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: March 31, 2014
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. Yesx 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). 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 May 6, 2014, there were 8,676,517 shares of Common Stock, without par value, outstanding.
BOLT TECHNOLOGY CORPORATION
INDEX
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
| | | Three Months Ended | | | Nine Months Ended | |
| | | March 31, | | | March 31, | |
| | | 2014 | | | 2013 | | | 2014 | | | 2013 | |
| | | | | | | | | | | | | |
| Sales | | $ | 15,716,000 | | | $ | 11,243,000 | | | $ | 53,668,000 | | | $ | 39,921,000 | |
| | | | | | | | | | | | | | | | | |
| Costs and Expenses: | | | | | | | | | | | | | | | | |
| Cost of sales | | | 7,353,000 | | | | 5,674,000 | | | | 26,008,000 | | | | 21,353,000 | |
| Research and development | | | 1,154,000 | | | | 586,000 | | | | 3,085,000 | | | | 2,024,000 | |
| Selling, general and administrative | | | 3,638,000 | | | | 3,046,000 | | | | 11,270,000 | | | | 9,547,000 | |
| Adjustment of contingent earnout liability | | | - | | | | - | | | | 1,500,000 | | | | - | |
| Other income | | | (53,000 | ) | | | (40,000 | ) | | | (665,000 | ) | | | (105,000 | ) |
| | | | 12,092,000 | | | | 9,266,000 | | | | 41,198,000 | | | | 32,819,000 | |
| | | | | | | | | | | | | | | | | |
| Income before income taxes | | | 3,624,000 | | | | 1,977,000 | | | | 12,470,000 | | | | 7,102,000 | |
| Provision for income taxes | | | 1,168,000 | | | | 596,000 | | | | 4,633,000 | | | | 2,316,000 | |
| Net income | | $ | 2,456,000 | | | $ | 1,381,000 | | | $ | 7,837,000 | | | $ | 4,786,000 | |
| | | | | | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.28 | | | $ | 0.16 | | | $ | 0.90 | | | $ | 0.56 | |
| Diluted | | $ | 0.28 | | | $ | 0.16 | | | $ | 0.90 | | | $ | 0.56 | |
| | | | | | | | | | | | | | | | | |
| Average number of common shares outstanding: | | | | | | | | | | | | | | | | |
| Basic | | | 8,676,381 | | | | 8,625,390 | | | | 8,661,090 | | | | 8,602,916 | |
| Diluted | | | 8,692,134 | | | | 8,627,439 | | | | 8,674,949 | | | | 8,605,041 | |
Refer to Notes to Consolidated Financial Statements (Unaudited).
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | March 31, | | | | |
| | | 2014 | | | June 30, | |
| | | (unaudited) | | | 2013 | |
| ASSETS | | | | | | | | |
| Current Assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 21,205,000 | | | $ | 22,816,000 | |
| Accounts receivable, less allowance for uncollectible accounts of $453,000 at March 31, 2014 and $255,000 at June 30, 2013 | | | 10,691,000 | | | | 12,308,000 | |
| Inventories | | | 20,438,000 | | | | 17,137,000 | |
| Deferred income taxes | | | 707,000 | | | | 478,000 | |
| Other current assets | | | 615,000 | | | | 981,000 | |
| Total current assets | | | 53,656,000 | | | | 53,720,000 | |
| Property, Plant and Equipment, net | | | 5,517,000 | | | | 4,922,000 | |
| Goodwill, net | | | 17,227,000 | | | | 17,227,000 | |
| Other Intangible Assets, net | | | 6,375,000 | | | | 6,967,000 | |
| Other Assets | | | 238,000 | | | | 250,000 | |
| Total assets | | $ | 83,013,000 | | | $ | 83,086,000 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | | |
| Current Liabilities: | | | | | | | | |
| Accounts payable | | $ | 2,764,000 | | | $ | 2,765,000 | |
| Accrued expenses | | | 2,627,000 | | | | 3,242,000 | |
| Contingent earnout liability | | | 1,810,000 | | | | 1,715,000 | |
| Dividends payable | | | 781,000 | | | | 604,000 | |
| Income taxes payable | | | 79,000 | | | | 72,000 | |
| Total current liabilities | | | 8,061,000 | | | | 8,398,000 | |
| Non-Current Portion of Contingent Earnout Liability | | | - | | | | 1,600,000 | |
| Deferred Income Taxes | | | 2,275,000 | | | | 2,379,000 | |
| Total liabilities | | | 10,336,000 | | | | 12,377,000 | |
| | | | | | | | | |
| Stockholders’ Equity: | | | | | | | | |
| Common stock | | | 33,020,000 | | | | 32,210,000 | |
| Retained earnings | | | 41,583,000 | | | | 40,425,000 | |
| Treasury stock, at cost | | | (1,926,000 | ) | | | (1,926,000 | ) |
| Total stockholders’ equity | | | 72,677,000 | | | | 70,709,000 | |
| Total liabilities and stockholders’ equity | | $ | 83,013,000 | | | $ | 83,086,000 | |
Refer to Notes to Consolidated Financial Statements (Unaudited).
