Teledyne Bolt 10-Q 2014 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended: September 30, 2013

OR

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________ to __________

Commission File Number: 001-12075

BOLT TECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

Connecticut	06-0773922
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

Four Duke Place, Norwalk, Connecticut	06854
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (203) 853-0700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x       No ¨

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

Large accelerated filer ¨	Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨

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

At November 4, 2013, there were 8,662,075 shares of Common Stock, without par value, outstanding.

BOLT TECHNOLOGY CORPORATION

INDEX

		Page Number
Part I - Financial Information:
Item 1.	Financial Statements
	Consolidated Statements of Income (Unaudited) -
	Three months ended September 30, 2013 and 2012	3
	Consolidated Balance Sheets -
	September 30, 2013 (Unaudited) and June 30, 2013	4
	Consolidated Statements of Cash Flows (Unaudited) -
	Three months ended September 30, 2013 and 2012	5
	Notes to Consolidated Financial Statements (Unaudited)	6-24
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25-33
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33
Item 4.	Controls and Procedures	33-34
Part II - Other Information:
Item 1.	Legal Proceedings	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 6.	Exhibits	34
Signatures		35
Exhibit Index		36

2

 

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Three Months Ended
	September 30,
	2013		2012
Sales	$	16,208,000	$	14,268,000
Costs and Expenses:
Cost of sales		7,957,000		7,670,000
Research and development		926,000		620,000
Selling, general and administrative		3,847,000		3,385,000
Interest income		(50,000)		(28,000)
		12,680,000		11,647,000
Income before income taxes		3,528,000		2,621,000
Provision for income taxes		1,165,000		917,000
Net income	$	2,363,000	$	1,704,000
Earnings per share:
Basic	$	0.27	$	0.20
Diluted	$	0.27	$	0.20
Average number of common shares outstanding:
Basic		8,643,400		8,576,586
Diluted		8,653,426		8,580,891

Refer to Notes to Consolidated Financial Statements (Unaudited).

3

 

BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30,
	2013		June 30,
	(unaudited)		2013
ASSETS
Current Assets:
Cash and cash equivalents	$	25,170,000	$	22,816,000
Accounts receivable, less allowance for uncollectible accounts     of $320,000 at September 30, 2013 and $255,000 at     June 30, 2013		10,993,000		12,308,000
Inventories		18,568,000		17,137,000
Deferred income taxes		626,000		478,000
Other current assets		907,000		981,000
Total current assets		56,264,000		53,720,000
Property, Plant and Equipment, net		4,907,000		4,922,000
Goodwill, net		17,227,000		17,227,000
Other Intangible Assets, net		6,772,000		6,967,000
Other Assets		241,000		250,000
Total assets	$	85,411,000	$	83,086,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	2,288,000	$	2,765,000
Accrued expenses		3,015,000		3,242,000
Contingent earnout liability		2,170,000		1,715,000
Dividends payable		779,000		604,000
Income taxes payable		1,067,000		72,000
Total current liabilities		9,319,000		8,398,000
Non-Current Portion of Contingent Earnout Liability		1,145,000		1,600,000
Deferred Income Taxes		2,398,000		2,379,000
Total liabilities		12,862,000		12,377,000
Stockholders’ Equity:
Common stock		32,466,000		32,210,000
Retained earnings		42,009,000		40,425,000
Treasury stock, at cost		(1,926,000)		(1,926,000)
Total stockholders’ equity		72,549,000		70,709,000
Total liabilities and stockholders’ equity	$	85,411,000	$	83,086,000

Refer to Notes to Consolidated Financial Statements (Unaudited).

4

 

BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended September 30,
	2013		2012
Cash Flows From Operating Activities:
Net income	$	2,363,000	$	1,704,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		400,000		423,000
Deferred income taxes		(129,000)		(74,000)
Stock-based compensation expense		174,000		184,000
Change in operating assets and liabilities:
Accounts receivable		1,315,000		250,000
Inventories		(1,431,000)		573,000
Other assets		74,000		(140,000)
Accounts payable		(477,000)		(320,000)
Accrued expenses		(227,000)		(554,000)
Income taxes payable		995,000		417,000
Net cash provided by operating activities		3,057,000		2,463,000
Cash Flows From Investing Activities:
Capital expenditures and other non-current assets		(181,000)		(407,000)
Net cash used by investing activities		(181,000)		(407,000)
Cash Flows From Financing Activities:
Dividends paid		(604,000)		(429,000)
Exercise of stock options		24,000		69,000
Tax benefit from vested restricted stock		58,000		23,000
Net cash used by financing activities		(522,000)		(337,000)
Net increase in cash and cash equivalents		2,354,000		1,719,000
Cash and cash equivalents at beginning of period		22,816,000		24,613,000
Cash and cash equivalents at end of period	$	25,170,000	$	26,332,000
Supplemental Disclosure of Cash Flow Information:
Cash transactions:
Income taxes paid	$	241,000	$	552,000

Refer to Notes to Consolidated Financial Statements (Unaudited).

