The applicable margins for LIBOR-based borrowings are between 1.25% and 2.25%. At September 30, 2010, the Senior Credit Facility had a blended interest rate of 3.6%, for debt of $15,600 tied to LIBOR and for debt of $7 tied to the Prime Rate. The Company also pays a commitment fee of 0.375% on the average daily unused portion of the Revolver. The Senior Credit Facility requires the Company to enter into an interest rate swap (discussed below).

The Senior Credit Facility is secured by all of the Company’s assets and allows the Company to issue letters of credit against the total borrowing capacity of the facility. At September 30, 2010, there were no outstanding borrowings under the Revolver, $951 in outstanding (standby) letters of credit, and $9,049 in Revolver availability. The Senior Credit Facility contains certain financial covenants which require a minimum fixed charge coverage ratio that is not permitted to be less than 1.25 : 1.0 and a leverage ratio (as defined above) that is not permitted to be more than 2.5 : 1.0. The fixed charge coverage ratio is equal to consolidated EBITDA (as defined above) divided by fixed charges (the sum of cash interest expense, cash income taxes, dividends, cash environmental costs, scheduled principal installments on indebtedness adjusted for prepayments, capital expenditures, and payments under capitalized leases). The Company is permitted to exclude from fixed charges certain one-time capital expenditures of up to $5,500 related to the facility relocation. At September 30, 2010, the Company was in compliance with the covenant provisions of the Senior Credit Facility.

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

Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)

NOTE 9. Fair Value Measurements

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

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

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

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

The carrying amount reported in the Condensed Consolidated Balance Sheets for cash, accounts receivable, accounts payable and accrued expenses approximates fair value because of the short-term maturity of those instruments. The carrying amount for borrowings under the revolving portion of the Senior Credit Facility, if applicable, would approximate fair value because of the variable market interest rate charged to the Company for these borrowings. The fair value of the long-term debt was estimated using a discounted cash flow analysis and a yield rate that was estimated using yield rates for publicly traded debt instruments of comparable companies with similar features.

The carrying amounts and fair value of the Company’s financial instruments are presented below as of September 30, 2010.


	Carrying Amount		Fair Value
Long-term debt	$	15,607	$	15,607
Interest rate swap liability included in other long-term liabilities (Level 2)		138		138

NOTE 10. Employee Benefit Plans

The Company has a defined contribution plan covering all eligible employees. Contributions are based on certain percentages of an employee’s eligible compensation. Expenses related to this plan were $192 and $350, respectively, for the three and six month periods ended September 30, 2010, and $225 and $430, respectively, for the three and six month periods ended September 27, 2009.

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

In February 2002, the Company’s subsidiary, Seeger-Orbis GmbH & Co. OHG, now known as TransTechnology Germany GmbH (the “Selling Company”), sold its retaining ring business in Germany to Barnes Group Inc. (“Barnes”). German law prohibits the transfer of unfunded pension obligations which have vested for retired and former employees, so the legal responsibility for the pension plan that related to the business (the “Pension Plan”) remained with the Selling Company. At the time of the sale and subsequent to the sale, that pension liability was recorded based on the projected benefit obligation since future compensation levels will not affect the level of pension benefits. The relevant information for the Pension Plan is shown below under the caption Pension Plan. The measurement date is December 31. Barnes has entered into an agreement with the Company whereby Barnes is obligated to administer and discharge the pension obligation as well as indemnify and hold the Selling Company and the Company harmless from these pension obligations. Accordingly, the Company has recorded an asset equal to the benefit obligation for the Pension Plan of $3,415 and $3,376 as of September 30, 2010 and March 31, 2010, respectively. This asset is included in other long-term assets and it is restricted in use to satisfy the legal liability associated with the Pension Plan.

Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)

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


	Postretirement Benefits
	Three Months Ended				Six Months Ended
	September 30, 2010		September 27, 2009		September 30, 2010		September 27, 2009
Interest cost	$	11	$	9	$	18	$	18
Amortization of net (gain) loss		6		—		12		—

Net periodic cost	$	17	$	9	$	30	$	18


	Pension Plan
	Three Months Ended				Six Months Ended
	September 30, 2010		September 27, 2009		September 30, 2010		September 27, 2009
Interest cost	$	45	$	96	$	89	$	96
Amortization of net (gain) loss		—		—		—		—

Net periodic cost	$	45	$	96	$	89	$	96

NOTE 11. Concentration of Credit Risk

The Company is subject to concentration of credit risk primarily with its trade receivables. The Company grants credit to certain customers who meet pre-established credit requirements, and generally requires no collateral from its customers. Estimates of potential credit losses are provided for in the Company’s condensed consolidated financial statements and are within management’s expectations. As of September 30, 2010, the Company had no other significant concentrations of credit risk.

NOTE 12. New Accounting Standards

In January 2010, the FASB issued updated guidance related to ASC 820, “Fair Value Measurements and Disclosure,” which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows.