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | Nine Months Ended
March 31, | |
| | | 2014 | | | 2013 | |
| Cash Flows From Operating Activities: | | | | | | | | |
| Net income | | $ | 7,837,000 | | | $ | 4,786,000 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | | | 1,222,000 | | | | 1,253,000 | |
| Deferred income taxes | | | (363,000 | ) | | | (264,000 | ) |
| Stock-based compensation expense | | | 530,000 | | | | 564,000 | |
| Gain on condemnation settlement | | | (507,000 | ) | | | - | |
| Change in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | 1,617,000 | | | | 1,000 | |
| Inventories | | | (3,301,000 | ) | | | 48,000 | |
| Other assets | | | 366,000 | | | | (297,000 | ) |
| Accounts payable | | | (1,000 | ) | | | (385,000 | ) |
| Accrued expenses | | | (615,000 | ) | | | (709,000 | ) |
| Contingent earnout liability | | | (1,505,000 | ) | | | (2,185,000 | ) |
| Income taxes payable | | | 7,000 | | | | (413,000 | ) |
| Net cash provided by operating activities | | | 5,287,000 | | | | 2,399,000 | |
| Cash Flows From Investing Activities: | | | | | | | | |
| Proceeds from condemnation settlement | | | 529,000 | | | | - | |
| Capital expenditures and other non-current assets | | | (1,235,000 | ) | | | (578,000 | ) |
| Net cash used by investing activities | | | (706,000 | ) | | | (578,000 | ) |
| Cash Flows From Financing Activities: | | | | | | | | |
| Dividends paid | | | (6,502,000 | ) | | | (5,946,000 | ) |
| Exercise of stock options | | | 142,000 | | | | 286,000 | |
| Tax asset from vested restricted stock and stock options exercised | | | 168,000 | | | | 27,000 | |
| Net cash used by financing activities | | | (6,192,000 | ) | | | (5,633,000 | ) |
| | | | | | | | | |
| Net decrease in cash and cash equivalents | | | (1,611,000 | ) | | | (3,812,000 | ) |
| Cash and cash equivalents at beginning of period | | | 22,816,000 | | | | 24,613,000 | |
| Cash and cash equivalents at end of period | | $ | 21,205,000 | | | $ | 20,801,000 | |
| | | | | | | | | |
| Supplemental Disclosure of Cash Flow Information: | | | | | | | | |
| Cash transactions: | | | | | | | | |
| Income taxes paid | | $ | 4,820,000 | | | $ | 3,128,000 | |
| Contingent earnout payment | | $ | 3,005,000 | | | $ | 2,185,000 | |
Refer to Notes to Consolidated Financial Statements (Unaudited).
BOLT TECHNOLOGY CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 – Basis of Presentation
The Consolidated Balance Sheet as of March 31, 2014, the Consolidated Statements of Income for the three month and nine month periods ended March 31, 2014 and 2013 and the Consolidated Statements of Cash Flows for the nine month periods ended March 31, 2014 and 2013 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.
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 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 using the capitalized cash flow method. 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 identify any indicators of impairment.
