Teledyne Bolt 10-Q 2014 Q2 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: December 31, 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.YesxNo¨

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).  Yesx       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 filerx
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¨Nox

At February 5, 2014, there were 8,665,725 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 and six months ended December 31, 2013 and 2012	3
	Consolidated Balance Sheets -
	December 31, 2013 (Unaudited) and June 30, 2013	4
	Consolidated Statements of Cash Flows (Unaudited) -
	Six months ended December 31, 2013 and 2012	5
	Notes to Consolidated Financial Statements (Unaudited)	6-18
Item 2.	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations	18-27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	28
Part II - Other Information:
Item 1.	Legal Proceedings	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 6.	Exhibits	29
Signatures		30
Exhibit Index		31

2

 

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2013		2012		2013		2012
Sales	$	21,744,000	$	14,410,000	$	37,952,000	$	28,678,000
Costs and Expenses:
Cost of sales		10,698,000		8,009,000		18,655,000		15,679,000
Research and development		1,005,000		818,000		1,931,000		1,438,000
Selling, general and administrative		3,785,000		3,116,000		7,632,000		6,501,000
Adjustment of contingent earnout liability		1,500,000		-		1,500,000		-
Other income		(562,000)		(37,000)		(612,000)		(65,000)
		16,426,000		11,906,000		29,106,000		23,553,000
Income before income taxes		5,318,000		2,504,000		8,846,000		5,125,000
Provision for income taxes		2,300,000		803,000		3,465,000		1,720,000
Net income	$	3,018,000	$	1,701,000	$	5,381,000	$	3,405,000
Earnings per share:
Basic	$	0.35	$	0.20	$	0.62	$	0.40
Diluted	$	0.35	$	0.20	$	0.62	$	0.40
Average number of common shares outstanding:
Basic		8,663,490		8,606,773		8,653,445		8,591,680
Diluted		8,679,288		8,606,795		8,666,357		8,593,843

Refer to Notes to Consolidated Financial Statements (Unaudited).

3

 

BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,
	2013		June 30,
	(unaudited)		2013
ASSETS
Current Assets:
Cash and cash equivalents	$	23,704,000	$	22,816,000
Accounts receivable, less allowance for uncollectible accounts of $386,000     at December 31, 2013 and $255,000 at June 30, 2013		16,169,000		12,308,000
Inventories		18,544,000		17,137,000
Deferred income taxes		663,000		478,000
Other current assets		533,000		981,000
Total current assets		59,613,000		53,720,000
Property, Plant and Equipment, net		5,356,000		4,922,000
Goodwill, net		17,227,000		17,227,000
Other Intangible Assets, net		6,578,000		6,967,000
Other Assets		240,000		250,000
Total assets	$	89,014,000	$	83,086,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	2,276,000	$	2,765,000
Accrued expenses		2,588,000		3,242,000
Contingent earnout liability		4,815,000		1,715,000
Dividends payable		5,113,000		604,000
Income taxes payable		1,248,000		72,000
Total current liabilities		16,040,000		8,398,000
Non-Current Portion of Contingent Earnout Liability		-		1,600,000
Deferred Income Taxes		2,353,000		2,379,000
Total liabilities		18,393,000		12,377,000
Stockholders’ Equity:
Common stock		32,633,000		32,210,000
Retained earnings		39,914,000		40,425,000
Treasury stock, at cost		(1,926,000)		(1,926,000)
Total stockholders’ equity		70,621,000		70,709,000
Total liabilities and stockholders’ equity	$	89,014,000	$	83,086,000

Refer to Notes to Consolidated Financial Statements (Unaudited).

4

 

BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended
	December 31,
	2013		2012
Cash Flows From Operating Activities:
Net income	$	5,381,000	$	3,405,000
Adjustments to reconcile net income to net cash     provided by operating activities:
Depreciation and amortization		803,000		851,000
Deferred income taxes		(211,000)		(178,000)
Stock-based compensation expense		349,000		383,000
Adjustment of contingent earnout liability		1,500,000		-
Gain on condemnation settlement		(507,000)		-
Change in operating assets and liabilities:
Accounts receivable		(3,861,000)		803,000
Inventories		(1,407,000)		1,541,000
Other assets		448,000		(28,000)
Accounts payable		(489,000)		(136,000)
Accrued expenses		(654,000)		(1,083,000)
Income taxes payable		1,176,000		(329,000)
Net cash provided by operating activities		2,528,000		5,229,000
Cash Flows From Investing Activities:
Purchase of SeaBotix Inc.		-		(1,900,000)
Proceeds from condemnation settlement		529,000		-
Capital expenditures and other non-current assets		(860,000)		(476,000)
Net cash used by investing activities		(331,000)		(2,376,000)
Cash Flows From Financing Activities:
Dividends paid		(1,383,000)		(5,946,000)
Exercise of stock options		25,000		277,000
Tax asset from vested restricted stock     and stock options exercised		49,000		28,000
Net cash used by financing activities		(1,309,000)		(5,641,000)
Net increase (decrease) in cash and cash equivalents		888,000		(2,788,000)
Cash and cash equivalents at beginning of period		22,816,000		24,613,000
Cash and cash equivalents at end of period	$	23,704,000	$	21,825,000
Supplemental Disclosure of Cash Flow Information:
Cash transactions:
Income taxes paid	$	2,451,000	$	2,215,000

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 December 31, 2013, the Consolidated Statements of Income for the three month and six month periods ended December 31, 2013 and 2012 and the Consolidated Statements of Cash Flows for the six month periods ended December 31, 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.

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.

6

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.

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.

The Company conducted an assessment of qualitative factors regarding the A-G reporting unit at June 30, 2013. The Company’s review of the A-G goodwill balance at June 30, 2013 did not identify any indicators of impairment.

For the RTS reporting unit, the Company performed the quantitative impairment test at June 30, 2013. The impairment test for the RTS reporting unit indicated no impairment of the goodwill balance at June 30, 2013.

For the SBX reporting unit, the Company performed the quantitative impairment test at December 31, 2013 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 Company’s review of the SBX goodwill balance at June 30, 2013 did not identifyany indicators of impairment.

The Company reviewed A-G and RTS goodwill as of December 31, 2013 and no indicators of impairmentwere identified.

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, 2013 and the test indicated no impairment.  

7

The Company reviewed the SBX intangible asset with an indefinite life at June 30, 2013 and such review did notidentify any indicators of impairment.

The Company reviewed the RTS intangible asset with an indefinite life at December 31, 2013 and June 30, 2013 and no indicators of impairmentwere identified.

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.The Company’s reviews as of June 30, 2013 and December 31, 2013 did not identifyany indicators of impairment.

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.

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 targets are achieved. The Company recorded a contingent earnout liability at the acquisition date of SBX at its estimated fair value, which took 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.

8

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 and six month periods ended December 31, 2013 and 2012:

	Three Months Ended December 31,				Six Months Ended December 31,
	2013		2012		2013		2012
Net income available to common stockholders	$	3,018,000	$	1,701,000	$	5,381,000	$	3,405,000
Divided by:
Weighted average common shares		8,663,490		8,606,773		8,653,445		8,591,680
Weighted average common share equivalents		15,798		22		12,912		2,163
Total weighted average common shares and common     share equivalents		8,679,288		8,606,795		8,666,357		8,593,843
Basic earnings per share	$	0.35	$	0.20	$	0.62	$	0.40
Diluted earnings per share	$	0.35	$	0.20	$	0.62	$	0.40

For the three month period ended December 31, 2013, the calculation included all options to acquire shares because they were all dilutive.For the three month period ended December 31, 2012, the calculation did not include options to acquire40,250 shares, since the inclusion of these shares would have been anti-dilutive. 

 

Recent Accounting Developments

None.

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 due if SBX achieves certain revenue and gross profit margin targets during the four-year period ending December 31, 2014.

9

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

In the fourth quarters of fiscal years 2012 and 2013 and the second quarter of fiscal year 2014, the Company increased the contingent earnout liability by $4,500,000, $500,000 and $1,500,000, respectively, and these 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 December 31, 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		3,315,000
Increase to contingent earnout liability in December 2013		1,500,000
Balance at December 31, 2013	$	4,815,000

10

Earnout payments equal to15.5% 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 the remaining earnout period which ends on December 31, 2014.��If the Company determines that it is more likely than not that these future estimated earnout payments will exceed $4,815,000, the Company would have to increase the contingent earnout liability.Such increase would result in a non-cash charge to the Consolidated Statement of Income.

