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BOLT > SEC Filings for BOLT > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for BOLT TECHNOLOGY CORP

Form 10-Q for BOLT TECHNOLOGY CORP


9-Nov-2012

Quarterly Report


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 underwater robotic vehicles are generally related to the demand from governmental and quasi-governmental units. Refer to Note 14 to Consolidated Financial Statements (Unaudited) for further information on reportable segments.

Sales for the three month period ended September 30, 2012 increased by $4,696,000 or 49% from the three month period ended September 30, 2011. The combined sales for the marine seismic data acquisition segments increased from $8,464,000 for the three month period ended September 30, 2011 to $10,644,000 for the three month period ended September 30, 2012. In addition, sales for underwater robotic vehicles increased from $1,108,000 for the three month period ended September 30, 2011 to $3,624,000 for the three month period ended September 30, 2012.

The Company is hopeful that sales in the marine seismic data acquisition segments and in the underwater robotic vehicles segment will continue to show strength during the remainder of fiscal year 2013. The fiscal year outlook is anticipated to be positive for the marine seismic data acquisition segments due to the current level of customer orders and inquiries and the planned market introduction in the current fiscal year of the Smart Energy Source, a digital gun controller that also provides sophisticated near field measurements. While the outlook for the underwater robotic vehicles segment is positive through December 31, 2012, sales growth beyond that date remains dependent on several factors, including demand from its major customer groups and government budget levels.

At September 30, 2012, the Company conducted an assessment of the contingent earnout liability of $5,000,000 and determined that no adjustment was required. However, the current portion of the contingent earnout liability was adjusted from $1,700,000 at June 30, 2012 to $2,400,000 at September 30, 2012 and the non-current portion of the contingent earnout liability was adjusted by a like amount from $3,300,000 to $2,600,000, based on anticipated governmental budgetary constraints and the global economic situation.

The Company has a joint development effort 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 three month periods ended September 30, 2012 and 2011, the Company recorded $320,000 and $140,000, respectively, as research and development expense in connection with the joint development efforts.

The Company's balance sheet remained strong during the three month period ended September 30, 2012. Working capital increased to $46,063,000 at September 30, 2012 from $45,303,000 at June 30, 2012. In addition, the Company remained debt free at September 30, 2012. The Company's cash position increased to $26,332,000 at September 30, 2012 from $24,613,000 at June 30, 2012.

The Company follows accounting standards set by the Financial Accounting Standards Board ("FASB"), which are referred to as generally accepted accounting principles or "GAAP" as contained in the FASB Accounting Standards Codification.

Liquidity and Capital Resources

As of September 30, 2012, the Company believes that cash and cash equivalent balances and projected cash flow from operations will be adequate to meet foreseeable operating needs for the remainder of fiscal year 2013.

On August 21, 2012, the Company's Board of Directors approved a dividend of $0.07 per common share, to be paid on October 4, 2012 to stockholders of record on September 6, 2012.

In the fourth quarter of fiscal year 2010, the Company's Board of Directors authorized and approved a program to repurchase up to $10,000,000 of its Common Stock through open market and privately negotiated transactions. Pursuant to the terms of the repurchase program, management determines the timing and amount of any stock repurchase transactions depending on market conditions, share prices, capital availability and other factors. The Company is not obligated to purchase any shares under the repurchase program. The repurchase program does not have an expiration date and repurchases may be commenced or suspended at any time or from time to time without prior notice. The repurchase program is structured to conform to the safe harbor provisions of SEC Rule 10b-18. Through September 30, 2012, the Company had repurchased 202,075 of its shares under the repurchase program at an aggregate cost of $1,926,000. No shares were repurchased during the three month period ended September 30, 2012.

Three Months Ended September 30, 2012

At September 30, 2012, the Company had $26,332,000 in cash and cash equivalents, as compared to September 30, 2011, when it had $31,332,000 in cash and cash equivalents. The decrease in cash and cash equivalents was primarily due to dividend payments, payment of consideration relating to the acquisition of SBX and the stock repurchase program, partially offset by cash provided from operations.