In June 2009, the FASB issued the FASB Accounting Standards Codification, codified as ASC 105, “Generally Accepted Accounting Principles”, formerly SFAS No. 168, as the single source of authoritative nongovernmental U.S. GAAP. ASC 105 does not change current U.S. GAAP, but is intended to simplify user access to U.S. GAAP by providing all authoritative literature related to a particular topic in one place. ASC 105 supersedes all existing accounting standard documents and considers all other accounting literature not included in the FASB Codification as non-authoritative. The Codification also superseded all then-existing non-SEC accounting and reporting standards, and all other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. ASC 105 is effective for interim and annual periods ending after September 15, 2009 and, accordingly, is effective for the Company’s current fiscal reporting period. Adopting this guidance did not have an impact on the Company’s consolidated financial statements, but will impact the Company’s financial disclosures by eliminating pre-codification nomenclature.

Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)

In February 2010, the FASB issued updated guidance related to ASC 855, “Subsequent Events.” The amendments within Accounting Standards Update (“ASU’) 2010-09 were issued by the FASB due to questions that were raised in practice that the requirements to disclose the date that the financial statements are issued potentially conflict with some of the SEC’s guidance. The FASB’s update addresses both the interaction of the requirements of this Topic with the SEC’s reporting requirements and the intended breadth of the reissuance disclosure provision related to subsequent events. All of the updated guidance is effective upon issuance. The adoption of the updated guidance did not have an impact on the Company’s financial position, results of operations, or cash flows.

In April 2009, the FASB issued ASC 820, “Fair Value Measurements and Disclosures”, formerly three FASB Staff Positions (“FSP”) — FSP No. 157-4, FSP No. 157, and FSP No. 115-2, intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides additional guidelines for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements. FSP No. 115-2, Recognition and Presentation of Other-Than-Temporary Impairments, provides additional guidance related to the disclosure of impairment losses on securities and the accounting for impairment losses on debt securities. FSP No. 115-2 does not amend existing guidance related to other-than-temporary impairments of equity securities. FSP No. 107-1 and Accounting Principles Board (“APB”) Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments, increases the frequency of fair value disclosures. These FSPs are effective for fiscal years and interim periods ended after June 15, 2009. The adoption of this guidance did not have a material effect on the Company’s financial position, results of operations, or cash flows.

NOTE 13. Contingencies

Environmental Matters

The Company is involved in environmental proceedings and potential proceedings relating to soil and groundwater contamination and other environmental matters at several of its former facilities that were never required for its current operations. These facilities were part of the business disposed of by TransTechnology Corporation, the former parent of the Company. Environmental cleanup activities usually span multiple years, which make estimating liabilities a matter of judgment because of such factors as changing remediation technologies, assessments of the extent of contamination, and continually evolving regulatory environmental standards. The Company considers these and other factors in estimates of the timing and amount of any future costs that may be required for remediation actions. The Company records a liability for the amount that it determines to be the best estimate of the cost of remediation. The Company does not discount the recorded liabilities, as the amount and timing of future cash payments are not fixed or cannot be reliably determined.

In the fourth quarter of Fiscal 2010, the Company reviewed and evaluated new information regarding several of its environmental sites which triggered a reassessment of its environmental liability estimates. To support this reassessment, the Company retained the services of a nationally-recognized environmental consulting firm. Based upon the new information and the consultant’s analysis and recommendations, the Company determined that its best estimate of its future environmental liabilities is now $14,549 before offsetting cost-sharing of approximately $1,500 that is classified mostly as a non-current asset.

At September 30, 2010 and March 31, 2010, the aggregate amount of liabilities recorded relative to environmental matters was $14,549 and $14,496, respectively. In the first six months of Fiscal 2011, and for the entire Fiscal 2010, the Company spent $166 and $772, respectively, on environmental costs. In Fiscal 2011, the Company anticipates spending $959. These costs will be charged against the Company’s environmental liability reserve and will not impact income. The Company performs quarterly reviews of the status of its environmental sites and the related liabilities. Based on the reviews completed during Fiscal 2010, the Company increased the liability by $9,722 from the amounts recorded at March 31, 2009. There are a number of former operating facilities that the Company is monitoring or investigating for potential future remediation. In some cases, although a loss may be probable, it is not possible at this time to reasonably estimate the amount of any obligation for remediation activities because of uncertainties with respect to assessing the extent of the contamination or the applicable regulatory standard. The Company is also pursuing claims for contribution to site investigation and cleanup costs against other potentially responsible parties (PRPs), including the U.S. Government.

Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)

Although the Company takes great care in the development of these risk assessments and future cost estimates, the actual amount of the remediation costs may be different from those estimated as a result of a number of factors including: changes to federal and state environmental regulations or laws; changes in local construction costs and the availability of personnel and materials; unforeseen remediation requirements that are not apparent until the work actually commences; and actual remediation expenses that differ from those estimated. The Company does not include any unasserted claims that it might have against others in determining its potential liability for such costs, and, except as noted with regard to specific cost sharing arrangements, has no such arrangements, nor has the Company taken into consideration any future claims against insurance carriers that it may have in determining its environmental liabilities. In those situations where the Company is considered a de minimis participant in a remediation claim, the failure of the larger participants to meet their obligations could result in an increase in the liability with regard to such a site.