The $4,815,000 and $3,315,000 contingent earnout liability at December 31, 2013 and June 30, 2013, respectively, were estimated by the Company based upon projected SBX revenues and gross profit margins for the remaining earnout period.

Note 4 – Inventories

Inventories consist of the following:

	December 31,		June 30,
	2013		2013
Raw materials and sub-assemblies	$	17,166,000	$	15,268,000
Work-in-process		2,415,000		2,495,000
		19,581,000		17,763,000
Less – Reserve for inventory valuation		(1,037,000)		(626,000)
	$	18,544,000	$	17,137,000

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 six month period ended December 31, 2013, the inventory valuation reserve was increased by $411,000 and no items were scrapped or disposed.

11

 

Note 5 – 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 December 31, 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 approximately19% of the Company’s total assets at December 31, 2013 and thus the evaluation of goodwill impairment is a significant estimate by management.

Note 6 – Other Income

Other income consists of the following:

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2013		2012		2013		2012
Gain on condemnation settlement	$	(507,000)	$	-	$	(507,000)	$	-
Interest income		(55,000)		(37,000)		(105,000)		(65,000)
	$	(562,000)	$	(37,000)	$	(612,000)	$	(65,000)

Note 7 – Income Taxes

A reconciliation of the federal statutory rate to the effective tax rate reflected in the total provision for income taxes for the six month periods ended December 31 is as follows:

	2013			2012
Federal statutory rate		34	%		34	%
Exempt income from domestic manufacturer’s deduction		(4)			(3)
Non-deductible expenses:
Adjustment to fair value of contingent earnout liability		6			-
Other		-			2
State taxes		3			1
Effective tax rate		39	%		34	%

12

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 December 31, 2013 and June 30, 2013.  There were no unallocated tax reserves at December 31, 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 8 — Fair Value Measurements

Pursuant to the accounting guidance for fair value measurements, the Company uses a three-tier fair value hierarchy to prioritize the inputs for measuring fair value. The hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3).

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:

	Quoted
	Market Prices		Significant
	For		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Liabilities
At December 31, 2013 — Contingent earnout liability	$	—	$	—	$	4,815,000	$	4,815,000
At June 30, 2013 — Contingent earnout liability	$	—	$	—	$	3,315,000	$	3,315,000

This liability relates to the estimated fair value of future earnout payments to former SeaBotix Inc. stockholders for the earnout period ending December 31, 2014.

Set forth below are the changes in the Level 3 liability from June 30, 2013 to December 31, 2013:

	Fair Value
	of
	Contingent
	Earnout
	Liability
Balance at June 30, 2013	$	3,315,000
Adjustment to contingent earnout liability		1,500,000
Balance at December 31, 2013	$	4,815,000

The Company determined the fair value of the contingent earnout liability at December 31, 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 six month period ended December 31, 2013 and the year ended June 30, 2013.

13

Fair values of accounts receivable, accounts payable, accrued expenses, dividends payable and income taxes payable reflected in the December 31, 2013 (Unaudited)and June 30, 2013 Consolidated Balance Sheets approximate carrying values on those dates.

Note 9 – 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.

The 2012 Plan provides that750,000 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 of3,000 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

Stock option compensation expense was $92,000 and $127,000 for the six month periods ended December 31, 2013 and 2012, respectively.

A summary of changes in stock options during the six month period ended December 31, 2013 is as follows:

 

14

	2012 Plan			2006 Plan
		Weighted			Weighted
		Average			Average
		Exercise			Exercise
	Shares	Price		Shares	Price
Options outstanding at June 30, 2013	50,000	$	15.43	83,425	$	12.33
Granted	-	$	-	-	$	-
Exercised	-	$	-	(16,550)	$	(12.92)
Options outstanding at December 31, 2013	50,000	$	15.43	66,875	$	12.19

At December 31, 2013, the aggregate intrinsic value for outstanding options was $986,000, because the market price of the Company’s Common Stock at December 31, 2013 was higher than the weighted average exercise price of such options.

Restricted Stock

During the six month period ended December 31, 2013,33,100 shares of restricted stock were granted under the 2012 Plan. Of these shares,28,000,600 and4,500 shares vest over a five-year period, three-year period and one-year period, respectively, and the cost to the recipients is zero.  During the six month period ended December 31, 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 six month periods ended December 31, 2013 and 2012 was $618,000 and $463,000, 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 $257,000 and $256,000 for the six month periods ended December 31, 2013 and 2012, respectively.  