The Company reviewed A-G, RTS and SBX goodwill as of March 31, 2014 and no indicators of impairment were 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.
The Company reviewed the SBX intangible asset with an indefinite life at March 31, 2014 and June 30, 2013 and no indicators of impairment were identified.
The Company reviewed the RTS intangible asset with an indefinite life at March 31, 2014 and 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 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 March 31, 2014 and June 30, 2013 did not identify any 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.
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 nine month periods ended March 31, 2014 and 2013:
| | | Three Months Ended
March 31, | | | Nine Months Ended
March 31, | |
| | | 2014 | | | 2013 | | | 2014 | | | 2013 | |
| | | | | | | | | | | | | |
| Net income available to common stockholders | | $ | 2,456,000 | | | $ | 1,381,000 | | | $ | 7,837,000 | | | $ | 4,786,000 | |
| | | | | | | | | | | | | | | | | |
| Divided by: | | | | | | | | | | | | | | | | |
| Weighted average common shares | | | 8,676,381 | | | | 8,625,390 | | | | 8,661,090 | | | | 8,602,916 | |
| Weighted average common share equivalents | | | 15,753 | | | | 2,049 | | | | 13,859 | | | | 2,125 | |
| Total weighted average common shares and common share equivalents | | | 8,692,134 | | | | 8,627,439 | | | | 8,674,949 | | | | 8,605,041 | |
| | | | | | | | | | | | | | | | | |
| Basic earnings per share | | $ | 0.28 | | | $ | 0.16 | | | $ | 0.90 | | | $ | 0.56 | |
| Diluted earnings per share | | $ | 0.28 | | | $ | 0.16 | | | $ | 0.90 | | | $ | 0.56 | |
For the three month periods ended March 31, 2014 and 2013, the calculation did not include options to acquire 55,000 shares and 18,250 shares, respectively, since the inclusion of these shares would have been anti-dilutive.
Reclassification
Certain amounts in the Consolidated Statement of Cash Flows (Unaudited) for the nine month period ended March 31, 2013 have been reclassified to conform to the current period classification.
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.
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 March 31, 2014:
| | | 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 | |
| Earnout paid in fiscal year 2014 | | | (3,005,000 | ) |
| Balance at March 31, 2014 | | $ | 1,810,000 | |
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 the remaining earnout period which ends on December 31, 2014. If the Company determines that it is more likely than not that estimated earnout payments for the calendar year ending December 31, 2014 will exceed $1,810,000, 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 $1,810,000 and $3,315,000 contingent earnout liability at March 31, 2014 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:
| | | March 31,
2014 | | | June 30,
2013 | |
| | | | | | | |
| Raw materials and sub-assemblies | | $ | 18,460,000 | | | $ | 15,268,000 | |
| Work-in-process | | | 3,055,000 | | | | 2,495,000 | |
| | | | 21,515,000 | | | | 17,763,000 | |
| Less – Reserve for inventory valuation | | | (1,077,000 | ) | | | (626,000 | ) |
| | | $ | 20,438,000 | | | $ | 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 nine month period ended March 31, 2014, the inventory valuation reserve was increased by $451,000 and no items were scrapped or disposed.