5

 

BOLT TECHNOLOGY CORPORATION AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 – Basis of Presentation

The Consolidated Balance Sheet as of September 30, 2013, the Consolidated Statements of Income for the three month periods ended September 30, 2013 and 2012 and the Consolidated Statements of Cash Flows for the three month periods ended September 30, 2013 and 2012 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal, recurring items. Interim results are not necessarily indicative of results for a full year. These Consolidated Financial Statements (Unaudited) should be read in conjunction with the Consolidated Financial Statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

Note 2 – Description of Business and Significant Accounting Policies

The Company develops, manufactures and sells marine seismic data acquisition equipment and underwater remotely operated robotic vehicles, and consists of four operating units (each a separate reportable segment): Bolt Technology Corporation (“Bolt”), A-G Geophysical Products, Inc. (“A-G”), Real Time Systems Inc. (“RTS”) and SeaBotix Inc. (“SBX”). The Bolt seismic energy sources segment develops, manufactures and sells marine seismic energy sources (air guns) and replacement parts. The A-G underwater cables and connectors segment develops, manufactures and sells underwater cables, connectors, hydrophones, depth and pressure transducers and seismic source monitoring systems. The RTS seismic energy source controllers segment develops, manufactures and sells air gun controllers/synchronizers, data loggers and auxiliary equipment. The SBX underwater robotic vehicles segment develops, manufactures and sells underwater remotely operated robotic vehicles used for a variety of underwater tasks.

Refer to Note 14 to Consolidated Financial Statements (Unaudited) for additional information concerning reportable segments.

Principles of Consolidation

The Consolidated Financial Statements (Unaudited) include the accounts of Bolt Technology Corporation and its subsidiary companies. All significant intercompany balances and transactions have been eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Refer to Note 13 to Consolidated Financial Statements (Unaudited) for additional information regarding concentration of cash and cash equivalent balances.

6

Allowance for Uncollectible Accounts

The allowance for uncollectible accounts is established through a provision for bad debts charged to expense. Accounts receivable are charged against the allowance for uncollectible accounts when the Company believes that collection of the principal is unlikely. The allowance is an amount that the Company believes will be adequate to absorb estimated losses on existing accounts receivable balances based on the evaluation of their collectability and prior bad debt experience. This evaluation also takes into consideration factors such as changes in the nature and volume of the accounts receivable, overall quality of accounts receivable, review of specific problem accounts receivable, and current economic and industry conditions that may affect customers’ ability to pay. While the Company uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic and industry conditions or any other factors considered in the Company’s evaluation.

Inventories

Inventories are valued at the lower of cost or market, with cost principally determined on an average cost method that approximates the first-in, first-out method. The Company maintains an inventory valuation reserve to provide for slow moving and obsolete inventory. Amounts are charged to the reserve when the Company scraps or disposes of inventory. Refer to Note 4 to Consolidated Financial Statements (Unaudited) for additional information concerning inventories.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation for financial accounting purposes is computed using the straight-line method over the estimated useful lives of 40 years for buildings, over the shorter of the term of the lease or the estimated useful life for leasehold improvements, and 5 to 10 years for machinery and equipment. Major improvements that add to the productive capacity or extend the life of an asset are capitalized, while repairs and maintenance are charged to expense as incurred. Refer to Note 5 to Consolidated Financial Statements (Unaudited) for additional information concerning property, plant and equipment.

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

Goodwill represents the unamortized excess cost over the value of net assets acquired in business combinations. The Financial Accounting Standards Board guidance for testing goodwill for impairment provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform a two-step quantitative impairment test, otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether an entity chooses to perform the qualitative assessment or proceeds directly to the two-step quantitative impairment test.

7

Step one of the two-step quantitative goodwill impairment test is to compare the “fair value” of the reporting unit with its “carrying amount.” The fair value of a reporting unit is the amount that a willing party would pay to buy or sell the unit other than in a forced liquidation sale. The carrying amount of a reporting unit is total assets, including goodwill, minus total liabilities. If the fair value of a reporting unit is greater than the carrying amount, the Company considers goodwill not to be impaired. If the fair value is below the carrying amount, the Company would proceed to the next step, which is to measure the impairment loss. Any such impairment loss would be recognized in the Company’s results of operations in the period in which the impairment loss arose.

The Company conducted an assessment of qualitative factors regarding the A-G reporting unit at June 30, 2013. The qualitative assessment indicated no impairment of the A-G goodwill balance at June 30, 2013.

For the RTS reporting unit, the Company performed the quantitative impairment test at June 30, 2013. The estimated fair value of the RTS reporting unit was determined utilizing the capitalized cash flow method and the market price method. The capitalized cash flow method relies on historical financial performance, an estimate of the long-term growth rate in free cash flows and a determination of the weighted average cost of capital for the unit. The market price method gives consideration to the prices paid for publicly traded stocks of comparable companies. The impairment test for the RTS reporting unit indicated no impairment of the goodwill balance at June 30, 2013.

Goodwill relating to the SBX reporting unit was tested for impairment at December 31, 2012 using the capitalized cash flow method and the market price method, as well as the discounted cash flow method, and the test indicated no impairment of the goodwill balance. The discounted cash flow method relies on the estimated future cash flows that are discounted back to their present value using a risk-adjusted discount rate to arrive at an estimated value of the reporting unit. The Company’s review of the SBX goodwill balance at June 30, 2013 did not result in any indicators of impairment.

The Company reviewed A-G, RTS and SBX goodwill as of September 30, 2013 and there was no impairment.

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, 2012 and the test indicated no impairment. The Company reviewed intangible assets with indefinite lives at June 30, 2013 and such review did not result in any indicators of impairment, and therefore no impairment tests were performed.

8

The Company reviewed the RTS and SBX intangible assets with indefinite lives at September 30, 2013 and June 30, 2013 and there was no impairment.

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 these assets for impairment 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 June 30, 2013 and September 30, 2013 did not result in any indicators of impairment, and therefore no impairment tests were performed.

