Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

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 Quarterly Report on Form 10-Q. This discussion and certain other information in this Quarterly Report on Form 10-Q includes forward-looking statements, including statements about the demand for the Company's products and future results. Please refer to the "Cautionary Statement for Purposes of Forward-Looking Statements" set forth below.

In this Quarterly Report on Form 10-Q, we refer to Bolt Technology Corporation and its subsidiaries as "we," "the registrant" or "the Company," unless the context clearly indicates otherwise.

Cautionary Statement for Purposes of Forward-Looking Statements

Forward-looking statements in this Quarterly Report on 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, dividends, 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, (vi) risks associated with global economic conditions, (vii) risks of changes in environmental or regulatory matters and (viii) 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," "may," "could," "should" and similar expressions are intended to identify forward-looking statements.

Overview

The Company develops, manufactures and sells marine seismic data acquisition equipment and underwater remotely operated robotic vehicles. The Company's four operating units, each of which is considered to be a separate reportable segment, consist of: seismic energy sources, underwater cables and connectors, seismic energy source controllers and underwater robotic vehicles. Sales of the Company's products in the three segments dedicated to marine seismic data acquisition equipment (seismic energy sources, underwater cables and connectors and seismic energy source controllers) are generally related to the level of worldwide oil and gas exploration and development activity, which is based on current and projected crude oil and natural gas prices. Sales of the Company's products in its fourth segment, underwater robotic vehicles, are generally related to the demand from governmental and quasi-governmental units. Refer to Note 13 to Consolidated Financial Statements (Unaudited) for further information on reportable segments.

Effective January 1, 2011, the Company acquired SeaBotix Inc. ("SBX"), a developer, manufacturer and seller of underwater remotely operated robotic vehicles. SBX has significant sales to the defense industry, federal, state and local governmental units, fire and rescue organizations and educational institutions. Budgetary constraints experienced by these customer groups negatively impacted SBX's performance during fiscal year 2011 and the quarter ended September 30, 2011. During the three month period ended December 31, 2011, however, SBX's sales improved significantly as sales for the quarter totaled $6,443,000. During the three month period ended March 31, 2012, SBX's sales amounted to $3,287,000, an increase of $2,392,000 or 267% from the three month period ended March 31, 2011. Refer to Notes 3, 6, 7, 8 and 13 to Consolidated Financial Statements (Unaudited) for additional information concerning SBX.

Sales for the nine month period ended March 31, 2012 increased to $37,153,000 or 33% over the same period in the prior year. The sales increase was principally due to the inclusion of SBX sales of $10,838,000 for the nine month period in fiscal year 2012. In fiscal year 2011, SBX was only included for a three month period since it was acquired January 1, 2011. For the nine month period ended March 31, 2012, sales for the three marine seismic data acquisition segments amounted to $26,315,000 compared to $27,144,000 for the nine month period ended March 31, 2011. The sales decrease reflects lower sales in the underwater cables and connectors and seismic energy source controllers segments partially offset by higher sales in the seismic energy sources segment.

The Company announced in September 2011 that it had commenced joint development efforts with WesternGeco, a product line of Schlumberger, to develop an environmentally sensitive energy source for marine seismic exploration surveys. The air gun is a bandwidth-controlled source of acoustic waves designed to reduce the potential impact of seismic signals on marine life. This is a multi-phase development project which, if successfully developed and commercialized, could be a significant new development in the marine seismic exploration industry. Expenditures made in support of this project are recorded as research and development expense in the Consolidated Statement of Income. During the nine month period ended March 31, 2012, the Company recorded $403,000 as research and development expense in connection with the joint development efforts.

The Company's balance sheet remained strong during the nine month period ended March 31, 2012. Working capital amounted to $44,347,000 and the Company remained debt free at March 31, 2012. The Company's cash position decreased to $20,790,000 at March 31, 2012 from $31,683,000 at June 30, 2011, primarily due to a payment of a special cash dividend of $8,576,000 in December 2011 and a payment of $4,060,000 to the former stockholders of SBX for earnout payments, a purchase price holdback and a pro forma working capital adjustment.