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 March 31, 2014 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 21% of the Company’s total assets at March 31, 2014 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
March 31, | | | Nine Months Ended
March 31, | |
| | | 2014 | | | 2013 | | | 2014 | | | 2013 | |
| Gain on condemnation settlement | | $ | - | | | $ | - | | | $ | (507,000 | ) | | $ | - | |
| Interest income | | | (53,000 | ) | | | (40,000 | ) | | | (158,000 | ) | | | (105,000 | ) |
| | | $ | (53,000 | ) | | $ | (40,000 | ) | | $ | (665,000 | ) | | $ | (105,000 | ) |
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 nine month periods ended March 31 is as follows:
| | | 2014 | | | 2013 | |
| | | | | | | |
| 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 | | | 4 | | | | - | |
| Other | | | - | | | | 2 | |
| State taxes | | | 3 | | | | - | |
| Effective tax rate | | | 37 | % | | | 33 | % |
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 March 31, 2014 and June 30, 2013. There were no unallocated tax reserves at March 31, 2014 and June 30, 2013. The Company’s federal income tax returns for fiscal years prior to fiscal year 2011 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
for
Identical
Assets
(Level 1) | | | Significant
Other
Observable
Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | | | Total | |
| Liabilities | | | | | | | | | | | | | | | | |
| At March 31, 2014 — Contingent earnout liability | | $ | — | | | $ | — | | | $ | 1,810,000 | | | $ | 1,810,000 | |
| 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 March 31, 2014:
| | | Fair Value
of
Contingent
Earnout | |
| | | Liability | |
| | | | |
| Balance at June 30, 2013 | | $ | 3,315,000 | |
| Adjustment to contingent earnout liability | | | 1,500,000 | |
| Cash payment for achieving performance threshold | | | (3,005,000 | ) |
| Balance at March 31, 2014 | | $ | 1,810,000 | |
The Company determined the fair value of the contingent earnout liability at March 31, 2014 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 earnout liability is classified within Level 3 of the fair value hierarchy. There were no significant changes to this methodology during the nine month period ended March 31, 2014 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 March 31, 2014 (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 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 can be granted and awards of restricted stock can 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
Stock option compensation expense was $141,000 and $184,000 for the nine month periods ended March 31, 2014 and 2013, respectively.
A summary of changes in stock options during the nine month period ended March 31, 2014 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 | | | 55,000 | | | $ | 21.16 | | | | - | | | $ | - | |
| Exercised | | | (500 | ) | | $ | 15.43 | | | | (30,050 | ) | | $ | (12.30 | ) |
| Options outstanding at March 31, 2014 | | | 104,500 | | | $ | 18.45 | | | | 53,375 | | | $ | 12.35 | |
During the three months ended March 31, 2014, stock option grants for 55,000 shares were awarded in January 2014 under the 2012 Plan. The fair value per share of options granted in January 2014 was $1.88, as estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
| | | January | |
| | | 2014 | |
| | | Grant | |
| Expected dividend yield | | | 3.87 | % |
| Stock price volatility | | | 19 | % |
| Expected life (years) | | | 5 years | |
| Expected forfeiture rate | | | 0 | % |
| Risk-free interest rate | | | 0.8 | % |
At March 31, 2014, the aggregate intrinsic value for outstanding options was $535,000, because the market price of the Company’s Common Stock at March 31, 2014 was higher than the weighted average exercise price of such options.
Restricted Stock
During the nine month period ended March 31, 2014, 33,100 shares of restricted stock were granted under the 2012 Plan. Of these shares, 28,000, 600 and 4,500 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 nine month period ended March 31, 2013, 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 nine month periods ended March 31, 2014 and 2013 was $618,000 and $479,000, 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 $389,000 and $380,000 for the nine month periods ended March 31, 2014 and 2013, respectively.
A summary of changes in restricted stock awards during the nine month period ended March 31, 2014 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 | | | 33,100 | | | $ | 18.67 | | | | - | | | $ | - | |
| Vested | | | (3,600 | ) | | $ | 14.33 | | | | (30,300 | ) | | $ | 12.61 | |
| Unvested restricted stock awards outstanding at March 31, 2014 | | | 34,700 | | | $ | 18.50 | | | | 60,800 | | | $ | 12.47 | |
Note 10 - Stockholders’ Equity
Changes in issued Common Stock and Stockholders’ Equity for the nine month period ended March 31, 2014 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 | | | — | | | | 530,000 | | | | — | | | | — | | | | — | | | | 530,000 | |
| Stock options exercised | | | 17,389 | | | | 142,000 | | | | — | | | | — | | | | — | | | | 142,000 | |
| Tax asset from vested restricted stock and stock options exercised | | | — | | | | 138,000 | | | | — | | | | — | | | | — | | | | 138,000 | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | 7,837,000 | | | | 7,837,000 | |
| Dividends ($0.77 per share) | | | — | | | | — | | | | — | | | | — | | | | (6,679,000 | ) | | | (6,679,000 | ) |
| Balance March 31, 2014 | | | 8,878,592 | | | $ | 33,020,000 | | | | 202,075 | | | $ | (1,926,000 | ) | | $ | 41,583,000 | | | $ | 72,677,000 | |
At March 31, 2014 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 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.
