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| BOLT > SEC Filings for BOLT > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
The following management's discussion and analysis should be read together with the Consolidated Financial Statements (Unaudited) and accompanying notes and other detailed information appearing elsewhere in this Form 10-Q. This discussion and certain other information in this Form 10-Q includes forward-looking statements, including statements about the demand for our products and future results. Please refer to the "Cautionary Statement for Purposes of Forward-Looking Statements" below.
In this Quarterly Report on Form 10-Q, we refer to Bolt Technology Corporation and its subsidiaries as "we, "our," "us," "the registrant" or "the Company," unless the context clearly indicates otherwise.
Cautionary Statement for Purposes of Forward-Looking Statements
Forward-looking statements in this Form 10-Q, future filings by the Company with
the Securities and Exchange Commission, the Company's press releases and oral
statements by authorized officers of the Company are intended to be subject to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These include statements about anticipated financial performance, future
revenues or earnings, business prospects, new products, anticipated energy
industry activity, anticipated market performance, planned production and
shipping of products, expected cash needs and similar matters. Investors are
cautioned that all forward-looking statements involve risks and uncertainty,
including without limitation (i) the risk of technological change relating to
the Company's products and the risk of the Company's inability to develop new
competitive products in a timely manner, (ii) the risk of changes in demand for
the Company's products due to fluctuations in energy industry activity,
(iii) the Company's reliance on certain significant customers, (iv) risks
associated with a significant amount of foreign sales, (v) the risk of
fluctuations in future operating results and (vi) other risks detailed in the
Company's filings with the Securities and Exchange Commission. The Company
believes that forward-looking statements made by it are based on reasonable
expectations. However, no assurances can be given that actual results will not
differ materially from those contained in such forward-looking statements. The
words "estimate," "project," "anticipate," "expect," "predict," "believe" and
similar expressions are intended to identify forward-looking statements.
Overview
Sales of the Company's products are generally related to the level of worldwide oil and gas exploration activity, which is highly dependent on oil and gas prices, and with regard to new air gun sales, the number of additional seismic exploration vessels put into service. New seismic exploration vessels typically result in large sales of new air guns. In certain periods, several vessels may be placed in service and in other periods none may be placed in service resulting in an "uneven" sales pattern for new air gun sales.
Sales of our products for the first quarter of fiscal 2009 amounted to $11,263,000 compared to $14,336,000 in last year's first quarter, a decrease of 21%. This decrease was driven by a 51% decrease in air gun sales partially offset by a 33% increase in sales of underwater electrical cables and connectors and seismic energy source controllers. The Company believes that the decrease in air gun sales was due primarily to the uneven sales pattern referred to above.
The Company continues to experience an active level of customer inquiries, including those for new air guns, underwater electrical cables and connectors and seismic energy source controllers. Based on these inquiries, and considering the uneven sales pattern for new air gun sales and the 33% increase in sales in the first quarter of underwater electrical cables and connectors, we remain cautiously optimistic that fiscal year 2009
will be a good year for the Company. However, we believe that a reduction in worldwide exploration spending as a result of the recent turmoil in the world credit markets and/or a decrease in the demand for oil which could result from a severe economic downturn, would undoubtedly have an effect on our business.
Effective May 31, 2008, the Company sold substantially all of the assets of its wholly-owned subsidiary, Custom Products Corporation ("Custom"). Custom, a developer, manufacturer and seller of miniature industrial clutches and brakes and seller of sub-fractional horsepower electrical motors, formerly comprised the Company's "industrial products" segment. Custom was the only unit in the industrial products segment. Therefore, due to the sale of Custom, the Company operates only in the oilfield services equipment business. In the Consolidated Financial Statements (Unaudited), amounts relating to Custom have been reported as discontinued operations for the three month period ended September 30, 2007. See Note 4 to Consolidated Financial Statements (Unaudited) for further information concerning discontinued operations.
At September 30, 2008, the Company's balance sheet continued to strengthen from June 30, 2008. Cash increased from $19.1 million at June 30, 2008 to $20.3 million at September 30, 2008. Working capital increased from $39.2 million at June 30, 2008 to $41.5 million at September 30, 2008.