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

In the first quarter of Fiscal 2003, the Company entered into a consent order for a former facility in Glen Head, New York, which is currently subject to a contract for sale, pursuant to which the Company developed a remediation plan for review and approval by the New York Department of Environmental Conservation. The Company was advised during Fiscal 2010 that the Department of Environmental Conservation was requiring additional offsite groundwater delineation studies as part of its review. At the former facility in Glen Head, New York based upon the characterization work performed to date and this latest request, the Company has accrued estimated costs of approximately $4,299. The amounts and timing of payments are subject to the approved remediation plan and additional discussions with the Department on the scope of the additional delineation study.

The Company sold the business previously operated at the property it owns in Saltzburg, Pennsylvania (“Federal Labs”). The Company presented an environmental cleanup plan during the fourth quarter of Fiscal 2000 for a portion of Federal Labs site, which was approved during the third quarter of Fiscal 2004. This plan was submitted pursuant to the Consent Order and Agreement with the Pennsylvania Department of Environmental Protection (“PaDEP”) concluded in Fiscal 1999 (the “1999 Consent Order”). Pursuant to the Consent Order, the Company paid $0.2 million for past costs, future oversight expenses and in full settlement of claims made by PaDEP related to the environmental remediation of the site with an additional $0.2 million paid in Fiscal 2001. The Company concluded a second Consent Order with PaDEP in the third quarter of Fiscal 2001 for a second portion of the Federal Labs site (the “2001 Consent Order”), and a third Consent Order for the remainder of the Federal Labs site was concluded in the third quarter of Fiscal 2003 (the “2003 Consent Order”). The Company submitted an environmental cleanup plan for the portion of the Federal Labs site covered by the 2003 Consent Order during the second quarter of Fiscal 2004. The Company is also administering an agreed settlement with the Federal Government, concluded in the first quarter of Fiscal 2000, under which the Federal Government pays 50% of the direct and indirect environmental response costs associated with a portion of the Fed Labs site subject to the 1999 Consent Order. The Company also concluded an agreement in the first quarter of Fiscal 2006, under which the Federal Government paid an amount equal to 45% of the estimated environmental response costs associated with a second portion of the Federal Labs site subject to the 2001 Consent Order. No future payments are due under this second agreement. The Company is currently under a tolling agreement with the Federal Government with respect to the remainder of the Federal Labs site while we negotiate a cost sharing arrangement with respect to the final portion of this site subject to the 2003 Consent Order. However, there can be no assurance the Company will be successful in these negotiations or any litigation seeking to enforce our rights to contribution and or indemnification from the Federal Government with respect to this final portion of the Federal Labs site. The reserves are shown without giving effect to any cost sharing payments due from the Federal Government. These amounts are shown as other assets on our balance sheet.

At September 30, 2010, the reserve for environmental liabilities at Federal Labs was $5,844. The Company expects that remediation at this site, which is subject to the oversight of the Pennsylvania authorities, will not be completed for several years, and that monitoring costs, although expected to be incurred over twenty years, could extend for up to thirty years.

Notes To Unaudited Condensed Consolidated Financial Statements
($ In Thousands Except Share Amounts)
(Unaudited)

In addition, the Company has been named as a potentially responsible party in four environmental proceedings pending in several states in which it is alleged that the Company was a generator of waste that was sent to landfills and other treatment facilities. Such properties generally relate to businesses which have been sold or discontinued. The Company estimates that expected future costs, and the estimated proportional share of remedial work to be performed associated with these proceedings, will not exceed $100 and has provided for these estimated costs in the Company’s accrual for environmental liabilities.

The Company has entered into a sales contract for the Glen Head, New York property for $4,000, and it is classified as held for sale in the amount of $3,800 after allowing for certain costs. The contract does not include a price adjustment clause and although there are conditions precedent to the buyer’s obligations to close, the contract does not allow for contract termination. Thus, the buyer cannot unilaterally terminate the contract without liability, a buy-out, or some other settlement that must be negotiated with the Company. However, there is no outside date for closing to occur and we must provide the buyer with a funded remediation plan and environmental insurance prior to the buyer being obligated to close. The buyer has indicated 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 former industrial site for residential purposes. Based on information provided by the buyer, the Company believes that all necessary approvals precedent to the sale of the Glen Head property are likely to be completed and the sale closed by June 2011. The property is the subject of a consent order with the State of New York in which the Company has developed a remediation plan for review and approval by the New York Department of Environmental Conservation. The Company received a request from the Department in Fiscal 2010 to provide delineation and testing with respect to offsite groundwater contamination. Neither the consent order nor the remediation plan affect the buyer’s obligation to close under the sales contract. At the time the sales contract was entered into in July 2001, the property had an appraised value of $3,300 without adjusting for the Company’s estimated cost of remediation, which is separately reserved. In 2005, the property had an appraised value of $4,200 without adjusting for the Company’s estimated cost of remediation. The property has not been appraised since 2005.