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.
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 nine month periods ended March 31, 2014 and 2013:
| | | | | | | | | Seismic | | | | | | Corporate | | | | |
| | | Seismic | | | Underwater | | | Energy | | | Underwater | | | Headquarters | | | | |
| | | Energy | | | Cables & | | | Source | | | Robotic | | | & | | | | |
| | | Sources | | | Connectors | | | Controllers | | | Vehicles | | | Eliminations | | | Consolidated | |
| Nine Months Ended March 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales to external customers | | $ | 18,947,000 | | | $ | 13,355,000 | | | $ | 3,801,000 | | | $ | 17,565,000 | | | $ | — | | | $ | 53,668,000 | |
| Intersegment sales | | | 926,000 | | | | 321,000 | | | | 739,000 | | | | — | | | | (1,986,000 | ) | | | — | |
| Depreciation and amortization | | | 215,000 | | | | 232,000 | | | | 56,000 | | | | 705,000 | | | | 14,000 | | | | 1,222,000 | |
| Income (loss) before income taxes | | | 5,067,000 | | | | 5,271,000 | | | | 1,842,000 | | | | 3,152,000 | | | | (2,862,000 | ) | | | 12,470,000 | |
| Fixed asset additions | | | 336,000 | | | | 647,000 | | | | 109,000 | | | | 138,000 | | | | — | | | | 1,230,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales to external customers | | $ | 4,786,000 | | | $ | 3,761,000 | | | $ | 755,000 | | | $ | 6,414,000 | | | $ | — | | | $ | 15,716,000 | |
| Intersegment sales | | | 199,000 | | | | 67,000 | | | | 198,000 | | | | — | | | | (464,000 | ) | | | — | |
| Depreciation and amortization | | | 77,000 | | | | 81,000 | | | | 20,000 | | | | 237,000 | | | | 4,000 | | | | 419,000 | |
| Income (loss) before income taxes | | | 810,000 | | | | 1,529,000 | | | | 270,000 | | | | 2,022,000 | | | | (1,007,000 | ) | | | 3,624,000 | |
| Fixed asset additions | | | 220,000 | | | | 43,000 | | | | 29,000 | | | | 85,000 | | | | — | | | | 377,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet Data at March 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment assets | | $ | 18,294,000 | | | $ | 16,230,000 | | | $ | 6,110,000 | | | $ | 23,485,000 | | | $ | 18,894,000 | | | $ | 83,013,000 | |
| Goodwill | | | — | | | | 7,679,000 | | | | 3,278,000 | | | | 6,270,000 | | | | — | | | | 17,227,000 | |
| Other intangible assets | | | 117,000 | | | | — | | | | 304,000 | | | | 5,954,000 | | | | — | | | | 6,375,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended March 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales to external customers | | $ | 17,263,000 | | | $ | 11,964,000 | | | $ | 1,845,000 | | | $ | 8,849,000 | | | $ | — | | | $ | 39,921,000 | |
| Intersegment sales | | | — | | | | 269,000 | | | | 447,000 | | | | — | | | | (716,000 | ) | | | — | |
| Depreciation and amortization | | | 150,000 | | | | 220,000 | | | | 181,000 | | | | 688,000 | | | | 14,000 | | | | 1,253,000 | |
| Income (loss) before income taxes | | | 3,918,000 | | | | 4,538,000 | | | | 561,000 | | | | 796,000 | | | | (2,711,000 | ) | | | 7,102,000 | |
| Fixed asset additions | | | 58,000 | | | | 391,000 | | | | 2,000 | | | | 105,000 | | | | — | | | | 556,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales to external customers | | $ | 4,687,000 | | | $ | 3,845,000 | | | $ | 252,000 | | | $ | 2,459,000 | | | $ | — | | | $ | 11,243,000 | |
| Intersegment sales | | | — | | | | 111,000 | | | | 211,000 | | | | — | | | | (322,000 | ) | | | — | |
| Depreciation and amortization | | | 49,000 | | | | 75,000 | | | | 42,000 | | | | 231,000 | | | | 5,000 | | | | 402,000 | |
| Income (loss) before income taxes | | | 1,371,000 | | | | 1,478,000 | | | | (1,000 | ) | | | 13,000 | | | | (884,000 | ) | | | 1,977,000 | |
| Fixed asset additions | | | 4,000 | | | | 28,000 | | | | — | | | | 70,000 | | | | — | | | | 102,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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.