Liquidity and Capital Resources
As of September 30, 2008, the Company believes that current cash and cash equivalent balances are, and projected cash flow from operations in fiscal 2009 will be, adequate to meet foreseeable operating needs, as well as any possible earnout payments associated with the acquisition of RTS, in fiscal year 2009. See Note 3 to Consolidated Financial Statements (Unaudited) for further information concerning the RTS acquisition.
The Company has a $4,000,000 unsecured revolving credit facility with a bank to provide funds for general corporate purposes should the need arise. The Company has not borrowed any funds under this facility. See Note 12 to Consolidated Financial Statements (Unaudited) for further information concerning the revolving credit facility.
Three Months Ended September 30, 2008
At September 30, 2008, the Company had $20,337,000 in cash and cash equivalents compared to $19,137,000 at June 30, 2008.
For the three month period ended September 30, 2008, cash flow from continuing operating activities after changes in working capital items was $1,420,000, primarily due to net income adjusted for non cash items, principally depreciation and stock based compensation expense, and lower accounts receivable partially offset by higher inventories and lower current liabilities.
In the three month period ended September 30, 2008, the Company used $220,000 for capital expenditures relating primarily to new and replacement equipment and leasehold improvements for a new leased manufacturing facility in Fredericksburg, Texas.
The Company anticipates that capital expenditures for the remainder of fiscal 2009 will approximate $800,000, which will be funded from operating cash flow.
Since a relatively small number of customers account for the majority of the Company's sales, the consolidated accounts receivable balance at the end of any period tends to be concentrated in a small number of customers. At September 30, 2008 and June 30, 2008, the five customers with the highest accounts receivable balances represented, in the aggregate, 69% and 62%, respectively, of the consolidated accounts receivable balances on those dates.
Three Months Ended September 30, 2007
At September 30, 2007, the Company had $6,856,000 in cash and cash equivalents. This amount was $3,132,000 or 31% lower than the amount of cash and cash equivalents at June 30, 2007.
For the three month period ended September 30, 2007, cash flow from continuing operating activities after changes in working capital items was $1,727,000, primarily due to net income adjusted for non cash items and higher current liabilities partially offset by higher accounts receivable and inventories. For the three month period ended September 30, 2007, cash flow from discontinued operating activities after changes in working capital items was $200,000.
For the three month period ended September 30, 2007, the Company used $4,468,000, net of $147,000 of cash received, for the acquisition of RTS and $637,000 for capital expenditures relating to continuing operations for new and replacement equipment. For the three month period ended September 30, 2007, there were no capital expenditures relating to discontinued operations.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet financing arrangements.
Contractual Obligations
During the three month period ended September 30, 2008, there were no changes in the operating leases described in the Company's Annual Report on Form 10-K for the Fiscal Year Ended June 30, 2008. The Company had no long-term borrowings, capital leases, purchase obligations or other long-term liabilities at September 30, 2008 and June 30, 2008. In May 2007, the Company entered into a $4,000,000 unsecured revolving credit facility with a bank to provide funds for general corporate purposes should the need arise. The Company has not borrowed any funds under this facility. See Note 12 to Consolidated Financial Statements (Unaudited) for further information concerning the revolving credit facility.
The Company will be relocating the RTS facility to new leased premises (approximately 7,000 square feet) in Fredericksburg, Texas under a five-year, triple net, operating lease. As of September 30, 2008, the Company had not yet finalized a lease with the lessor, which is an affiliate of the President and former owner of RTS.
Results of Operations
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
Consolidated sales for the three month period ended September 30, 2008 totaled $11,263,000, a decrease of $3,073,000 or 21% from the three month period ended September 30, 2007. Sales of air guns and related spare parts decreased by $4,730,000 or 51% but sales of underwater electrical cables and connectors and seismic source controllers increased by 33%. The sales decrease for air guns reflects primarily the uneven sales pattern associated with outfitting new seismic vessels with air guns and other technological equipment.
Consolidated gross profit as a percentage of consolidated sales was 49% for the three month period ended September 30, 2008 versus 46% for the three month period ended September 30, 2007. The improvement in the gross profit percentage was caused primarily by higher manufacturing efficiencies relating to underwater electrical cables and connectors and seismic source controllers reflecting the 33% increase in sales volume, partially offset by lower manufacturing efficiencies relating to air guns as a result of the 51% decrease in air gun sales.