Refer to Notes 3, 6 and 7 to Consolidated Financial Statements (Unaudited) for additional information concerning goodwill and other intangible assets.

Revenue Recognition and Warranty Costs

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.

Warranty costs and product returns incurred by the Company have not been significant.

Income Taxes

The provision for income taxes is determined under the liability method. Deferred tax assets and liabilities are recognized based on differences between the book and tax bases of assets and liabilities using currently enacted tax rates. The provision for income taxes is the sum of the amount of income tax paid or payable for the period determined by applying the provisions of enacted tax laws to the taxable income for that period and the net change during the period in the Company’s deferred tax assets and liabilities.

The Company follows the accounting standard for accounting for uncertainty in income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company’s policy is to record any interest and penalties relating to an uncertain tax position as a component of income tax expense.

9

Refer to Note 9 to Consolidated Financial Statements (Unaudited) for additional information concerning the provision for income taxes and deferred tax accounts.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements, and the reported amounts of revenues and expenses during the reporting period. The most critical estimates made by the Company are those relating to inventory reserves, the potential impairment of goodwill and intangible assets with indefinite lives, other long-lived assets impairment, valuation of acquisitions, contingent earnout liability and realization of deferred tax assets. Actual results could differ from those estimates.

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 detailed 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

In the SBX acquisition, the Company is obligated under an earnout arrangement to make cash payments to the former SBX stockholders if certain revenue and gross profit margin targets 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 SBX 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.

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 targets 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.

10

Refer to Notes 3 and 10 to Consolidated Financial Statements (Unaudited) for further information concerning the SBX contingent earnout liability.

Computation of Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period including common share equivalents (which includes stock option grants and restricted stock awards) assuming dilution. Unvested shares of restricted stock are included in computing basic earnings per share because they contain rights to receive non-forfeitable dividends. The following is a reconciliation of basic earnings per share to diluted earnings per share for the three month periods ended September 30, 2013 and 2012:  

	Three Months Ended September 30,
	2013		2012
Net income available to common stockholders	$	2,363,000	$	1,704,000
Divided by:
Weighted average common shares		8,643,400		8,576,586
Weighted average common share     equivalents		10,026		4,305
Total weighted average common shares and     common share equivalents		8,653,426		8,580,891
Basic earnings per share	$	0.27	$	0.20
Diluted earnings per share	$	0.27	$	0.20

For the three month period ended September 30, 2013, the calculation included all options to acquire shares because they were all dilutive. For the three month period ended September 30, 2012, the calculations do not include options to acquire 40,250 shares, since the inclusion of these shares would have been anti-dilutive. 

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 ASU 2012-02 did not have an impact on the Company’s financial statements.

11

 

Note 3 – SeaBotix Inc. Acquisition

The Company acquired all of the outstanding shares of capital stock of SeaBotix Inc. effective January 1, 2011.

At closing, $9,500,000 was paid and a $500,000 purchase price holdback was accrued by the Company. Additional post-closing earnout payments are to be made if SBX achieves certain revenue and gross profit margin targets during the four-year period ending December 31, 2014.

The total purchase price paid or accrued consisted of the following:

Cash paid	$	9,500,000
Accrual for contingent earnout payments		5,000,000
Accrual for holdback and pro forma working capital     adjustment		1,560,000
Total purchase price	$	16,060,000

The final purchase price allocation was as follows:

Net current assets, including cash acquired of $316,000     and accounts receivable of $1,342,000	$	4,963,000
Non-current assets (mainly property and equipment)		796,000
Goodwill		6,270,000
Other intangible assets		8,500,000
Accounts payable and accrued expenses		(1,010,000)
Debt assumed		(539,000)
Deferred tax liability (non-current)		(2,920,000)
Total purchase price allocation	$	16,060,000

The estimate of fair value of SBX’s identifiable intangible assets was determined primarily using the “income approach,” which requires a forecast of all of the expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royalty method. Some of the more significant assumptions inherent in the development of intangible asset values include: the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows, and the assessment of the intangible asset’s life cycle.

12

In the fourth quarter of fiscal years 2012 and 2013, the Company increased the contingent earnout liability by $4,500,000 and $500,000, respectively, and the amounts were charged to the Consolidated Statement of Income. These charges are non deductible for income tax purposes. These amounts are not included in the total purchase price of $16,060,000.

Set forth below is a summary of the activity in the contingent earnout liability (all amounts represent fair values) from the date of closing to September 30, 2013:

	Contingent
	Earnout
	Liability
Balance at closing	$	5,000,000
Earnout paid in fiscal year 2011		(2,000,000)
Balance at June 30, 2011		3,000,000
Earnout paid in fiscal year 2012		(2,500,000)
Increase to contingent earnout liability in June 2012		4,500,000
Balance at June 30, 2012		5,000,000
Earnout paid in fiscal year 2013		(2,185,000)
Increase to contingent earnout liability in June 2013		500,000
Balance at June 30, 2013 and September 30, 2013	$	3,315,000	*

*Refer to Note 10 to Consolidated Financial Statements (Unaudited) for further information concerning the SBX contingent earnout liability.

As of September 30, 2013, the Company has paid $6,685,000 in earnout payments and has an accrual of $3,315,000 to cover anticipated earnout payments over the remaining earnout period which ends on December 31, 2014.