Liquidity and Capital Resources

As of March 31, 2012, the Company believes that current cash and cash equivalent balances and projected cash flow from operations will be adequate to meet foreseeable operating needs.

At the November 2011 meeting of the Company's Board of Directors, the Board declared a special cash dividend of $1.00 per share on the Company's outstanding Common Stock. This special cash dividend, in the aggregate amount of $8,576,000, was paid on December 20, 2011 to stockholders of record on December 6, 2011.

At the January 2012 meeting of the Company's Board of Directors, the Board approved a quarterly dividend program and declared an initial quarterly dividend of $0.05 per share on the Company's outstanding Common Stock, which was paid on April 5, 2012 to stockholders of record on March 8, 2012.

Nine Months Ended March 31, 2012

At March 31, 2012, the Company had $20,790,000 in cash and cash equivalents, as compared to June 30, 2011, when it had $31,683,000 in cash and cash equivalents.

For the nine month period ended March 31, 2012, cash flow from operating activities after changes in working capital items was $3,549,000, primarily due to net income adjusted for non-cash items and higher current liabilities, partially offset by higher accounts receivable and inventories. This compared to $3,814,000 of cash flow from operating activities after changes in working capital items for the prior year period, primarily due to net income adjusted for non-cash items and lower accounts receivable, partially offset by higher inventories and lower current liabilities.

For the nine month period ended March 31, 2012, cash used in investing activities was $4,996,000 primarily due to payments made to the former SBX stockholders for a purchase price holdback ($500,000), pro forma working capital adjustment ($1,060,000) and an earn-out payment ($2,500,000), as well as capital expenditures for new and replacement equipment ($954,000). For the prior year period, cash used in investing activities was $11,534,000, due to the purchase of SBX ($11,184,000) and capital expenditures for new and replacement equipment ($301,000) and higher other non-current assets ($49,000).

For the nine month period ended March 31, 2012, cash used in financing activities was $9,446,000, primarily due to payment of a special cash dividend in an aggregate amount of $8,576,000, and repurchases of 93,954 shares of the Company's Common Stock at an aggregate cost of $966,000 pursuant to the Company's $10,000,000 stock repurchase program approved by the Company's Board of Directors in June 2010. For the prior year period, cash used in financing activities was $1,450,000, primarily due to repurchases of the Company's Common Stock ($877,000) and SBX debt repayment ($539,000).

The Company anticipates that capital expenditures for the remainder of fiscal year 2012 will not exceed $170,000 and 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 March 31, 2012 and June 30, 2011, the five customers with the highest accounts receivable balances represented 60% and 66% of the consolidated accounts receivable balances on those dates, respectively.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet financing arrangements.

Contractual Obligations

There have been no changes in the Company's future minimum lease payments as reported in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2011 relating to its non-cancelable operating leases with terms in excess of one year except as noted in the following paragraph.

In September 2011, SBX entered into a lease extension for its administration/engineering/sales building. The impact of this extension was to increase the Company's future minimum lease payments from $1,441,000 through the fiscal year ending June 30, 2014 to $1,986,000 through the fiscal year ending June 30, 2017.

The Company had no long-term borrowings, capital leases, purchase obligations or other long term liabilities at March 31, 2012.

Results of Operations

Nine Months Ended March 31, 2012 Compared to Nine Months Ended March 31, 2011

Consolidated sales for the nine month period ended March 31, 2012 totaled $37,153,000, an increase of $9,114,000 or 33% from the nine month period ended March 31, 2011. The change in net sales from the prior year period by reportable segment was as follows: seismic energy sources increased by $763,000 (6%), underwater cables and connectors decreased by $668,000 (6%), seismic energy source controllers decreased by $924,000 (42%), and underwater robotic vehicles increased by $9,943,000. In fiscal year 2011, SBX's sales were for only a three month period, rather than a nine month period, due to the January 1, 2011 acquisition date.

Higher sales in the seismic energy sources segment was primarily due to increased air gun replacement parts business. Lower sales in the underwater cables and connectors segment reflects lower marine seismic exploration activity in the Gulf of Mexico since the Deepwater Horizon incident partially offset by higher SSMS sales. Lower sales in the seismic energy source controllers segment reflects decreasing demand for analog controllers. A digital controller has been developed and is currently in final field testing.