Litigation

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

NOTE 14. Segment, Geographic Location and Customer Information

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

Net sales greater than 10% of total revenues derived from one customer for the three and six month periods ended September 30, 2010 and September 27, 2009 are summarized as follows.


	Three Months Ended						Six Months Ended
	September 30, 2010			September 27, 2009			September 30, 2010			September 27, 2009
Customer A		18	%		30	%		26	%		22	%
Customer B		20			19			19			19
Customer C		18			20			16			22
Customer D		10			7			11			8

Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)

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

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objective of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative thereof or any variation there on or similar terminology or expressions.

We based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to: changes in business conditions, changes in applicable laws, rules and regulations affecting the Company in locations in which it conducts its business, interest rate trends, a decline or redirection of the U.S. defense budget, the termination of any contracts with the U.S. Government, changes in our sales strategy and product development plans, changes in the marketplace, developments in environmental proceedings that we are involved in, continued services of our executive management team, competitive pricing pressures, market acceptance of our products under development, delays in the development of products, changes in spending allocation or the termination, postponement, or failure to fund one or more significant contracts by the U.S. Government or other customers, determination by the Company to dispose of or acquire additional assets, events impacting the U.S. and world financial markets and economies, and statements of assumption underlying any of the foregoing, as well as other factors set forth under “Item 1A. Risk Factors” contained in the Company’s Annual Report on Form 10-K filed for the Fiscal year ended March 31, 2010 and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise our forward-looking statements based on changes in internal estimates, expectations, or otherwise.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)

OVERVIEW

We design, develop, manufacture, sell, and service sophisticated engineered mission equipment for specialty aerospace and defense applications. With over 50% of the global market, we have long been recognized as the world’s leading designer, manufacturer, service provider, and supplier of mission-critical rescue hoists and cargo hook systems. We also manufacture weapons-handling systems, cargo winches, and tie-down equipment. Our products are designed to be efficient and reliable in extreme operating conditions and are used to complete rescue operations and military insertion/extraction operations, move and transport cargo, and load weapons onto aircraft and ground-based launching systems.

CORE BUSINESS

Our core business is aerospace and defense products. We believe we are the world’s leading designer, manufacturer, service provider, and supplier of mission-critical electric and hydraulic rescue hoists and cargo hook systems. We also manufacture weapons handling systems, cargo winches, and tie-down equipment. These products are sold primarily to military and civilian agencies and aerospace contractors. Our emphasis is on the engineering, assembly, testing, service, and support of our products.

PRODUCTS AND SERVICES

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

Products

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

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

We make static-line retrieval and cargo winches for military cargo aircraft including the Boeing C-17, Alenia C-27J, and CASA CN-235, CASA C-295, and Airbus A400M. In addition, we have a contract with Airbus to develop and sell a new cargo positioning and restraint system for the A400M cargo plane and will be the sole supplier of this system with anticipated delivery beginning after Fiscal 2012.

Once our products are qualified and approved for use with a particular aircraft model, sales of products and services generally continue over the life of the aircraft model, which can be decades. It can be expensive and difficult for a second supplier’s product to become qualified and approved on the same aircraft.

Our weapons handling systems include weapons handling equipment for land-based rocket launchers and munitions hoists for loading missiles and other loads using electric power or exchangeable battery packs. We also supply equipment for the United States, Japanese, and European Multiple-Launch Rocket Systems (MLRS), and the United States High Mobility Artillery Rocket System (HIMARS), which uses specialized

Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)

hoists to load and unload rocket pod containers. We also provide actuators and specialty gearboxes for specialty weapons applications.

Services

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

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

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

LABOR MATTERS

The United Auto Workers (UAW) represents certain hourly employees at our facility. Our collective bargaining agreement with these employees expired on September 30, 2010. During September 2010, certain of our unionized workers began a work slowdown that reduced the new equipment and overhaul & repair volume. The Company and the union employees operated under a mutually agreed extension of the expired agreement until reaching a new three-year agreement on October 28, 2010.

OUTLOOK

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

CRITICAL ACCOUNTING POLICIES

For information regarding our critical accounting policies, please refer to the discussion provided in our Annual Report on Form 10-K for our fiscal year ended March 31, 2010 under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” and our Notes to Consolidated Financial Statements included therein.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)

Results of Operations

Three Months Ended September 30, 2010 Compared with Three Months Ended September 27, 2009


	Three Months Ended						Increase/(Decrease)
	September 30,			September 27,
	2010			2009			$			%


Products	$	10,788		$	11,725		$	(937	)		(8.0	)%
Services		4,318			4,683			(365	)		(7.8	)

Net sales		15,106			16,408			(1,302	)		(7.9	)


Products		5,851			7,312			(1,461	)		(20.0	)
Services		3,079			3,133			(54	)		(1.7	)

Cost of sales		8,930			10,445			(1,515	)		(14.5	)


Gross profit		6,176			5,963			213			3.6
As a % of net sales		40.9	%		36.3	%		N/A		4.6		%Pt