Earnout payments equal to 15.5% of annual gross revenues are payable if SBX generates annual gross revenues in excess of $10,000,000 and maintains a certain gross profit margin for calendar years 2013 and 2014. If the Company estimates that it is more likely than not that these future earnout payments will exceed $3,315,000, the Company would have to increase the contingent earnout liability by the anticipated additional amount of the earnout payments. Such increase would result in a non cash charge to the Consolidated Statement of Income.

The $3,315,000 contingent earnout liability at September 30, 2013 and June 30, 2013 was estimated by the Company based upon projected SBX revenues and gross profit margins for calendar years 2013 and 2014. The calculation is based on an analysis using a probability approach for three performance outcomes for these years. The performance outcomes were then discounted using an appropriate discount rate commensurate with the risk associated with SBX to arrive at the fair value of the contingent earnout liability at September 30, 2013 and June 30, 2013. The Company is required to reassess the fair value of the contingent earnout liability on a recurring basis. Should a determination be made that the contingent earnout liability requires adjustment, a charge or credit will be made in the Consolidated Statement of Income in the period in which the adjustment is required.

13

The following table summarizes key information underlying SBX’s identifiable intangible assets related to the acquisition:

Category	Life	Amount		Annual Amortization
Tradename	Indefinite	$	1,200,000	$	-
Acquired technology	6-15 years		5,900,000		583,000
Customer and distributor relationships	7 years		1,400,000		200,000
Total		$	8,500,000	$	783,000

Note 4 – Inventories

Inventories consist of the following:

	September 30, 2013		June 30, 2013
Raw materials and sub-assemblies	$	16,488,000	$	15,268,000
Work-in-process		2,876,000		2,495,000
		19,364,000		17,763,000
Less – Reserve for inventory valuation		(796,000)		(626,000)
	$	18,568,000	$	17,137,000

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 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, 2013, the inventory valuation reserve was increased by $170,000 and no items were scrapped or disposed.

14

 

Note 5 – Property, Plant and Equipment

Property, plant and equipment consist of the following:

	September 30, 2013		June 30, 2013
Land	$	253,000	$	253,000
Buildings		1,203,000		1,203,000
Leasehold improvements		1,217,000		1,198,000
Machinery and equipment		11,402,000		11,240,000
		14,075,000		13,894,000
Less - accumulated depreciation		(9,168,000)		(8,972,000)
	$	4,907,000	$	4,922,000

Depreciation expense for the three months ended September 30, 2013 and 2012 amounted to $196,000 and $168,000, respectively.

Note 6 – Goodwill

The Company’s goodwill carrying amounts relate to the acquisitions of A-G, RTS and SBX. A-G, RTS and SBX are three reporting units under ASC 350, “Intangibles — Goodwill and Other.” Bolt, the parent of A-G, RTS and SBX, is a fourth reporting unit and has no goodwill.

The composition of the net goodwill balance at September 30, 2013 and June 30, 2013 is as follows:

A-G	$	7,679,000
RTS		3,278,000
SBX		6,270,000
	$	17,227,000

Goodwill represents approximately 20% of the Company’s total assets at September 30, 2013 and thus the evaluation of goodwill impairment is a significant estimate by management.

Refer to Notes 2 and 3 to Consolidated Financial Statements (Unaudited) for additional information concerning goodwill.

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Note 7 – Other Intangible Assets

Other intangible assets consist of the following:

Category	Life	September 30, 2013		June 30, 2013
Trade name	Indefinite	$	1,425,000	$	1,425,000
License	5.5 years		570,000		570,000
Non-Compete agreements	6 years		647,000		647,000
Technology	6 – 15 years		6,170,000		6,170,000
Customer & distributor relationships	7 years		1,400,000		1,400,000
Other	n.a.		109,000		100,000
			10,321,000		10,312,000
Less accumulated amortization			(3,549,000)		(3,345,000)
Total other intangible assets		$	6,772,000	$	6,967,000

Other intangible assets consist mainly of intangible assets acquired in the purchases of RTS ($1,712,000 on July 1, 2007) and SBX ($8,500,000 on January 1, 2011). The major portion of intangible assets ($8,787,000) is being amortized using the straight-line method. Intangible asset amortization for the three month periods ended September 30, 2013 and 2012 amounted to $204,000 and $255,000, respectively. A summary of the estimated amortization expense for the next five years is as follows:

Fiscal years ended June 30,
2014	$	812,000
2015	$	812,000
2016	$	812,000
2017	$	639,000
2018	$	367,000

Refer to Notes 2 and 3 to Consolidated Financial Statements (Unaudited) for additional information concerning other intangible assets.

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Note 8 – Accrued Expenses

Accrued expenses consist of the following:

	September 30, 2013		June 30, 2013
Compensation and related taxes	$	981,000	$	1,318,000
Compensated absences		723,000		692,000
Commissions payable		468,000		535,000
Accrued professional fees		129,000		294,000
Customer deposits		441,000		192,000
Other		273,000		211,000
	$	3,015,000	$	3,242,000

Note 9 – Income Taxes

Income tax expense consists of the following for the three month periods ended September 30:

	2013		2012
Current:
Federal	$	1,265,000	$	939,000
State		29,000		52,000
Deferred:
Federal		(119,000)		(80,000)
State		(10,000)		6,000
Income tax expense	$	1,165,000	$	917,000

A reconciliation of the federal statutory rate to the effective tax rate reflected in the total provision for income taxes for the three month periods ended September 30 is as follows:

	2013			2012
Federal statutory rate		34	%		34	%
Exempt income from domestic manufacturer’s deduction		(3)			(3)
Non-deductible expenses		1			3
State taxes		1			1
Effective tax rate		33	%		35	%

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ASC 740, “Income Taxes,” requires the Company to review all open tax years in all tax jurisdictions to determine if there are any uncertain income tax positions that require recognition in the Company’s financial statements, including any penalties and interest, based on the “more-likely-than-not” criterion.  Based on its review, the Company has concluded that there were no significant income tax positions that would require the recording of additional income taxes or the recognition of any tax benefit in the Company’s financial statements at September 30, 2013 and June 30, 2013.  There were no unallocated tax reserves at September 30, 2013 and June 30, 2013.  The Company’s federal income tax returns for fiscal years prior to fiscal year 2010 are no longer subject to examination by the Internal Revenue Service.

