Item 1 – Financial Statements
BOLT TECHNOLOGY CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended
September 30,
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2007
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2006
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Sales
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$
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15,261,000
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$
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10,001,000
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Costs and Expenses:
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Cost of sales
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8,193,000
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5,434,000
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Research and development
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69,000
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81,000
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Selling, general and administrative
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2,036,000
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1,567,000
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Interest income
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(58,000
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)
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(42,000
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)
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10,240,000
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7,040,000
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Income before income taxes
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5,021,000
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2,961,000
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Provision for income taxes
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1,566,000
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959,000
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Net income
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$
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3,455,000
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$
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2,002,000
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Earnings per share:
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Basic
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$
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0.60
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$
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0.36
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Diluted
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$
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0.60
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$
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0.35
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Average shares outstanding:
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Basic
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5,721,065
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5,571,933
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Diluted
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5,721,510
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5,676,731
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See Notes to Consolidated Financial Statements (Unaudited).
3
BOLT TECHNOLOGY CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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September 30,
2007
(unaudited)
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June 30,
2007
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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6,856,000
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$
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9,988,000
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Accounts receivable, net
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12,268,000
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10,619,000
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Inventories, net
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12,956,000
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11,921,000
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Deferred income taxes
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246,000
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228,000
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Other
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367,000
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466,000
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Total current assets
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32,693,000
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33,222,000
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Property, Plant and Equipment, net
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3,831,000
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3,204,000
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Goodwill and Other Assets
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14,653,000
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11,079,000
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Total assets
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$
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51,177,000
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$
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47,505,000
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current Liabilities:
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Accounts payable
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$
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3,340,000
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$
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3,668,000
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Accrued expenses
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1,600,000
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2,622,000
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Income taxes payable
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1,452,000
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—
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Total current liabilities
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6,392,000
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6,290,000
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Deferred Income Taxes
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565,000
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529,000
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Total liabilities
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6,957,000
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6,819,000
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Stockholders’ Equity:
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Common stock
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28,414,000
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28,335,000
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Retained earnings
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15,806,000
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12,351,000
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Total stockholders’ equity
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44,220,000
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40,686,000
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Total liabilities and stockholders’ equity
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$
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51,177,000
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$
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47,505,000
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See Notes to Consolidated Financial Statements (Unaudited).
4
BOLT TECHNOLOGY CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three Months Ended
September 30,
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2007
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2006
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Cash Flows From Operating Activities:
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Net income
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$
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3,455,000
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$
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2,002,000
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Adjustments to reconcile net income to cash provided by operating activities:
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Depreciation and amortization
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101,000
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92,000
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Deferred income taxes
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28,000
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9,000
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Stock based compensation expense
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33,000
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—
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3,617,000
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2,103,000
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Changes in operating assets and liabilities, net of effects of Real Time Systems Inc. purchase:
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Accounts receivable
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(1,234,000
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)
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599,000
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Inventories
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(662,000
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)
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(1,578,000
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Other assets
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106,000
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(62,000
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)
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Accounts payable
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(328,000
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)
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394,000
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Accrued expenses
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(1,024,000
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)
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(561,000
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)
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Income taxes payable
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1,452,000
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(4,000
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)
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Customer deposits
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—
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520,000
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Net cash provided by operating activities
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1,927,000
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1,411,000
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Cash Flows From Investing Activities:
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Purchase of Real Time Systems Inc., net of cash acquired
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(4,468,000
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)
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—
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Purchase of property, plant and equipment
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(637,000
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)
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(113,000
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)
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Net cash used by investing activities
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(5,105,000
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)
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(113,000
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)
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Cash Flows From Financing Activities:
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Tax benefits from stock options exercised
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46,000
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—
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Net cash provided by financing activities
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46,000
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—
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Net (decrease) increase in cash and cash equivalents
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(3,132,000
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)
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1,298,000
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Cash and cash equivalents at beginning of period
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9,988,000
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4,580,000
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Cash and cash equivalents at end of period
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$
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6,856,000
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$
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5,878,000
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Supplemental disclosure of cash flow information:
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Cash transactions:
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Income taxes paid
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$
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14,000
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$
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954,000
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See Notes to Consolidated Financial Statements (Unaudited).
5
BOLT TECHNOLOGY CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 – Basis of
Presentation
The consolidated balance sheet as of September 30, 2007, the consolidated statements of operations for the three
month periods ended September 30, 2007 and 2006 and the consolidated statements of cash flows for the three month periods ended September 30, 2007 and 2006 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 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, 2007.