Selling, general, and administrative expenses		4,816			4,488			328			7.3	%
Relocation expense		—			51			(51	)		N/A

Operating income		1,360			1,424			(64	)		(4.5	)

Interest expense		170			229			(59	)		(25.8	)

Net income	$	643		$	654		$	(11	)		(1.7	)%

Net Sales. Fiscal 2011 second quarter net sales of $15,106 were lower by $1,302, or 7.9%, from net sales of $16,408 in the Fiscal 2010 second quarter. Fiscal 2011 products sales of $10,788 were $937, or 8.0%, below prior year primarily due to lower volume of new equipment of $2,189 due to large shipments to the U.S. Government and an OEM customer last year, and a labor work slowdown, related to union negotiations, partly offset by higher spare parts volume of $1,252 for U.S. military, the Japan Ministry of Defense, and third-party overhaul & repair customers.

Fiscal 2011 second quarter services sales of $4,318 were lower by $365, or 7.8%, compared with the prior year primarily due to reduced overhaul and repair volume caused by a labor work slowdown, partly offset by higher engineering services volume in weapons handling for the Predator-C in weapons handling.

The timing of U.S. Government awards, availability of U.S. Government funding, and product delivery schedules are among the factors that affect the period of recording revenues. Fiscal 2010 was consistent with recent years with revenues in the second half of the fiscal year exceeding revenues in the first half of the fiscal year; we believe Fiscal 2011 revenues will be consistent with this pattern.

Cost of Sales. Products cost of sales of $5,851 in the Fiscal 2011 second quarter were 20.0% lower than the prior year due to the lower sales volume and to a greater mix of spare parts sales that have lower costs, partly offset by higher costs from under-absorbed overhead. Cost of services provided in the Fiscal 2011 second quarter of $3,079 were 1.7% lower than the prior year due to lower sales volume, partly offset by an increase in cost due to under-absorbed overhead.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)

The under-absorbed overhead of $420 resulted from the labor slowdown as a part of labor collective bargaining negotiations. This under-absorption is approximately split between products at 40% and services at 60%.

Gross profit. Gross profit of $6,176 in the Fiscal 2011 second quarter was 3.6% ahead of the same period in Fiscal 2010. The dollar increase is due to sales volume growth in spare parts, partly offset by under-absorbed overhead. As a percent of sales, the gross profit margin was 40.9% for the Fiscal 2011 second quarter compared with 36.3% for the prior year. Excluding under-absorbed overhead of $420, or 2.8% of sales, gross profit margin as a percent of sales would have been 43.7% and reflects a favorable shift in mix due to higher margins on spare parts and a favorable customer mix from lower shipments of hoists with a low profit margin to a major customer in the current fiscal quarter.

Selling, General, and Administrative Expenses. Selling, general, and administrative (“SG&A”) expenses were $4,816 in the Fiscal 2011 second quarter compared with $4,488 in the Fiscal 2010 second quarter, an increase of $328. This increase is primarily due to higher incentive compensation, third-party sales commissions, and amortization related to the relocation. These costs were partly offset by lower engineering expenses. Sales commission rates are higher for spare parts sales, and spare parts sales increased in the quarter over prior year. As a percent of sales, SG&A was 31.9% in the Fiscal 2011 second quarter versus 27.4% in the comparable period last year, partly reflecting lower sales.

Interest Expense. Interest expense was $170 in the Fiscal 2011 second quarter versus $229 in the Fiscal 2010 second quarter. The decline in interest expense is primarily due to $6,508 lower total debt at September 30, 2010 compared with September 27, 2009, partly offset by a higher interest-rate margin spread.

Net Income. Net income was $643, or $0.07 per diluted share, in the Fiscal 2011 second quarter compared with $654, or $0.07 per diluted share, in the same period in Fiscal 2010. The impact of lower sales volume and higher SG&A costs was mostly offset by higher gross profit and lower interest expense.

New Orders. New products and services orders received during the three months ended September 30, 2010 decreased 3.0% to $18,407 compared with $18,971 during the three months ended September 27, 2009. The decrease was primarily due to lower new equipment orders, partly offset by higher spare parts orders, primarily from the U.S. military but also from third-party overhaul & repair. Orders for new equipment decreased by $2,156, or 22.2%, primarily due to customers deferring their production requirements.

New orders for services in overhaul and repair and engineering for the three months ended September 30, 2010 were 5.3% below prior year as higher overhaul and repair orders were more than offset by lower engineering orders as the prior year included a large engineering order from Airbus.

Backlog. Backlog at September 30, 2010 was $136,635 compared with $130,144 at March 31, 2010 and $135,821 at September 27, 2009. The backlog at September 30, 2010, March 31, 2010, and September 27, 2009 includes approximately $69,699, $69,463, and $69,506, respectively, for the Airbus A400M military transport aircraft that was once scheduled to commence shipping in late calendar 2009 and continue through 2020. Airbus now indicates shipments are likely to commence in calendar 2012.