Note 10 — Fair Value Measurements

Pursuant to the accounting guidance for fair value measurements, fair value is defined as the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which the asset or liability would transact and considers assumptions that market participants would use when pricing the asset or liability. 

Fair Value Hierarchy

Under fair value accounting guidance, there is a three-tier fair value hierarchy to prioritize the inputs used in measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s market assumptions. 

The hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels are defined as follows:

• Level 1 — Inputs to the valuation methodology are quoted market prices for identical assets or liabilities.

• Level 2 — Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs.

• Level 3 — Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.

Set forth below is a summary of liabilities that are measured at fair value on a recurring basis based on the three-level valuation hierarchy:

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		Quoted Market Prices for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Liabilities
At September 30, 2013 — Contingent earnout liability	$	—	$	—	$	3,315,000	$	3,315,000
At June 30, 2013 — Contingent earnout liability	$	—	$	—	$	3,315,000	$	3,315,000

This liability relates to the estimated fair value of earnout payments to former SeaBotix Inc. stockholders for the earnout period ending December 31, 2014. The current and non-current portions of the fair value of the contingent earnout liability at September 30, 2013 are $2,170,000 and $1,145,000 respectively. The current and non-current portions of the fair value of the contingent earnout liability at June 30, 2013 are $1,715,000 and $1,600,000, respectively. Refer to Note 3 to Consolidated Financial Statements (Unaudited) for SeaBotix Inc. acquisition information.

There have been no changes in the total Level 3 liability of $3,315,000 from June 30, 2013 to September 30, 2013. 

The Company determined the fair value of the contingent earnout liability at September 30, 2013 and June 30, 2013 using a probability weighted approach. The principal inputs to the approach include expectations of the specific business’s revenue in calendar years 2013 and 2014 and the probability of achieving required gross profit margin targets using an appropriate discount rate. Given the use of significant inputs that are not observable in the market, the contingent liability is classified within Level 3 of the fair value hierarchy. There were no significant changes to this methodology during the three month period ended September 30, 2013 and the year ended June 30, 2013.

Fair values of accounts receivable, accounts payable, accrued expenses, dividends payable and income taxes payable reflected in the September 30, 2013 (Unaudited) and June 30, 2013 Consolidated Balance Sheets approximate carrying values on those dates.

Note 11 – Stock Options and Restricted Stock

The Company recognizes compensation costs for all share-based payments granted based on the grant-date fair value estimated in accordance with the provisions of ASC 718, “Compensation — Stock Compensation.”

The Bolt Technology Corporation 2012 Stock Incentive Plan (the “2012 Plan”) was approved by the Company’s stockholders at the November 20, 2012 Annual Meeting of Stockholders. The 2012 Plan replaced the Company’s Amended and Restated 2006 Stock Option and Restricted Stock Plan (the “2006 Plan”). No new grants may be made under the 2006 Plan, but stock option and restricted stock grants awarded prior to the effective date of the 2012 Plan continue in effect.

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The 2012 Plan provides that 750,000 shares of Common Stock may be used for equity awards under the 2012 Plan of either stock options or restricted stock grants or any combination thereof. Stock options granted under the 2012 Plan can become vested over, and can be exercisable for, a period of up to ten years.

Under the 2012 Plan, non-qualified or compensatory stock options may be granted and awards of restricted stock may be made to non-employee directors at the discretion of the compensation committee, for up to a combined annual maximum of 3,000 shares of Common Stock per non-employee director. Under the terms of the 2012 Plan, no stock options or restricted stock can be granted subsequent to June 30, 2022.

Stock Options

The aggregate compensation expense for stock options, using the Black-Scholes option-pricing model, for outstanding grants under the 2006 Plan and the 2012 Plan was $2,081,000 as of the option grant dates. This expense, which is a non cash item, is being recognized in the Company’s financial statements over the four-year vesting period. Stock option compensation expense was $47,000 and $64,000 for the three month periods ended September 30, 2013 and 2012, respectively. Unrecognized compensation expense for stock options at September 30, 2013 amounted to $353,000 and the weighted average period for recognizing this expense is 2.9 years.

A summary of changes in stock options during the three month period ended September 30, 2013 is as follows:

	2012 Plan			2006 Plan
		Weighted Average Exercise			Weighted Average Exercise
	Shares	Price		Shares	Price
Options outstanding at June 30, 2013	50,000	$	15.43	83,425	$	12.33
Granted	-	$	-	-	$	-
Exercised	-	$	-	(16,500)	$	(12.93)
Options outstanding at September 30, 2013	50,000	$	15.43	66,925	$	12.18

At September 30, 2013, the aggregate intrinsic value for outstanding options was $524,000, because the market price of the Company’s Common Stock at September 30, 2013 was higher than the weighted average exercise price of such options.

The weighted average remaining contractual life of options outstanding at September 30, 2013 was 3.6 years.