A summary of changes in restricted stock awards during the six month period ended December 31, 2013 is as follows:

	2012 Plan			2006 Plan
		Weighted			Weighted
		Average			Average
		Grant Date			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	33,100	$	18.67	-	$	-
Vested	(3,400)	$	14.27	(28,480)	$	12.74
Unvested restricted stock awards outstanding at December     31, 2013	34,900	$	18.48	62,620	$	12.42

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Note 10 - Stockholders’ Equity

Changes in issued Common Stock and Stockholders’ Equity for the six month period ended December 31, 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		33,100		—		—		—		—		—
Stock based compensation expense		—		349,000		—		—		—		349,000
Stock options exercised		6,597		25,000		—		—		—		25,000
Tax asset from vested restricted stock     and stock options exercised		—		49,000		—		—		—		49,000
Net income		—		—		—		—		5,381,000		5,381,000
Dividends ($0.68 per share)		—		—		—		—		(5,892,000)		(5,892,000)
Balance December 31, 2013		8,867,800	$	32,633,000		202,075	$	(1,926,000)	$	39,914,000	$	70,621,000

At December 31, 2013 and June 30, 2013,20,000,000 shares of Common Stock, no par value, were authorized.  

Note 11 – 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 to12 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.

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 12 – 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 and six month periods ended December 31, 2013 and 2012:

					Seismic				Corporate
	Seismic		Underwater		Energy		Underwater		Headquarters
	Energy		Cables &		Source		Robotic		&
	Sources		Connectors		Controllers		Vehicles		Eliminations		Consolidated
Six Months Ended December 31, 2013
Sales to external customers	$	14,161,000	$	9,594,000	$	3,046,000	$	11,151,000	$	—	$	37,952,000
Intersegment sales		727,000		254,000		541,000		—		(1,522,000)		—
Depreciation and amortization		138,000		151,000		36,000		468,000		10,000		803,000
Income (loss) before income taxes		4,257,000		3,742,000		1,572,000		1,130,000		(1,855,000)		8,846,000
Fixed asset additions		116,000		604,000		80,000		53,000		—		853,000
Three Months Ended December 31, 2013
Sales to external customers	$	7,883,000	$	4,448,000	$	1,384,000	$	8,029,000	$	—	$	21,744,000
Intersegment sales		347,000		77,000		250,000		—		(674,000)		—
Depreciation and amortization		69,000		76,000		19,000		234,000		5,000		403,000
Income (loss) before income taxes		2,978,000		1,613,000		701,000		910,000		(884,000)		5,318,000
Fixed asset additions		19,000		575,000		29,000		49,000		—		672,000
Balance Sheet Data at December 31, 2013
Segment assets	$	21,545,000	$	17,793,000	$	6,613,000	$	25,000,000	$	18,063,000	$	89,014,000
Goodwill		—		7,679,000		3,278,000		6,270,000		—		17,227,000
Other intangible assets		117,000		—		311,000		6,150,000		—		6,578,000
Six Months Ended December 31, 2012
Sales to external customers	$	12,576,000	$	8,119,000	$	1,593,000	$	6,390,000	$	—	$	28,678,000
Intersegment sales		—		158,000		263,000		—		(394,000)		—
Depreciation and amortization		101,000		145,000		139,000		457,000		9,000		851,000
Income (loss) before income taxes		2,547,000		3,060,000		562,000		783,000		(1,827,000)		5,125,000
Fixed asset additions		54,000		363,000		2,000		35,000		—		454,000
Three Months Ended December 31, 2012
Sales to external customers	$	7,169,000	$	3,764,000	$	711,000	$	2,766,000	$	—	$	14,410,000
Intersegment sales		—		109,000		134,000		—		(243,000)		—
Depreciation and amortization		50,000		75,000		70,000		229,000		4,000		428,000
Income (loss) before income taxes		1,788,000		1,239,000		191,000		89,000		(803,000)		2,504,000
Fixed asset additions		18,000		32,000		2,000		(4,000)		—		48,000
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
Other intangible assets		100,000		—		325,000		6,542,000		—		6,967,000

The Company does not allocate income taxes to the segments.  