We measure backlog by the amount of products or services that customers committed by contract to purchase as of a given date. Backlog may vary substantially over time due to the size and timing of orders. Backlog of approximately $52,521 at September 30, 2010 is scheduled for shipment during the next twelve months.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ 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 1.2 for both the Fiscal 2011 and Fiscal 2010 second quarter.

Six Months Ended September 30, 2010 Compared with Six Months Ended September 27, 2009


	Six Months Ended						Increase/(Decrease)
	September 30,			September 27,
	2010			2009			$			%


Products	$	23,873		$	19,913		$	3,960			19.9	%
Services		7,773			9,857			(2,084	)		(21.1	)

Net sales		31,646			29,770			1,876			6.3


Products		13,029			11,864			1,165			9.8
Services		6,308			6,709			(401	)		(6.0	)

Cost of sales		19,337			18,573			764			4.1


Gross profit		12,309			11,197			1,112			9.9
As a % of net sales		38.9	%		37.6	%		N/A		1.3		% Pt

Selling, general, and administrative expenses		9,446			8,672			774			8.9	%
Relocation expense		211			189			22			11.6

Operating income		2,652			2,336			316			13.5

Interest expense		383			463			(80	)		(17.3	)

Net income	$	1,232		$	1,012		$	220			21.7	%

Net Sales. Fiscal 2011 first six months net sales of $31,646 increased by $1,876, or 6.3%, from net sales of $29,770 in Fiscal 2010. Fiscal 2011 products sales of $23,873 were $3,960, or 19.9%, above prior year primarily due to increased spare parts volume of $5,360 resulting primarily from U.S. military and third-party overhaul & repair customers, partly offset by lower new equipment volume of $1,400.

Fiscal 2011 first six months services sales of $7,773 were lower by $2,084, or 21.1%, compared with prior year primarily due to reduced overhaul and repair volume and also due to lower engineering services volume. Overhaul and repair sales were lower than last year due to ramping up operations in the Fiscal 2011 first quarter following our March 2010 relocation to our Whippany, New Jersey facility and a labor slowdown in the Fiscal 2011 second quarter related to labor collective bargaining negotiations.

Cost of Sales. Products cost of sales of $13,029 in the Fiscal 2011 first six months were 9.8% higher than the prior year primarily due to higher sales and also due to under-absorbed manufacturing overhead. Cost of services provided of $6,308 in the Fiscal 2011 first six months were $401 lower than the prior year due to lower sales volume, partly offset by under-absorbed overhead.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)

The under-absorbed overhead of $1,642 resulted from a manufacturing ramp-up period early in the Fiscal 2011 first quarter due to our relocation in March 2010 and a labor slowdown related to labor collective bargaining negotiations in our Fiscal second quarter. This under-absorption is approximately split between products at 40% and services at 60%.

Gross profit. Gross profit of $12,309 in the Fiscal 2011 first six months was 9.9% ahead of the same period in Fiscal 2010. The dollar increase is due to sales volume growth in spare parts, partly offset by under-absorbed overhead. As a percent of sales, the gross profit margin was 38.9% for the Fiscal 2011 first six months compared with 37.6% for the prior year. Excluding under-absorbed overhead of $1,642, or 5.2% of sales, gross profit margin as a percent of sales would have been 44.1% and reflects a favorable shift in product mix due to higher margins on spare parts and a favorable customer mix from lower shipments of hoists with a low profit margin to a major customer in the Fiscal 2011 second quarter.

Selling, General, and Administrative Expenses. Selling, general, and administrative (“SG&A”) expenses were $9,446 in the Fiscal 2011 first six months compared with $8,672 in Fiscal 2010, an increase of $774. The increase is due to higher incentive compensation, third-party sales commissions, and amortization related to the relocation. These costs were partly offset by lower information technology and engineering expenses. As a percent of sales, SG&A was 29.8% in the Fiscal 2011 first six months versus 29.1% in the comparable period last year.

We relocated our headquarters and factory to Whippany, New Jersey during the Fiscal 2010 fourth quarter and incurred $211 of expenses related to the move in the Fiscal 2011 first six months.

Interest Expense. Interest expense was $383 in the Fiscal 2011 first six months versus $463 in Fiscal 2010. The decline in interest expense is primarily due to $6,508 lower total debt at September 30, 2010 compared with September 27, 2009, partly offset by a higher interest-rate margin spread.

Net Income. Net income was $1,232, or $0.13 per diluted share, in the Fiscal 2011 first six months compared with $1,012, or $0.11 per diluted share, in the same period in Fiscal 2010. The net income increase resulted from the higher sales volume and gross profit, lower interest expense, partly offset by higher SG&A expenses.

New Orders. New products and services orders received during the six months ended September 30, 2010 increased 10.2% to $38,137 compared with $34,603 during the six months ended September 27, 2009. The increase was due to spare parts orders, primarily from the U.S. military. Orders for new equipment decreased by $3,060, or 17.3%, primarily due to customers deferring their production requirements.

New orders for services in overhaul and repair and engineering for the six months ended September 30, 2010 were 3.5% lower than the prior year.