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The expiration dates for the outstanding options at September 30, 2013 are as follows:

Expiration Date of Option	Number of Shares
November 2014	3,750
November 2015	7,500
November 2016	16,875
January 2017	38,800
January 2018	50,000
Total	116,925

Options exercisable at September 30, 2013, totaled 12,325 shares, consisting of 3,750 non-qualified and 8,575 qualified options.

During the three month periods ended September 30, 2013 and 2012, the fair value of options that vested was $202,406 (10,625 shares) and $180,000 (12,188 shares), respectively. During the three month period ended September 30, 2013 and 2012, 16,500 and 5,313 options were exercised. The weighted average exercise price of exercisable options as of September 30, 2013 was $12.78. At September 30, 2013, the aggregate intrinsic value of exercisable options was $65,000 because the market price at September 30, 2013 was higher than the weighted average exercise price of exercisable options. The weighted average remaining contractual life of exercisable options at September 30, 2013 was 3 years.

Restricted Stock

During the three month period ended September 30, 2013, 29,500 shares of restricted stock were granted under the 2012 Plan. Of these shares, 28,000 and 1,500 shares vest over a five-year period and one-year period, respectively, and the cost to the recipients is zero.  During the three month period ended September 30, 2012, 27,100 shares of restricted stock were granted under the 2006 Plan. These shares vest over a five year period and the cost to the recipients is zero. The aggregate compensation cost for restricted stock granted during the three month periods ended September 30, 2013 and 2012 was $546,000 and $403,000, respectively, as of the grant dates. This compensation expense, which is a non-cash item, is being recognized in the Company’s financial statements over the vesting period of each restricted stock grant.  

Restricted stock compensation expense was $127,000 and $120,000 for the three month periods ended September 30, 2013 and 2012, respectively.  Unrecognized compensation expense for restricted stock at September 30, 2013 amounted to $1,309,000.

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A summary of changes in restricted stock awards during the three month period ended September 30, 2013 is as follows:

	2012 Plan			2006 Plan
		Weighted Average Grant Date			Weighted Average Grant Date
	Shares	Fair Value		Shares	Fair Value
Unvested restricted stock awards outstanding     at June 30, 2013	5,200	$	14.49	91,100	$	12.52
Granted	29,500	$	18.51	-	$	-
Vested	-	$	-	(25,520)	$	13.10
Unvested restricted stock awards outstanding     at September 30, 2013	34,700	$	17.91	65,580	$	12.29

Tax Deduction

The Company receives a tax deduction for certain stock option exercises when the options are exercised, generally for the excess of the fair value over the exercise price of the option.  The Company also receives a tax deduction and/or liability when restricted stock vests based on the difference between the fair value at the grant date versus the vesting date. The tax benefit and/or liability from the exercise of stock options and/or the vesting of restricted stock are reported as cash flows from financing activities in the Consolidated Statements of Cash Flows.

Note 12 - Stockholders’ Equity

Changes in issued Common Stock and Stockholders’ Equity for the three month period ended September 30, 2013 were as follows:

	Common Stock			Treasury Stock			Retained
	Shares	Amount		Shares	Amount		Earnings		Total
Balance June 30, 2013	8,828,103	$	32,210,000	202,075	$	(1,926,000)	$	40,425,000	$	70,709,000
Restricted stock grants	29,500		—	—		—		—		—
Stock based compensation     expense	—		174,000	—		—		—		174,000
Stock options exercised	6,547		24,000	—		—		—		24,000
Tax benefit from vested     restricted stock	—		58,000	—		—		—		58,000
Net income	—		—	—		—		2,363,000		2,363,000
Dividends ($0.09 per share)	—		—	—		—		(779,000)		(779,000)
Balance September 30, 2013	8,864,150	$	32,466,000	202,075	$	(1,926,000)	$	42,009,000	$	72,549,000

At September 30, 2013 and June 30, 2013, 20,000,000 shares of Common Stock, no par value, were authorized.

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Note 13 – Concentrations and Contingencies

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents and trade accounts receivable. The Company maintains substantial cash and cash equivalent balances with various financial institutions in amounts that exceed the limit of FDIC insurance and with several non-banking U.S. corporations that are not insured or guaranteed. The Company believes that the risk of loss associated with cash and cash equivalents is remote. The Company believes that the concentration of credit risk in its trade receivables is substantially mitigated by the Company’s ongoing credit evaluation and its short collection terms. The Company does not generally require collateral from its customers but, in certain cases, the Company does require customers to provide a letter of credit or an advance payment. In limited cases, the Company will grant customers extended payment terms of up to 12 months. The Company establishes an allowance for uncollectible accounts based upon factors surrounding the credit risk of specific customers. Historically, the Company has not incurred significant credit related losses.

 The Company does not hold or issue financial instruments for trading purposes or hedging purposes, nor does it hold interest rate, leveraged or other types of derivative financial instruments.

From time to time, the Company is a party to routine litigation and proceedings that are considered part of the ordinary course of business.  The Company is not aware of any material current or pending litigation.

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Note 14 – Segment Information

The Company has four reportable segments aligned with each of the Company’s product lines in accordance with ASC 280, “Segment Reporting.”  