For the three month period ended September 30, 2012, cash flow from operating activities after changes in working capital items was $2,463,000, primarily due to net income adjusted for non-cash items, lower accounts receivable and inventory, partially offset by lower current liabilities. For the three month period ended September 30, 2011, cash flow from operating activities after changes in working capital items was $1,710,000, primarily due to net income adjusted for non-cash items, lower accounts receivable and higher accounts payable, partially offset by higher inventories.

For the three month period ended September 30, 2012, cash used in investing activities was $407,000 primarily due to capital expenditures for new and replacement equipment. For the three month period ended September 30, 2011, cash used in investing activities was $1,760,000 primarily due to payments made to the former SBX stockholders.

For the three month period ended September 30, 2012, cash used in financing activities was $337,000 due to cash dividends paid, partially offset by proceeds from the exercise of stock options. For the three month period ended September 30, 2011, cash used in financing activities was $301,000 due primarily to repurchases of the Company's Common Stock.

The Company anticipates that capital expenditures for the remainder of fiscal year 2013 should not exceed $700,000 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 September 30, 2012 and June 30, 2012, the five customers with the highest accounts receivable balances represented 61% and 57% of the consolidated accounts receivable balances on those dates, respectively.

Off-Balance Sheet Arrangements

The Company had no off-balance sheet financing arrangements at September 30, 2012.

Contractual Obligations

The Company had no long-term borrowings, capital leases, purchase obligations or other long-term liabilities at September 30, 2012 except for the non-current portion of the contingent earnout liability.

Results of Operations

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Consolidated sales for the three month period ended September 30, 2012 totaled $14,268,000, an increase of $4,696,000 or 49% from the three month period ended September 30, 2011. The change in net sales from the prior year period by reportable segment was as follows: seismic energy sources increased by $578,000 (12%), underwater cables and connectors increased by $987,000 (29%), seismic energy source controllers increased by $615,000 (230%), and underwater robotic vehicles increased by $2,516,000 (227%).

Sales for the Company's three marine seismic data acquisition segments contributed 46% of the consolidated sales increase reflecting increased marine seismic activity and the lifting of moratoriums on exploration in the Gulf of Mexico. Many product categories reported higher sales, such as air gun spare parts, SSMS, and analog energy source controllers. SBX contributed 54% of the consolidated sales increase reflecting higher sales across many of its customer groups.

Consolidated gross profit as a percentage of consolidated sales was 46% for the three month period ended September 30, 2012 versus 49% for the three month period ended September 30, 2011. The decrease in the gross profit percentage was caused primarily by higher manufacturing costs.

Research and development ("R&D") costs for the three month period ended September 30, 2012 increased to $620,000 from $563,000 for the three month period ended September 30, 2011. The increase is primarily due to costs associated with the joint development effort with WesternGeco to develop an environmentally friendly seismic energy source.

Selling, general and administrative ("SG&A") expenses increased by $206,000 or 6% in the three month period ended September 30, 2012 from the three month period ended September 30, 2011. The increase was primarily due to an increase in the allowance for uncollectible accounts.

Interest income decreased by $18,000 or 39% in the three month period ended September 30, 2012 from the three month period ended September 30, 2011 primarily due to lower average cash and cash equivalent balances.

The provision for income taxes for the three month period ended September 30, 2012 was $917,000, an effective tax rate of 35%. This rate was higher than the federal statutory rate of 34% primarily due to state income taxes and nondeductible expenses offset by benefits associated with the domestic manufacturer's deduction. The provision for income taxes for the three month period ended September 30, 2011 was $244,000, an effective tax rate of 25%. This rate was lower than the federal statutory rate of 34% due to tax benefits associated with the domestic manufacturer's deduction and the research and development tax credit.

The above mentioned factors resulted in an increase in net income for the three month period ended September 30, 2012 to $1,704,000, compared to net income of $720,000 for the three month period ended September 30, 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, recording of inventory reserves, valuation of acquisitions, contingent earnout liability, deferred taxes, and the potential impairment of goodwill, intangible assets with indefinite lives and other long-lived assets. These policies are discussed below. The Company also has other key accounting policies, including the establishment of an allowance for uncollectible accounts. 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.