Backlog

The book to bill ratio for both the first six months of Fiscal 2011 and Fiscal 2010 was 1.2. Cancellations of purchase orders or reductions of product quantities in existing contracts, although seldom occurring, could substantially and materially reduce the Company’s backlog. Therefore, the backlog may not represent the actual amount of shipments or sales for any future period.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)

Liquidity and Capital Resources

Our principal sources of liquidity are cash on hand, cash generated from operations, and our $33,000 Senior Credit Facility. Our liquidity requirements depend on a number of factors, many of which are beyond our control, including the timing of production under contracts with the U.S. Government. Our working capital needs fluctuate between periods as a result of changes in program status and the timing of payments by program. Additionally, because sales are generally made on the basis of individual purchase orders, liquidity requirements vary based on the timing and volume of orders. Based on cash on hand, future cash expected to be generated from operations, and the Senior Credit Facility, we expect to have sufficient cash to meet liquidity requirements for the next twelve months.

Our $33,000 Senior Credit Facility consists of a $10,000 revolving line of credit (“Revolver”) and, at the inception of the credit agreement in August 2008, term loans totaling $23,000. The Senior Credit Facility is secured by all of our assets and accrue interest at either the “Base Rate” (as defined in the credit agreement) or the London Interbank Offered Rate (“LIBOR”) plus applicable margins based on our leverage ratio (as defined in the credit agreement) for the most recent four quarters and is calculated at each quarter end. At September 30, 2010, the term loan balance was $15,607, there were no outstanding Revolver borrowings, there were $951 in outstanding (standby) letters of credit, and $9,049 of availability under the Revolver. The Senior Credit Facility contains certain financial covenants, including fixed charge coverage ratio and leverage ratio. Unless waived, any failure to comply with such covenants could constitute an event of default resulting in the acceleration of all amounts due under the Senior Credit Facility. A more complete description of these covenants is contained in Note 8 of our financial statements. At September 30, 2010, we were in compliance with all covenant provisions of the Senior Credit Facility.

During the Fiscal 2011 second quarter, we made two $821 term loan repayments by pre-paying the amount due October 1, 2010. We made this accelerated term loan payment because of our strong cash position.

Working Capital

Working capital at September 30, 2010 was $26,275, an increase of $1,087, versus $25,188 at March 31, 2010. The ratio of current assets to current liabilities was 2.8:1.0 at September 30, 2010 compared with 2.7:1.0 at the beginning of Fiscal 2011. The working capital increase resulted primarily from a $1,516 increase in cash, an $822 decrease in the current portion of long-term debt, and a $543 increase in inventories. Partly offsetting this amount was a $1,315 accounts receivable decrease, a $717 accounts payable increase, and a $238 net increase in other working capital items.

The accounts receivable days outstanding based on 360 days decreased to 69.9 days at September 30, 2010, from 90.0 days at September 27, 2009, due primarily to lower accounts receivable balances exceeding ninety-days outstanding. Inventory turnover increased to 2.0 turns at September 30, 2010 versus 1.7 turns at September 27, 2009 due to management’s focus since January 2010 on reducing inventory.

Capital Expenditures

Capital expenditures-operations for the six months ended September 30, 2010 and September 27, 2009 were $386 and $1,610, respectively, which include capitalized relocation expenditures of $164 and $1,386, respectively. Capitalized project costs for engineering for the six months ended September 30, 2010 and September 27, 2009 were $174 and $382, respectively.

Senior Credit Facility

The Senior Credit Facility is discussed in Note 8 of the “Notes to Condensed Consolidated Financial Statements” contained in Part 1, Item 1 of this report.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)

Interest Rate Swap

The Interest Rate Swap is discussed in Note 8 of the “Notes to Condensed Consolidated Financial Statements” contained in Part 1, Item 1 of this report.

TAX BENEFITS FROM NET OPERATING LOSSES

The Tax Benefits from Net Operating Losses is discussed in Note 7 of the “Notes to Condensed Consolidated Financial Statements” contained in Part 1, Item 1 of this report.

CONTRACTUAL OBLIGATIONS

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


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

Debt principal repayments (a)	$	15,607	$	2,464	$	6,571	$	6,572	$	—
Estimated interest payments on long-term debt (b)		1,039		377		644		18		—
Operating leases		9,194		1,079		2,158		2,029		3,928

Purchase obligations (c)		—		—		—		—		—

Total	$	25,840	$	3,920	$	9,373	$	8,619	$	3,928


(a)		Obligations for long-term debt reflect the requirements of the term loan under the Senior Credit Facility. See Note 8 of “Notes to Condensed Consolidated Financial Statements” contained elsewhere in this report.

(b)		Estimated interest payments on long-term debt reflect the scheduled interest payments of the term loan under the Senior Credit Facility and assume an effective weighted average interest rate of 3.6%, our blended interest rate at September 30, 2010.

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

INFLATION

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

CONTINGENCIES

Environmental matters — Environmental matters are discussed in Note 13 of the “Notes to Condensed Consolidated Financial Statements” contained in Part 1, Item 1 of this report.