The following table provides selected financial information for each reportable segment for the three month periods ended September 30, 2013 and 2012:

	Seismic Energy Sources		Underwater Cables & Connectors		Seismic Energy Source Controllers		Underwater Robotic Vehicles		Corporate Headquarters & Eliminations		Consolidated
Three Months Ended     September 30, 2013
Sales to external customers	$	6,278,000	$	5,146,000	$	1,662,000	$	3,122,000	$	—	$	16,208,000
Intersegment sales		380,000		177,000		291,000		—		(848,000)		—
Depreciation and amortization		69,000		75,000		17,000		234,000		5,000		400,000
Income (loss) before income     taxes		1,279,000		2,129,000		871,000		220,000		(971,000)		3,528,000
Fixed asset additions		97,000		29,000		51,000		4,000		—		181,000
Three Months Ended     September 30, 2012
Sales to external customers	$	5,407,000	$	4,355,000	$	882,000	$	3,624,000	$	—	$	14,268,000
Intersegment sales		—		49,000		102,000		—		(151,000)		—
Depreciation and amortization		51,000		70,000		69,000		228,000		5,000		423,000
Income (loss) before income     taxes		759,000		1,821,000		371,000		694,000		(1,024,000)		2,621,000
Fixed asset additions		36,000		331,000		—		39,000		—		406,000
Balance Sheet Data at     September 30, 2013
Segment assets	$	19,411,000	$	18,760,000	$	6,701,000	$	22,529,000	$	18,010,000	$	85,411,000
Goodwill		—		7,679,000		3,278,000		6,270,000		—		17,227,000
Balance Sheet Data at     June 30, 2013
Segment assets	$	23,140,000	$	18,757,000	$	5,716,000	$	22,724,000	$	12,749,000	$	83,086,000
Goodwill		—		7,679,000		3,278,000		6,270,000		—		17,227,000

The Company does not allocate income taxes to the segments. 

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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 consists of four operating units: Bolt Technology Corporation (“Bolt”), A-G Geophysical Products, Inc. (“A-G”), Real Time Systems Inc. (“RTS”) and SeaBotix Inc. (“SBX”).

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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. Refer to Note 14 to Consolidated Financial Statements (Unaudited) for further information on reportable segments.

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 typically 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 government and quasi-government units.

During the first quarter of fiscal year 2014, the combined sales for the marine seismic data acquisition segments improved from $10,644,000 for the three month period ended September 30, 2012 to $13,086,000 for the three month period ended September 30, 2013. The 23% increase in sales for the three month period ended September 30, 2013 versus the three month period ended September 30, 2012 was due primarily to the shipment of a Seismic Energy Source System which included the first sale of the Company’s SmartSource™ digital controller.

The Company anticipates that sales for the marine seismic data acquisition business will continue to improve based on the current level of customer orders and inquiries. There can be no assurance, however, that sales and earnings will continue to improve in fiscal year 2014 as compared to fiscal year 2013 due to the marine seismic industry’s dependency on crude oil and natural gas prices, together with global political and economic uncertainties. 

During the three month period ended September 30, 2013, sales of underwater robotic vehicles decreased 14% from the three month period ended September 30, 2012. SBX’s sales growth remains dependent on higher demand from its major customer groups, especially the defense industry and state and local government units. It is difficult to predict the effect, if any, that governmental budgetary constraints and global political and economic uncertainties will have on SBX sales for the remainder of fiscal year 2014.

At September 30, 2013, the Company conducted an assessment of the June 30, 2013 contingent earnout liability of $3,315,000 and determined that no adjustment was required. 

During the three month period ended September 30, 2013, the Company continued its joint development effort with WesternGeco, a product line of Schlumberger, to develop an environmentally friendly energy source for marine seismic exploration surveys. 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. 

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The Company’s balance sheet remained strong at September 30, 2013. The Company’s cash balance increased to $25,170,000 at September 30, 2013 from $22,816,000 at June 30, 2013. Working capital increased to $46,945,000 at September 30, 2013 from $45,322,000 at June 30, 2013. In addition, the Company remained debt free at September 30, 2013.

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

The Company maintains its cash and cash equivalent balances primarily with several non-banking U.S. corporations as well as with certain U.S. based financial institutions. As of September 30, 2013, 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 2014.

On August 14, 2013, the Company’s Board of Directors approved a dividend of $0.09 per common share payable on October 3, 2013 to stockholders of record on September 5, 2013. This dividend amounted to $779,000.

In 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 Securities Exchange Act Rule 10b-18. As of September 30, 2013, 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, 2013.

Three Months Ended September 30, 2013

At September 30, 2013, the Company had $25,170,000 in cash and cash equivalents, as compared to September 30, 2012, when it had $26,332,000 in cash and cash equivalents. The decrease in cash and cash equivalents was primarily due to dividend payments and payment of consideration relating to the acquisition of SBX, partially offset by cash provided from operations.

For the three month period ended September 30, 2013, cash flow from operating activities after changes in working capital items was $3,057,000, primarily due to net income adjusted for non-cash items and lower accounts receivable, partially offset by higher inventory. 

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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 and lower accounts receivable and inventory, partially offset by lower current liabilities.

For the three month period ended September 30, 2013, cash used in investing activities was $181,000 due to capital expenditures for new and replacement equipment. 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, 2013, cash used in financing activities was $522,000 due primarily to cash dividends paid ($604,000), partially offset by tax benefits from vested restricted stock. For the three month period ended September 30, 2012, cash used in financing activities was $337,000 due primarily to cash dividends paid ($429,000), partially offset by proceeds from the exercise of stock options ($69,000). 

The Company anticipates that capital expenditures for the remainder of fiscal year 2014 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, 2013 and June 30, 2013, the five customers with the highest accounts receivable balances represented 73% and 64% 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, 2013.