Refer to 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 reserve for inventory valuation at September 30, 2012 and June 30, 2012 was $587,000 and $519,000, respectively. At September 30, 2012 and June 30, 2012, approximately $842,000 and $808,000, 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 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 three month period ended September 30, 2012, the inventory valuation reserve was increased by $68,000 and no items were scrapped or disposed.

Valuation of Acquisitions

The Company allocates the amounts it pays for each acquisition to the assets it acquires and the liabilities it assumes based on estimated fair values at acquisition date. The Company determines the estimated fair values of identifiable intangible assets based on valuations that use historical information and market assumptions. The Company allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill. The use of different valuation assumptions, including estimated cash flows and discount rates, or different estimated useful life assumptions could result in different purchase price allocations and intangible asset amortization expense in current and future periods.

Contingent Earnout Liability

The Company is obligated under an earnout arrangement to make cash payments to the former SBX stockholders if certain revenue and gross profit margin thresholds are achieved. The Company recorded a contingent earnout liability at the acquisition date at its estimated fair value, which takes into account the range and probability of projected future revenues of the acquired entity over the earnout period. The Company revalues the contingent earnout liability at the close of each accounting period and records any change in the estimated fair value in the Consolidated Statement of Income as "adjustment of contingent earnout liability." This adjustment would be a non-deductible expense for income tax purposes.

Increases or decreases in the fair value of the SBX contingent earnout liability can result from changes in assumed revenues, probabilities of achieving revenue and gross profit margin thresholds and discount rates. Significant judgment is used in determining the appropriateness of fair value assumptions at the acquisition date and in subsequent periods. As a result, actual contingent earnout payments can differ from estimates, and the differences could be material.

At September 30, 2012, the Company conducted an assessment of the contingent earnout liability of $5,000,000 and determined that no adjustment was required. However, the current portion of the contingent earnout liability was adjusted from $1,700,000 at June 30, 2012 to $2,400,000 at September 30, 2012 and the non-current portion of the contingent earnout liability was adjusted by a like amount from $3,300,000 to $2,600,000, based on anticipated governmental budgetary constraints and the global economic situation.

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

Impairment Testing of Goodwill, Intangible Assets with Indefinite Lives and Other Long-Lived Assets

The Company reviews goodwill for impairment annually or more frequently if impairment indicators arise. The Company conducted an assessment of qualitative factors regarding A-G at June 30, 2012 and the qualitative assessment indicated no impairment of the goodwill balance. RTS goodwill was tested for impairment and the test indicated no impairment of the goodwill balance at June 30, 2012. SBX goodwill was initially tested for impairment at December 31, 2011 and the test indicated no impairment of the goodwill balance. The Company's reviews of A-G, RTS and SBX goodwill as of September 30, 2012 did not result in any indicators of impairment, and therefore no impairment tests were performed.

Goodwill represents approximately 21% of the Company's total assets at September 30, 2012. The evaluation of goodwill 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. Refer to Notes 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 September 30, 2012 and such reviews did not result in any indicators of impairment, and therefore no impairment tests were performed.

The Company's other long-lived assets consist of property, plant and equipment, other intangible assets with definite lives and other non-current assets. The Company reviews for the impairment of these assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount is considered impaired when anticipated undiscounted cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Any such impairment is measured based on the difference between the fair value and the carrying value of the asset and would be recognized in the Company's results of operations in the period in which the impairment loss arose. The Company's reviews as of September 30, 2012 did not result in any indicators of impairment, and therefore no impairment tests were performed.

Recent Accounting Developments

Testing Indefinite-Lived Intangible Assets for Impairment

In July 2012, the Financial Accounting Standards Board issued Accounting Standards Update 2012-02 ("ASU 2012-02"), Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The purpose of ASU 2012-02, which amends the guidance to Topic 350, Intangibles - Goodwill and Other, is to simplify the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. ASU 2012-02 allows an entity to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test. The amendments in ASU 2012-02 permit an entity to first assess qualitatively whether it is more likely than not (more than 50%) that an indefinite-lived intangible asset is impaired, thus necessitating that it perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company's financial statements.

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