Consolidated gross profit as a percentage of consolidated sales was 47% for the nine month period ended March 31, 2012 versus 48% for the nine month period ended March 31, 2011. The decrease in the gross profit percentage was caused primarily by sales mix in the underwater cables and connectors segment and lower manufacturing efficiencies due to the sales decrease in the seismic energy source controllers segment.

Research and development ("R&D") costs increased by $1,062,000 or 178% in the nine month period ended March 31, 2012 from the nine month period ended March 31, 2011. The increase is primarily due to R&D of SBX, which amounted to $1,004,000 versus $331,000 for the nine month period ended March 31, 2011. In fiscal year 2011, R&D of SBX was for only a three month period, rather than a nine month period, due to the January 1, 2011 acquisition date. In addition, during the nine month period ended March 31, 2012 costs of $403,000 were incurred associated with a joint development project with WesternGeco to develop an environmentally sensitive seismic energy source.

Selling, general and administrative ("SG&A") expenses increased by $2,572,000 or 36% in the nine month period ended March 31, 2012 from the nine month period ended March 31, 2011. SG&A for the nine months ended March 31, 2012 and 2011 includes SBX in the amount of $2,713,000 and $714,000, respectively. In fiscal year 2011, SG&A of SBX was for only a three month period, rather than a nine month period, due to the January 1, 2011 acquisition date. Excluding SBX, SG&A increased by $573,000 or 9%, primarily due to higher compensation expense ($473,000), professional fees ($164,000) and bad debt expense ($110,000), partially offset by lower travel expense ($128,000).

Interest income decreased by $114,000 or 49% in the nine month period ended March 31, 2012 from the nine month period ended March 31, 2011, primarily due to lower average cash and cash equivalent balances.

The provision for income taxes for the nine month period ended March 31, 2012 was $1,810,000, an effective tax rate of 30%. This rate was lower than the federal statutory rate of 34%, due to tax benefits associated with the domestic manufacturer's deduction and the R&D tax credit partially offset by state income taxes and non-deductible expenses. The provision for income taxes for the nine month period ended March 31, 2011 was $1,713,000, an effective tax rate of 29%. This rate was lower than the federal statutory rate of 34% due to tax benefits associated with the domestic manufacturer's deduction, partially offset by non-deductible expenses.

The above mentioned factors resulted in an increase in net income for the nine month period ended March 31, 2012 to $4,251,000, compared to net income of $4,141,000 for the nine month period ended March 31, 2011.

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Consolidated sales for the three month period ended March 31, 2012 totaled $12,993,000, an increase of $3,612,000 or 39% from the three month period ended March 31, 2011. The change in sales by reportable segment was as follows: seismic energy sources increased by $1,359,000 (34%), underwater cables and connectors decreased by $25,000 (1%), seismic energy source controllers decreased by $114,000 (21%), and underwater robotic vehicles increased by $2,392,000 (267%).

Higher sales in the seismic energy sources segment was primarily due to increased air gun replacement parts business. Lower sales in the seismic energy source controllers segment was due to decreasing demand for analog controllers. A digital controller has been developed and is currently in final field testing. Higher sales in the underwater robotic vehicles segment was primarily due to increased revenues attributable to the new vLBV robotic vehicle and increased revenues from other robotic vehicle products as demand from SBX's major customer groups increased.

Consolidated gross profit as a percentage of consolidated sales was 46% for the three month period ended March 31, 2012, unchanged from the three month period ended March 31, 2011.

R&D costs increased by $128,000 or 31% in the three month period ended March 31, 2012 from the three month period ended March 31, 2011. The increase is primarily due to costs associated with a joint development project with WesternGeco to develop an environmentally sensitive seismic energy source.

SG&A increased by $570,000 or 21% in the three month period ended March 31, 2012 from the three month period ended March 31, 2011, primarily due to higher compensation expense ($327,000), professional fees ($110,000) and bad debt expense ($97,000).

Interest income decreased by $35,000 or 54% in the three month period ended March 31, 2012 from the three month period ended March 31, 2011, primarily due to lower average cash and cash equivalent balances.