Contractual Obligations

The Company had no long-term borrowings, capital leases, purchase obligations or other long-term liabilities at September 30, 2013 except for the non-current portion of the contingent earnout liability.

Results of Operations

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Consolidated sales for the three month period ended September 30, 2013 totaled $16,208,000, an increase of $1,940,000 or 14% from the three month period ended September 30, 2012. The change in net sales from the prior year period by reportable segment was as follows: seismic energy sources increased by $871,000 (16%), underwater cables and connectors increased by $791,000 (18%), seismic energy source controllers increased by $780,000 (88%), and underwater robotic vehicles decreased by $502,000 (14%).

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Higher sales for the three marine seismic data acquisition segments was primarily due to the shipment of a Seismic Energy Source System of over $4,000,000, which included the first sale of the Company’s SmartSource™ digital controller. 

Consolidated gross profit as a percentage of consolidated sales was 51% for the three month period ended September 30, 2013 versus 46% for the three month period ended September 30, 2012.  The increase in the gross profit percentage reflects higher manufacturing efficiencies associated with the 23% sales increase for the marine seismic data acquisition segments.  

Research and development (“R&D”) costs for the three month period ended September 30, 2013 increased to $926,000 from $620,000 for the three month period ended September 30, 2012. 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 $462,000 or 14% in the three month period ended September 30, 2013 from the three month period ended September 30, 2012. The increase was primarily due to an increase in trade show and compensation costs, partially offset by lower bad debt expense.

Interest income increased by $22,000 in the three month period ended September 30, 2013 from the three month period ended September 30, 2012 primarily due to higher interest rates.

The provision for income taxes for the three month period ended September 30, 2013 was $1,165,000, an effective tax rate of 33%.  This rate was lower than the federal statutory rate of 34% primarily due to benefits associated with the domestic manufacturer’s deduction, partially offset by state income taxes and nondeductible expenses. 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, partially offset by benefits associated with the domestic manufacturer’s deduction.  

The above mentioned factors resulted in an increase in net income for the three month period ended September 30, 2013 to $2,363,000, compared to net income of $1,704,000 for the three month period ended September 30, 2012.

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.

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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 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.

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 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 three month period ended September 30, 2013, the inventory valuation reserve was increased by $170,000 and no items were scrapped or disposed.

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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 detailed valuations that use historical information and market assumptions. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated 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

In the SBX acquisition, the Company is obligated under an earnout arrangement to make cash payments to the former SBX stockholders if certain revenue and gross profit margin targets 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.

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 targets 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, 2013, the Company conducted an assessment of the contingent earnout liability of $3,315,000 and determined that no adjustment was required. The current portion of the contingent earnout liability was increased from $1,715,000 at June 30, 2013 to $2,170,000 at September 30, 2013 reflecting higher estimated sales for calendar year 2013. The non-current portion of the contingent earnout liability was decreased from $1,600,000 at June 30, 2013 to $1,145,000 at September 30, 2013 reflecting lower estimated sales for calendar year 2014. 

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.  

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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, 2013 and June 30, 2013 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. A-G and RTS goodwill was tested for impairment and the tests indicated no impairment of the goodwill balances at June 30, 2013. SBX goodwill was tested for impairment at December 31, 2012 and the test indicated no impairment of the goodwill balance. The Company reviewed A-G, RTS and SBX goodwill as of September 30, 2013 and there was no impairment.

Goodwill represents approximately 20% of the Company’s total assets at September 30, 2013. 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, 2012 and the test indicated no impairment. The Company reviewed intangible assets with indefinite lives at September 30, 2013 and June 30, 2013 and there was no impairment.

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, 2013 did not result in any indicators of impairment, and therefore no impairment tests were performed.

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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 ASU 2012-02 did not have an impact on the Company’s financial statements.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

The Company is not subject to any material market risks associated with activities in derivative financial instruments, other financial instruments or derivative commodity instruments.

Item 4 – Controls and Procedures

The chief executive officer and the chief financial officer, with the assistance of key employees throughout the Company, including its subsidiaries, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2013.  Based upon the results of such evaluation, the chief executive officer and the chief financial officer have concluded that such disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.

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No changes in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2013 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

The information with respect to Item 1 is set forth under Note 13 to Consolidated Financial Statements (Unaudited). 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

In June 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. The Company did not repurchase any shares of its Common Stock during the three month period ended September 30, 2013. As of September 30, 2013, $8,074,000 remained available for repurchase under the existing repurchase authorization.

Item 6 – Exhibits

31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).*
31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).*
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).**
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).**

101. INS	XBRL Instance Document.
101. SCH	XBRL Taxonomy Extension Schema Document.
101. CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101. DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101. LAB	XBRL Taxonomy Extension Label Linkbase Document.
101. PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

*	Filed with this Form 10-Q.
**	Furnished with this Form 10-Q.

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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.

	BOLT TECHNOLOGY CORPORATION
Date: November 6, 2013	/s/ Raymond M. Soto
	Raymond M. Soto
	Chairman of the Board
	and Chief Executive Officer
	(Principal Executive Officer)
Date: November 6, 2013	/s/ Joseph Espeso
	Joseph Espeso
	Senior Vice President-Finance and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).*
31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).*
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).**
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).**
101. INS	XBRL Instance Document.
101. SCH	XBRL Taxonomy Extension Schema Document.
101. CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101. DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101. LAB	XBRL Taxonomy Extension Label Linkbase Document.
101. PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

*	Filed with this Form 10-Q.
**	Furnished with this Form 10-Q.

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