Note 13 – Subsequent Event
On April 24, 2014, the Company’s Board of Directors approved a quarterly dividend of $0.09 per common share, which will be paid on July 9, 2014 to stockholders of record on June 12, 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 budgetary levels 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.
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 nine month period ended March 31, 2014 increased by $13,747,000 or 34% from the nine month period ended March 31, 2013.
The combined sales for the three marine seismic data acquisition segments increased from $31,072,000 for the nine month period ended March 31, 2013 to $36,103,000 for the nine month period ended March 31, 2014, an increase of $5,031,000 or 16% 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 sales for the nine month period ended March 31, 2014 and the current level of customer orders and inquiries, the Company anticipates that sales and operating results for the three marine seismic data acquisition segments will be strong for fiscal year 2014.
Sales of underwater robotic vehicles increased from $8,849,000 for the nine month period ended March 31, 2013 to $17,565,000 for the nine month period ended March 31, 2014, an increase of $8,716,000 or 98% due primarily to higher shipments to the U.S. government. Based on the results for the nine month period ended March 31, 2014 and current orders, the Company anticipates that fiscal year 2014 sales and operating results for this segment will be strong.
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.” During the quarter ended March 31, 2014, a contingent earnout payment amounting to $3,005,000 was paid to the former stockholders of SBX, resulting in the balance of the contingent earnout liability at March 31, 2014 being $1,810,000.
During the nine month period ended March 31, 2014, 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 March 31, 2014 remained strong with cash of $21,205,000, working capital of $45,595,000 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 March 31, 2014, 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 January 22, 2014, the Company’s Board of Directors approved a quarterly dividend of $0.09 per common share payable on April 2, 2014 to stockholders of record on March 5, 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 March 31, 2014, 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 nine month period ended March 31, 2014.
Nine Months Ended March 31, 2014
At March 31, 2014, the Company had $21,205,000 in cash and cash equivalents, as compared to $20,801,000 at March 31, 2013. The increase in cash and cash equivalents was primarily due to cash provided from operations and cash received from a condemnation settlement, partially offset by a contingent earnout payment, dividends paid and capital expenditures.
For the nine month period ended March 31 2014, cash flow from operating activities after changes in working capital items was $5,287,000, primarily due to net income adjusted for non-cash items and lower accounts receivable, partially offset by higher inventory and lower current liabilities. For the nine month period ended March 31, 2013, cash flow from operating activities after changes in working capital items was $2,399,000, primarily due to net income adjusted for non-cash items, partially offset by lower current liabilities.
For the nine month period ended March 31, 2014, cash used in investing activities was $706,000, primarily due to capital expenditures for new and replacement equipment ($1,230,000), partially offset by proceeds from a condemnation settlement ($529,000). For the nine month period ended March 31, 2013, cash used in investing activities was $578,000, primarily due to capital expenditures for new and replacement equipment ($556,000).
For the nine month period ended March 31, 2014, cash used in financing activities was $6,192,000, primarily due to payment of cash dividends ($6,502,000). For the nine month period ended March 31, 2013, cash used in financing activities was $5,633,000, primarily due to payment of cash dividends ($5,946,000).
The Company anticipates that capital expenditures for the remainder of fiscal year 2014 will not exceed $200,000 and will be funded from operating cash flow.
Since a relatively small number of customers account for the majority of the Company’s sales, the consolidated accounts receivable balance at the end of any period tends to be concentrated in a small number of customers. At March 31, 2014 and June 30, 2013, the five customers with the highest accounts receivable balances represented 75% 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 March 31, 2014.