The provision for income taxes for the three month period ended March 31, 2012 was $625,000, an effective tax rate of 28%. This rate was lower than the federal statutory rate of 34%, primarily due to tax benefits associated with the domestic manufacturer's deduction and the R&D tax credit, partially offset by state income taxes. The provision for income taxes for the three month period ended March 31, 2011 was $263,000, an effective tax rate of 20%. This rate was lower than the federal statutory rate of 34%, primarily due to tax benefits associated with the domestic manufacturer's deduction and the R&D tax credit, partially offset by state income taxes.

The above mentioned factors resulted in an increase in net income for the three month period ended March 31, 2012 to $1,585,000 compared to net income of $1,027,000 for the three month period ended March 31, 2011.

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 those 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, inventory reserves, deferred taxes, the potential impairment of goodwill and intangible assets with indefinite lives, and contingent consideration. 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) establishing a set sales price with the customer; (3) delivering product to the customer before the close of the reporting period, whereby delivery results in the transfer of ownership risk to 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 based on experience and the exercise of professional judgment. 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 inventory valuation reserve at March 31, 2012 and June 30, 2011 was $911,000 and $768,000, respectively. At March 31, 2012 and June 30, 2011, approximately $1,165,000 and $978,000, 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 the 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. 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 inventory 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. During the nine month period ended March 31, 2012, the inventory valuation reserve was increased by $143,000 and no items were scrapped or disposed.

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 were to change, 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 March 31, 2012 and June 30, 2011 because future taxable income is believed to be sufficient to utilize any deferred tax asset.

Impairment Testing of Goodwill and Intangible Assets with Indefinite Lives

As required by ASC 350, "Intangibles - Goodwill and Other," the Company reviews goodwill for impairment annually or more frequently if impairment indicators arise. A-G and RTS goodwill was tested for impairment at June 30, 2011, and the tests indicated no impairment of the goodwill balances. SBX goodwill was tested for impairment at December 31, 2011, and the test indicated no impairment of the goodwill balance. The Company also reviewed goodwill at the A-G, RTS and SBX reporting units at March 31, 2012, and such review did not result in any indicators of impairment.

Goodwill represents approximately 22% of the Company's total assets at March 31, 2012. The evaluation of goodwill impairment 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 6 to Consolidated Financial Statements (Unaudited) for additional information concerning goodwill.

Intangible assets with indefinite lives must be tested annually, or more frequently if there are indicators of impairment, to determine if events and circumstances still justify the carrying value of such asset. The test consists of a comparison of the fair value of the asset to its carrying amount. If the carrying amount exceeds the fair value, an impairment loss is recognized equal to the excess of the carrying amount over the fair value. Any such loss would be recognized in the period in which the impairment arose. The SBX intangible asset with an indefinite life was tested for impairment at December 31, 2011 and the test indicated no impairment. The Company reviewed intangible assets with indefinite lives at March 31, 2012 and such review did not result in any indicators of impairment.

Contingent Consideration

Management estimates and records the fair value of contingent consideration at acquisition date based primarily on the range and probability of projected future revenues of the acquired entity over the earnout period. The estimate is reviewed at the end of each reporting period to determine if the contingent consideration amount requires adjustment. Actual contingent consideration payments may differ from such estimates, and the differences could be material.

Recent Accounting Developments

Testing Goodwill for Impairment

In September 2011, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2011-08, Testing Goodwill for Impairment. The purpose of this ASU, which amends the guidance to Topic 350, Intangibles - Goodwill and Other, is to simplify how entities test for goodwill impairment and to reduce costs. This ASU allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments in this ASU permit an entity to first assess qualitative factors to determine if events or circumstances exist leading to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, an entity must perform a more detailed, two-step goodwill impairment test to identify potential impairment and measure any goodwill impairment loss to be recognized. If the qualitative assessment indicates that it is not more likely than not that the fair value of a reporting unit is less than the carrying value, then performing the two-step impairment test is unnecessary. This ASU also improves previous guidance by providing examples of events and circumstances that an entity should consider between annual impairment tests to determine if there is impairment. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The adoption of this ASU will not have an impact on the Company's financial statements because it is intended to simplify the process for conducting the goodwill impairment assessment.