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Note 13 – Subsequent Event

On January 22, 2014, the Company’s Board of Directors approved aquarterly dividend of $0.09 per common share, which will be paid on April 2, 2014 to stockholders of record on March 5, 2014.

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) the risk of changing budgetarylevels for government and quasi-government units, (v) risks associated with a significant amount of foreign sales, (vi) the risk of fluctuations in future operating results, (vii) risks associated with global economic conditions, (viii) risks of changes in environmental or regulatory matters and (ix) 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.

 

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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”).

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 12 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.

Consolidated sales for the six month period ended December 31, 2013 increased by 9,274,000 or 32% from the six month period ended December 31, 2012.

The combined sales for the three marine seismic data acquisition segments increased from $22,288,000 for the six month period ended December 31, 2012 to $26,801,000 for the six month period ended December 31, 2013, an increase of $4,513,000 or 20% due primarily to the shipment of a large seismic energy source system which included the first sale of the Company’s Smart Source™ digital controller. Based on the current level of customer orders and inquiries, the Company anticipates that sales for the three marine seismic data acquisition segments should continue to show improvement for the remainder of fiscal year 2014.

Sales of underwater robotic vehicles increased from $6,390,000 for the six month period ended December 31, 2012 to $11,151,000 for the six month period ended December 31, 2013, an increase of $4,761,000 or 75% due primarily to higher shipments to the U.S. government. Based on the results for the six month period ended December 31, 2013 and current orders, the Company anticipates that fiscal year 2014 operating results for this segment will improve over fiscal year 2013.

At December 31, 2013, the Company conducted an assessment of the SBX contingent earnout liability and determined that it should be increased from $3,315,000 to $4,815,000. The $1,500,000 increase, which is non-deductible for income tax purposes, was charged to the Consolidated Statement of Income (Unaudited) at December 31, 2013 as “adjustment of contingent earnout liability.” The entire $4,815,000 was recorded in current liabilities at December 31, 2013 since the SBX earnout period ends on December 31, 2014.

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During the six month period ended December 31, 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 multiphase development project and, if successful, will be a significant new development for the marine seismic exploration industry. The Company has continued to incur costs, in support of this project, which are charged to research and development expense in the Consolidated Statement of Income.

The Company’s balance sheet at December 31, 2013 remained strong with cash of $23,704,000, working capital of $43,573,000 and no debt.

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 December 31, 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 November 22, 2013, the Company’s Board of Directors approved a quarterly dividend of $0.09 per common share, and a special dividend of $0.50 per common share.Both dividends were paid on January 15, 2014 to stockholders of record on January 2, 2014.

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 December 31, 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 six month period ended December 31, 2013.

Six Months Ended December 31, 2013

At December 31, 2013, the Company had $23,704,000 in cash and cash equivalents, as compared to $21,825,000 at December 31, 2012.The increase in cash and cash equivalents was primarily due to cash provided from operations partially offset by dividends and capital expenditures.

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For the six month period ended December 31 2013, cash flow from operating activities after changes in working capital items was $2,528,000, primarily due to net income adjusted for non-cash items and lower other assets, partially offset by higher accounts receivable and inventory.For the six month period ended December 31, 2012, cash flow from operating activities after changes in working capital items was $5,229,000, primarily due to net income adjusted for non-cash items and lower accounts receivable and inventory, partially offset by lower current liabilities.

For the six month period ended December 31, 2013, cash used in investing activities was $331,000 primarily due to capital expenditures for new and replacement equipment ($853,000) partially offset by proceeds from a condemnation settlement ($529,000).For the six month period ended December 31, 2012, cash used in investing activities was $2,376,000 primarily due to acontingent earnout payment ($1,900,000) and capital expenditures for new and replacement equipment ($454,000).

For the six month period ended December 31, 2013, cash used in financing activities was $1,309,000 primarily due to payment of quarterly cash dividends ($1,383,000).For the six month period ended December 31, 2012, cash used in financing activities was $5,641,000, primarily due to the payment of a special cash dividend ($4,312,000) and quarterly cash dividends ($1,634,000), partially offset by proceeds from the exercise of stock options ($277,000).