Contractual Obligations
The Company had no long-term borrowings, capital leases, purchase obligations or other long-term liabilities at March 31, 2014.
Results of Operations
Nine Months Ended March 31, 2014 Compared to Nine Months Ended March 31, 2013
Consolidated sales for the nine month period ended March 31, 2014 totaled $53,668,000, an increase of $13,747,000 or 34% from the nine month period ended March 31, 2013. The increase in net sales by reportable segment was as follows: seismic energy sources increased by $1,684,000 (10%), underwater cables and connectors increased by $1,391,000 (12%), seismic energy source controllers increased by $1,956,000 (106%) and underwater robotic vehicles increased by $8,716,000 (98%).
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 52% for the nine month period ended March 31, 2014 versus 47% for the nine month period ended March 31, 2013. The increase in the gross profit percentage reflects higher manufacturing efficiencies associated with the 34% increase in consolidated sales.
Research and development (“R&D”) costs in the nine month period ended March 31, 2014 increased $1,061,000 or 52% from the nine month period ended March 31, 2013. The increase was primarily due to costs associated with the joint development effort with WesternGeco to develop an environmentally friendly seismic energy source, and higher R&D at the underwater robotics segment.
Selling, general and administrative (“SG&A”) expenses increased by $1,723,000 or 18% in the nine month period ended March 31, 2014 from the nine month period ended March 31, 2013. The increase was primarily due to higher compensation costs and advertising/trade show expense.
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 nine month period ended March 31, 2014. 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 for additional information concerning SBX.
Other income increased by $560,000 in the nine month period ended March 31, 2014 from the nine month period ended March 31, 2013, 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.
The provision for income taxes for the nine month period ended March 31, 2014 was $4,633,000, an effective tax rate of 37%. 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 nine month period ended March 31, 2013 was $2,316,000, an effective tax rate of 33%. This rate was lower than the federal statutory rate of 34%, due to tax benefits associated with the domestic manufacturer’s deduction, partially offset by non-deductible expenses and state income taxes.
The above mentioned factors resulted in net income for the nine month period ended March 31, 2014 of $7,837,000, compared to net income of $4,786,000 for the nine month period ended March 31, 2013.
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
Consolidated sales for the three month period ended March 31, 2014 totaled $15,716,000, an increase of $4,473,000 or 40% from the three month period ended March 31, 2013. The change in sales by reportable segment was as follows: seismic energy sources increased by $99,000 (2%), underwater cables and connectors decreased by $84,000 (2%), seismic energy source controllers increased by $503,000 (200%), and underwater robotic vehicles increased by $3,955,000 (161%).
The increase in sales in the underwater robotics segment was primarily due to higher sales to the U.S. government.
Consolidated gross profit as a percentage of consolidated sales was 53% for the three month period ended March 31, 2014 versus 50% for the three month period ended March 31, 2013. The increase in the gross profit percentage reflects higher manufacturing efficiencies associated with the 40% increase in consolidated sales.
R&D costs for the three month period ended March 31, 2014 increased to $1,154,000 from $586,000 for the three month period ended March 31, 2013. The increase was primarily due to costs associated with the joint development effort with WesternGeco to develop an environmentally friendly seismic energy source and higher SBX R&D.
SG&A expense increased by $592,000 or 19% in the three month period ended March 31, 2014 from the three month period ended March 31, 2013. The increase was primarily due to higher compensation costs and advertising/trade show expense.
The provision for income taxes for the three month period ended March 31, 2014 was $1,168,000, 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 state income taxes. The provision for income taxes for the three month period ended March 31, 2013 was $596,000, an effective tax rate of 30%. This rate was lower than the federal statutory rate of 34%, primarily due to tax benefits associated with the domestic manufacturer’s deduction.
The above mentioned factors resulted in net income for the three month period ended March 31, 2014 of $2,456,000, compared to net income of $1,381,000 for the three month period ended March 31, 2013.
Critical Accounting Policies
The methods, estimates and judgments the Company uses in applying the accounting policies most critical to its financial statements have a significant impact on the results the Company reports in its financial statements. The Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of the Company’s financial condition and results, and require the Company to make its most difficult and subjective judgments.