Research and development costs for the three month period ended September 30, 2008 decreased by $6,000 or 9% from the three month period ended September 30, 2007. These expenditures were associated with improvements to the Company's Annular Port Air Guns and Seismic Source Monitoring System ("SSMS"). The decrease is due primarily to lower spending for improvements to SSMS.
Selling, general and administrative expenses increased by $292,000 in the three month period ended September 30, 2008 from the three month period ended September 30, 2007 due primarily to: higher salaries and stock based compensation expense ($146,000), amortization of other intangible assets ($60,000), and higher travel, bad debt, freight out and shareholder relations expense ($112,000), partially offset by lower professional fees due primarily to lower Sarbanes-Oxley compliance costs ($107,000).
The provision for income taxes for the three month period ended September 30, 2008 was $1,121,000, an effective tax rate of 33%. This rate was lower than the federal statutory rate of 34%, primarily due to tax benefits associated with the domestic manufacturer's deduction. The provision for income taxes for the three month period ended September 30, 2007 was $1,468,000, an effective tax rate of 31%. This rate was lower than the federal statutory rate of 35%, primarily due to tax benefits associated with the domestic manufacturer's deduction, partially offset by state income taxes.
The above mentioned factors resulted in income from continuing operations for the three month period ended September 30, 2008 of $2,280,000 compared to income from continuing operations of $3,295,000 for the three month period ended September 30, 2007.
Effective May 31, 2008, substantially all of the assets of Custom, a wholly owned subsidiary of Bolt, were sold for $5,250,000, subject to adjustments for certain liabilities. Custom, a developer, manufacturer and seller of miniature industrial clutches and brakes and seller of sub-fractional horsepower electrical motors, was formerly in the Company's "industrial products" segment. Custom was the only unit in the industrial products segment; therefore, due to the sale of Custom, the Company now operates only in the oilfield services equipment business. In the Consolidated Financial Statements (Unaudited), reported amounts relating to Custom have been reported as discontinued operations. The Company recorded as discontinued operations the operating results of Custom for the three month period ending September 30, 2007. See Note 4 to Consolidated Financial Statements (Unaudited) for additional information concerning discontinued operations.
The above mentioned factors resulted in net income for the three month period ended September 30, 2008 of $2,280,000 compared to net income of $3,455,000 for the three month period ended September 30, 2007.
Critical Accounting Policies
The methods, estimates and judgments the Company uses in applying the accounting policies most critical to its financial statements have a significant impact on the results the Company reports in its financial statements. The Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of the Company's financial condition and results, and require the Company to make its most difficult and subjective judgments.
Based on this definition, the Company's most critical accounting policies include: revenue recognition, recording of inventory reserves, deferred taxes, and the potential impairment of goodwill. These policies are discussed below. The Company also has other key accounting policies, including the establishment of bad debt reserves. The Company believes that these other policies either do not generally require it to make estimates and judgments that are as difficult or as subjective, or are less likely to have a material impact on the Company's reported results of operations for a given period.
Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the end of each reporting period and involve inherent risks and uncertainties. Actual results may differ significantly from the Company's estimates and its estimates could be different using different assumptions or conditions.
See Note 2 to Consolidated Financial Statements (Unaudited) for additional information concerning significant accounting policies.
Revenue Recognition
The Company recognizes sales revenue when it is realized and earned. The
Company's reported sales revenue is based on meeting the following criteria:
(1) manufacturing products based on customer specifications; (2) delivering
product to the customer before the close of the reporting period, whereby
delivery results in the transfer of ownership risk to the customer;
(3) establishing a set sales price with the customer; (4) collecting the sales
revenue from the customer is reasonably assured; and (5) no contingencies exist.
Inventory Reserves
A significant source of the Company's revenue arises from the sale of replacement parts required by customers who have previously purchased products. As a result, the Company maintains a large quantity of parts on hand that may not be sold or used in final assemblies for an extended period of time. In order to recognize that certain inventory may become obsolete or that the Company may have supplies in excess of reasonably supportable sales forecasts, an inventory valuation reserve has been established. The inventory valuation reserve is a significant estimate made by management. Actual results may differ from this estimate, and the difference could be material.