The Company anticipates that capital expenditures for the remainder of fiscal year 2014 will not exceed $400,000 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 December 31, 2013 and June 30, 2013, the five customers with the highest accounts receivable balances represented 81% 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 December 31, 2013.

Contractual Obligations

The Company had no long-term borrowings, capital leases, purchase obligations or other long-term liabilities at December 31, 2013.

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Results of Operations

Six Months Ended December 31, 2013 Compared to Six Months Ended December 31, 2012

Consolidated sales for the six month period ended December 31, 2013 totaled $37,952,000, an increase of $9,274,000 or 32% from the six month period ended December 31, 2012. The increase in net sales by reportable segment was as follows: seismic energy sources increased by $1,585,000 (13%), underwater cables and connectors increased by $1,475,000 (18%), seismic energy source controllers increased by $1,453,000 (91%) and underwater robotic vehicles increased by $4,761,000 (75%). 

Higher sales for the Company’s 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 Smart Source™digital controller.The underwater robotics increase in sales was primarily due to higher sales to the U.S. government.

Consolidated gross profit as a percentage of consolidated sales was 51% for the six month period ended December 31, 2013 versus 45% for the six month period ended December 31, 2012.  The increase in the gross profit percentage reflects higher manufacturing efficiencies associated with the 32% increase in consolidated sales.

 

Research and development (“R&D”) costs in the six month period ended December 31, 2013 increased $493,000 or 34% from the six month period ended December 31, 2012. The increase is primarily due to costs associated with the joint development effort with WesternGeco to develop an environmentally friendly seismic energy source, partially offset by lower R&D at the underwater robotics segment.

Selling, general and administration (“SG&A”) expenses increased by $1,131,000 or 17% in the six month period ended December 31, 2013 from the six month period ended December 31, 2012.The increase of $1,131,000 was primarily due to higher compensation costs and advertising/trade show expense reflecting improved operating results.

The Company recorded an adjustment of contingent earnout liability of $1,500,000 with respect to potential future earnout payments to former SBX stockholders in the six month period ended December 31, 2013. This non-cash charge to the results of operations is a non-deductible expense for income tax purposes. This liability is evaluated each reporting period and any changes to the earnout liability is recorded in the Consolidated Statement of Income. The adjustment to the contingent earnout liability is based on management’s assessment of the likelihood of achievement of certain revenue and gross profit margin levels during the earnout period ending December 31, 2014. Refer to Notes 2, 3 and 8 to Consolidated Financial Statements (Unaudited) for additional information concerning SBX.

Other income increased by $547,000 in the six month period ended December 31, 2013 from the six month period ended December 31, 2012, primarily due to a $507,000 gain on a condemnation settlement.The condemnation involved a small portion of land at the A-G facility in Cypress, Texas.Refer to Note 6 to Consolidated Financial Statements (Unaudited) for additional information concerning other income.

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The provision for income taxes for the six month period ended December 31, 2013 was $3,465,000, an effective tax rate of 39%.   This rate was higher than the federal statutory rate of 34%, due to non-deductible expenses and state income taxes partially offset by tax benefits associated with the domestic manufacturer’s deduction.The provision for income taxes for the six month period ended December 31, 2012 was $1,720,000, an effective tax rate of 34%.  This rate was the same as the federal statutory rate of 34% due to tax benefits associated with the domestic manufacturer’s deduction fully offset by non-deductible expenses and state income taxes.

The above mentioned factors resulted in net income for the six month period ended December 31, 2013 of $5,381,000, compared to net income of $3,405,000 for the six month period ended December 31, 2012.

Three Months Ended December 31, 2013 Compared to Three Months Ended December 31, 2012

Consolidated sales for the three month period ended December 31, 2013 totaled $21,744,000, an increase of $7,334,000 or 51% from the three month period ended December 31, 2012. The increase in net sales by reportable segment was as follows: seismic energy sources increased by $714,000 (10%), underwater cables and connectors increased by $684,000 (18%), seismic energy source controllers increased by $673,000 (95%), and underwater robotic vehicles increased by $5,263,000 (190%). 

Higher sales for the three marine seismic data acquisition segments was primarily due to sales of several seismic energy source systems and the second sale of the Company’s Smart Source™ digital controller.The underwater robotics increase in sales was primarily due to higher sales to the U.S. government.