Based on this definition, the Company’s most critical accounting policies include: revenue recognition, recording of inventory reserves, valuation of acquisitions, contingent earnout liability, deferred taxes, and the potential impairment of goodwill, intangible assets with indefinite lives and other long-lived assets. These policies are discussed below. The Company also has other key accounting policies, including the establishment of an allowance for uncollectible accounts. The Company believes that these other policies either do not generally require it to make estimates and judgments that are as difficult or as subjective, or are less likely to have a material impact on the Company’s reported results of operations for a given period.
Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the end of each reporting period and involve inherent risks and uncertainties. Actual results may differ significantly from the Company’s estimates and its estimates could be different using different assumptions or conditions.
Refer to Note 2 to Consolidated Financial Statements (Unaudited) for additional information concerning significant accounting policies.
Revenue Recognition
The Company recognizes sales revenue when it is realized and earned. The Company’s reported sales revenue is based on meeting the following criteria: (1) manufacturing products based on customer specifications; (2) establishing a set sales price with the customer; (3) delivering product to the customer before the close of the reporting period, whereby delivery results in the transfer of ownership risk to the customer; (4) collecting the sales revenue from the customer is reasonably assured; and (5) no contingencies exist.
Inventory Reserves
A significant source of the Company’s revenue arises from the sale of replacement parts required by customers who have previously purchased products. As a result, the Company maintains a large quantity of parts on hand that may not be sold or used in final assemblies for an extended period of time. In order to recognize that certain inventory may become obsolete or that the Company may have supplies in excess of reasonably supportable sales forecasts, an inventory valuation reserve has been established. The inventory valuation reserve is a significant estimate made by management based on experience and the exercise of professional judgment. Actual results may differ from this estimate, and the difference could be material.
Management establishes the inventory valuation reserve by reviewing the inventory for items that should be reserved in full based on a lack of usage for a specified period of time and for which future demand is not forecasted and establishes an additional reserve for slow moving inventory based on varying percentages of the cost of the items. The inventory valuation reserve is adjusted at the close of each accounting period, as necessary, based on management’s estimate of the inventory valuation reserve required. This estimate is calculated on a consistent basis as determined by the Company’s inventory valuation policy. Increases to the inventory valuation reserve result in a charge to cost of sales, and decreases to the reserve result in a credit to cost of sales. The inventory valuation reserve is also decreased when items are scrapped or disposed.During the nine month period ended March 31, 2014, the inventory valuation reserve was increased by $451,000 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.
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.” During the quarter ended March 31, 2014, a contingent earnout payment amounting to $3,005,000 was paid to the former stockholders of SBX, resulting in the balance of the contingent earnout liability at March 31, 2014 being $1,810,000.
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 March 31, 2014 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.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 using the capitalized cash flow method. 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 identify any indicators of impairment.
The Company reviewed A-G, RTS and SBX goodwill as of March 31, 2014 and no indicators of impairment were identified.
Goodwill represents approximately 21% of the Company’s total assets at March 31, 2014. 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 SBX intangible asset with an indefinite life at March 31, 2014 and June 30, 2013 and no indicators of impairment were identified.
The Company reviewed the RTS intangible asset with an indefinite life at March 31, 2014 and 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 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 March 31, 2014 and June 30, 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.
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 March 31, 2014. 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 March 31, 2014 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 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 nine month period ended March 31, 2014. As of March 31, 2014, $8,074,000 remained available for repurchase under the existing repurchase authorization.
Item 5 – Other Information
Joseph Espeso, the Senior Vice President-Finance and Chief Financial Officer, has decided to retire from the Company, with an anticipated retirement date of September 15, 2014. Following his retirement as Senior Vice President-Finance and Chief Financial Officer, Mr. Espeso will continue to serve on the Company’s Board of Directors.
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. |
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: May 8, 2014 | | /s/ Raymond M. Soto |
| | | Raymond M. Soto Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |
| | | |
| Date: May 8, 2014 | | /s/ Joseph Espeso |
| | | Joseph Espeso Senior Vice President-Finance and Chief Financial Officer (Principal Financial and Accounting Officer) |
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. |