Management establishes the inventory valuation reserve by reviewing the inventory for items that should be reserved in full based on a lack of usage for a specified period of time and for which future demand is not forecasted and establishes an additional reserve for slow moving inventory based on varying percentages of the cost of the items. The reserve for inventory valuation at September 30, 2008 and June 30, 2008 was $433,000 and $406,000, respectively. At September 30, 2008 and June 30, 2008, approximately $1,347,000 and $1,247,000, respectively, of the raw materials and sub-assemblies inventory were considered slow moving and subject to a reserve provision equal to all or a portion of the cost, less an estimate for scrap value. In certain instances, this inventory has been unsold for more than five years from date of manufacture or purchase, and in other instances the Company has more than a five-year supply of inventory on hand based on recent sales
volume. At September 30, 2008, the cost of inventory for which the Company has more than a five-year supply on hand and the cost of inventory for which the Company has had no sales during the last five years amounted to approximately $780,000. Management believes that this inventory is properly valued and appropriately reserved. Even if management's estimate were incorrect, that would not result in a cash outlay since the cash required to manufacture or purchase the older inventory was expended in prior years.
The inventory valuation reserve is adjusted at the close of each accounting period, as necessary, based on management's estimate of the valuation reserve required. This estimate is calculated on a consistent basis as determined by the Company's inventory valuation policy. Increases to the inventory valuation reserve result in a charge to cost of sales, and decreases to the reserve result in a credit to cost of sales. The inventory valuation reserve is also decreased when items are scrapped or disposed of. During the three month period ended September 30, 2008, the inventory valuation reserve was increased by $27,000, and the Company did not scrap or dispose of any items.
Deferred Taxes
The Company applies an asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. The recoverability of deferred tax assets is dependent upon the Company's assessment of whether it is more likely than not that sufficient future taxable income will be generated in the relevant tax jurisdiction to utilize the deferred tax asset. The Company reviews its internal forecasted sales and pre-tax earnings estimates to make its assessment about the utilization of deferred tax assets. In the event the Company determines that future taxable income will not be sufficient to utilize the deferred tax asset, a valuation allowance is recorded. If that assessment changes, a charge or a benefit would be recorded in the consolidated statement of income. The Company has concluded that no deferred tax valuation allowance was necessary at September 30, 2008 and June 30, 2008 because future taxable income is believed to be sufficient to utilize any deferred tax asset.
Goodwill Impairment Testing
As required by SFAS No. 142, "Goodwill and Other Intangible Assets," the Company reviews goodwill for impairment annually or more frequently if impairment indicators arise. Management tested goodwill for impairment as of June 30, 2008 and 2007 and the tests indicated no impairment. The Company reviewed goodwill at September 30, 2008, and such review did not indicate impairment.
Goodwill represents approximately 16% of the Company's total assets at September 30, 2008 and is thus a significant estimate by management. Even if management's estimate were incorrect, it would not result in a cash outlay because the goodwill amounts arose out of acquisition accounting. See Notes 2, 3 and 5 to Consolidated Financial Statements (Unaudited) for additional information concerning goodwill.
Recent Accounting Developments
Business Combinations
In December 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 (revised 2007), "Business Combinations" ("SFAS 141(R)"), which is a revision of SFAS 141. SFAS 141(R) continues to require the purchase method of accounting for business combinations and the identification and recognition of intangible assets separately from goodwill. SFAS 141(R) requires, among other things, the buyer to: (1) fair value assets and liabilities acquired as of the acquisition date
(i.e., a "fair value" model rather than a "cost allocation" model); (2) expense acquisition-related costs; (3) recognize assets or liabilities assumed arising from contractual contingencies at acquisition date using acquisition-date fair values; (4) recognize goodwill as the excess of the consideration transferred plus the fair value of any noncontrolling interest over the acquisition-date fair value of net assets acquired; (5) recognize at acquisition any contingent consideration using acquisition-date fair values (i.e., fair value earn-outs in the initial accounting for the acquisition); and (6) eliminate the recognition of liabilities for restructuring costs expected to be incurred as a result of the business combination. SFAS 141(R) also defines a "bargain" purchase as a business combination where the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus the fair value of any noncontrolling interest. Under this circumstance, the buyer is required to recognize such excess (formerly referred to as "negative goodwill") in earnings as a gain. In addition, if the buyer determines that some or all of its previously booked deferred tax valuation allowance is no longer needed as a result of the business combination, SFAS 141(R) requires that the reduction or elimination of the valuation allowance be accounted as a reduction of income tax expense. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008. The Company will apply SFAS 141(R) to any acquisitions that are made on or after July 1, 2009.
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