Consolidated gross profit as a percentage of consolidated sales was 51% for the three month period ended December 31, 2013 versus 44% for the three month period ended December 31, 2012.  The increase in the gross profit percentage reflects higher manufacturing efficiencies associated with the 51% increase in consolidated sales.

R&D costs for the three month period ended December 31, 2013 increased to $1,005,000 from $818,000 for the three month period ended December 31, 2012. The increase is primarily due to costs associated with the joint development effort with WesternGeco to develop an environmentally friendly seismic energy source.

SG&A expense increased by $669,000 or 21% in the three month period ended December 31, 2013 from the three month period ended December 31, 2012.The increase of $669,000 was primarily due to higher compensation costs reflecting improved operating results.

The Company recorded an adjustment of contingent earnout liability of $1,500,000 with respect to potential future earnout payments to former SBX stockholders in the three month period ended December 31, 2013. This non-cash charge to the results of operations is also a non-deductible expense for income tax purposes. This liability is evaluated each reporting period and any changes to the earnout liability is recorded in the Consolidated Statement of Income. The adjustment to the contingent earnout liability is based on management’s assessment of the likelihood of achievement of certain revenue and gross profit margin levels during the earnout period ending December 31, 2014. Refer to Notes 2, 3 and 8 to Consolidated Financial Statements (Unaudited) for additional information concerning SBX.

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Other income increased by $525,000 in the three month period ended December 31, 2013 from the three month period ended December 31, 2012 primarily due a $507,000 gain on a condemnation settlement.Refer to Note 6 to Consolidated Financial Statements (Unaudited) for additional information concerning other income.

The provision for income taxes for the three month period ended December 31, 2013 was $2,300,000, an effective tax rate of 43%.   This rate was higher than the federal statutory rate of 34% primarily due to non-deductible expenses and state income taxes, partially offset by tax benefits associated with the domestic manufacturer’s deduction.The provision for income taxes for the three month period ended December 31, 2012 was $803,000, an effective tax rate of 32%.  This rate was lower than the federal statutory rate of 34% primarily due to tax benefits associated with the domestic manufacturer’s deduction, partially offset by non-deductible expenses and state income taxes.

The above mentioned factors resulted in net income for the three month period ended December 31, 2013 of $3,018,000, compared to net income of $1,701,000 for the three month period ended December 31, 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 Commissionhas defined the most critical accounting policies as the ones that are most important to the portrayal of the Company’s financial condition and results, and require the Company to make its most difficult and subjective judgments.

Based on this definition, the Company’s most critical accounting policies include: revenue recognition, recording of inventory reserves, 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.

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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 six month period ended December 31, 2013, the inventory valuation reserve was increased by $411,000 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 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.

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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 targets are achieved. The Company recorded a contingent earnout liability at the acquisition date of SBX at its estimated fair value, which took 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 December 31, 2013, the Company conducted an assessment of the SBX contingent earnout liability and determined that it should be increased from $3,315,000 to $4,815,000.The $1,500,000 increase, which is non-deductible for income tax purposes, was charged to the Consolidated Statement of Income (Unaudited) at December 31, 2013 as “adjustment of contingent earnout liability.”The entire $4,815,000 was recorded in current liabilities at December 31, 2013 since the SBX earnout period ends on December 31, 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.  

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 December 31, 2013 and June 30, 2013 because future taxable income is believed to be sufficient to utilize any deferred tax asset.

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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, 2013 and the test indicated no impairment of the goodwill balance.The Company reviewed A-G and RTS goodwill as of December 31, 2013 and noindicators impairmentwere identified.

Goodwill represents approximately 19% of the Company’s total assets at December 31, 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 2 and 5 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, 2013 and the test indicated no impairment. The Company reviewed the RTS intangible asset withan indefinite life at December 31, 2013 and no indicators of impairment were identified.The Company reviewed intangible assets with indefinite lives at June 30, 2013 and no indicators of impairment were identified.

 

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 review as of December 31, 2013 did not identify any indicators of impairment.

Recent Accounting Developments

None.

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.

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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 December 31, 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.

No changes in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 2013 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

The information with respect to Item 1 is set forth under Note 11 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 six month period ended December 31, 2013.As of December 31, 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: February 10, 2014	/s/ Raymond M. Soto
	Raymond M. Soto Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
Date: February 10, 2014	/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.

31