Litigation — Litigation is discussed in Note 13 of the “Notes to Condensed Consolidated Financial Statements” contained in Part 1, Item 1 of this report.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
($ In Thousands Except Share Amounts)

RECENTLY ISSUED ACCOUNTING STANDARDS

The recent accounting pronouncements are discussed in Note 12 of the “Notes to Condensed Consolidated Financial Statements” contained in Part 1, Item 1 of this report.

($ In Thousands Except Share data)

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our business is affected by global economic and geo-political conditions, particularly defense spending by the United States Government. In particular, any decline in or a redirection of the United States defense budget could have a material impact on revenues and earnings in future periods. Although the United States Defense spending levels are historically high, the priority of the wars in Iraq and Afghanistan has resulted in less procurement for replacement parts and service for our products than in prior years.

As our OEM customers’ development timetables have been extended, we have experienced corresponding product development schedule slippage and increased investment. We have not seen, nor do we currently anticipate, any program cancellations and still expect all of our current product development projects to lead to production and aftermarket services which supports our current and expected investments. As an example, the Airbus A400M military transport aircraft is not expected to generate material revenues until after Fiscal 2012.

We are exposed to various market risks, primarily changes in interest rates associated with our Senior Credit Facility. The Senior Credit Facility requires us to enter into an interest rate swap for at least three years in an amount not less than 50% of the term loan for the first two years and 35% of the term loan for the third year. An interest rate swap, a type of derivative financial instrument, is used to minimize the effects of interest rate fluctuations on cash flows. We do not use derivatives for trading or speculative purposes. In September 2008, we entered into a three-year interest rate swap to exchange floating rate for fixed rate interest payments on the term loan as required by our Senior Credit Facility. The swap’s net effect of the spread between the floating rate (30 day LIBOR) and the fixed rate (3.25%), is settled monthly, and is reflected as an adjustment to interest expense in the period incurred. An unrealized loss to adjust the interest rate swap to its fair value was recorded net of tax, in accumulated other comprehensive loss, during the first six months of Fiscal 2011.

At September 30, 2010, $15,600 of our Senior Credit Facility was tied to LIBOR, and a 1% increase or decrease in interest rates would increase or decrease annual interest expense by approximately $99 based on the debt outstanding under the facility at September 30, 2010.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15(d)-15(e) under the Exchange Act) as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2010, our disclosure controls and procedures were effective to ensure (i) that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in order to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) during the first six months of the fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

Item 1A. RISK FACTORS

In addition to the other information set forth in this report, the user/reader should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2010 as filed with the Securities and Exchange Commission and incorporated herein by reference, which factors could materially affect our business, financial condition, financial results or future performance.

Item 6. EXHIBITS


31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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


	BREEZE-EASTERN CORPORATION (Registrant)
Dated: October 29, 2010	By:	/s/ Mark D. Mishler
		Mark D. Mishler, Senior Vice President,
		Chief Financial Officer, Treasurer, and Secretary *


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


		Page No.

PART 1	Financial Information

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets September 30, 2010 (Unaudited) and March 31,2010	4

	Condensed Consolidated Statements of Operations Three and Six Month Periods Ended September 30, 2010 and September 27, 2009 (Unaudited)	5

	Condensed Consolidated Statements of Cash Flows Six Month Periods Ended September 30, 2010 and September 27, 2009 (Unaudited)	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7 - 18

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19 - 28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4.	Controls and Procedures	30

PART II.	Other Information

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	30

Item 6.	Exhibits	31

SIGNATURES		31


EX-31.1
EX-31.2
EX-32.1


	Three Months Ended				Six Months Ended
Location	September 30, 2010		September 27, 2009		September 30, 2010		September 27, 2009
United States	$	7,990	$	9,679	$	18,266	$	15,975
Italy		1,649		3,040		3,206		5,259
England		590		332		950		611
Other European countries		1,603		802		2,492		2,031
Pacific and Far East		1,634		702		3,168		2,294
Other international		1,640		1,853		3,564		3,600

Total	$	15,106	$	16,408	$	31,646	$	29,770

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	Three Months Ended				Six Months Ended
	September 30, 2010		September 27, 2009		September 30, 2010		September 27, 2009
Net sales	$	15,106	$	16,408	$	31,646	$	29,770
Cost of sales		8,930		10,445		19,337		18,573

Gross profit		6,176		5,963		12,309		11,197

Selling, general, and administrative expenses		4,816		4,488		9,446		8,672
Relocation expense		—		51		211		189

Operating income		1,360		1,424		2,652		2,336

Interest expense		170		229		383		463
Other expense — net		81		67		145		128

Income before incomes taxes		1,109		1,128		2,124		1,745

Income tax provision		466		474		892		733

Net income	$	643	$	654	$	1,232	$	1,012

Earnings per common share:
Basic net income per share	$	0.07	$	0.07	$	0.13	$	0.11
Diluted net income per share		0.07		0.07		0.13		0.11


Weighted-average basic shares outstanding		9,400,000		9,389,000		9,398,000		9,377,000
Weighted-average diluted shares outstanding		9,412,000		9,394,000		9,412,000		9,388,000