Note 2 – Description of Business and Significant Accounting Policies
The Company
consists of four operating units: Bolt Technology Corporation (“Bolt”), A-G Geophysical Products, Inc. (“A-G”), Real Time Systems Inc. (“RTS”), which was acquired effective July 1, 2007, and Custom Products
Corporation (“Custom Products”). Bolt, A-G and RTS are in the “geophysical equipment” segment. Bolt manufactures and sells air guns and replacement parts, A-G manufactures and sells underwater cables, connectors, hydrophones and
seismic source monitoring systems and RTS manufactures and sells air gun controllers and synchronizers. Custom Products, which is in the “industrial products” segment, manufactures and sells miniature industrial clutches and brakes and
sells sub-fractional horsepower electrical motors.
Principles of Consolidation:
The Consolidated Financial Statements 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.
Allowance for Uncollectible Accounts:
The allowance
for uncollectible accounts is established through a provision for bad debts charged to expense. Accounts receivable are charged against the allowance for uncollectible accounts when the Company believes that collectibility of the principal is
unlikely. The allowance is an amount that the Company believes will be adequate to absorb estimated losses on existing
6
accounts receivable balances, based on the evaluation of their collectibility and prior bad debt experience. This evaluation also takes into consideration
such factors as changes in the nature and volume of the accounts receivable, overall quality of accounts receivable, review of specific problem accounts receivable, and current economic and industry conditions that may affect the customers’
ability to pay. While the Company uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic and industry conditions or any other factors considered
in the Company’s evaluation.
Inventories:
Inventories are valued at the lower of cost or market, with cost principally determined on an average cost method that approximates the first-in, first-out method. The Company maintains an inventory valuation reserve to provide for slow
moving and obsolete inventory. Amounts are charged to the reserve when the Company scraps or disposes of inventory. See Note 5 to Consolidated Financial Statements (Unaudited) for additional information concerning inventories.
Property, Plant and Equipment:
Property, plant and
equipment are stated at cost. Depreciation for financial accounting purposes is computed using the straight-line method over the estimated useful lives of 40 years for buildings, over the term of the lease for leasehold improvements and 5 to 10
years for machinery and equipment. Major improvements that add to the productive capacity or extend the life of an asset are capitalized, while repairs and maintenance are charged to expense as incurred. See Note 6 to Consolidated Financial
Statements (Unaudited) for additional information concerning property, plant and equipment.
Goodwill and Other Long-Lived Assets:
Goodwill represents the unamortized excess cost over the value of net tangible assets acquired in business combinations. As required by SFAS No. 142,
“Goodwill and Other Intangible Assets,” the Company tests goodwill for impairment annually or more frequently if impairment indicators arise. Step one of the goodwill impairment test is to compare the “fair value” of the
reporting unit with its “carrying amount.” The fair value of a reporting unit is the amount that a willing party would pay to buy or sell the unit other than in a forced liquidation sale. The carrying amount of a reporting unit is total
assets, including goodwill, minus total liabilities. If the fair value of a reporting unit is greater than the carrying amount, the Company considers goodwill not to be impaired. If the fair value is below the carrying amount, the Company would
proceed to the next step, which is to measure the impairment loss. Any such impairment loss would be recognized in the Company’s results of operations in the period in which the impairment loss arose. Goodwill was tested for impairment as of
July 1, 2007 and 2006, and the tests indicated no impairment.
7
The Company’s approach to determining the fair value of the Custom Products and A-G reporting units
was based on three different valuation methods: (a) a capitalized cash flow method which relies on historical financial performance, an estimate of the long-term growth rate in free cash flows and a determination of the weighted average cost of
capital of each reporting unit, (b) a market price method that gives consideration to the prices paid for publicly traded stocks, and (c) a projected net income method that examines the projected net income of certain publicly traded
stocks to determine a multiple of earnings that should be applied to the business unit’s estimated earnings.
The estimated fair
values of the Custom Products and A-G reporting units were determined utilizing each of the above methods, and the valuation methods were analyzed as indicators of value. Based on the foregoing, the Company determined that there was no impairment.
See Note 3 to Consolidated Financial Statements (Unaudited) for additional information concerning goodwill.
The Company’s other
long-lived assets consist of property, plant and equipment 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. The Company’s reviews as of
September 30, 2007 and June 30, 2007 did not result in any indicators of impairment, and therefore no impairment tests were performed on these other long-lived assets.
Revenue Recognition and Warranty Costs:
The Company recognizes sales revenue when it is realized and
earned. The Company’s reported sales revenue is based on meeting the following criteria: (1) manufacturing products based on customer specifications; (2) delivering product to the customer before the close of the reporting period,
whereby delivery results in the transfer of ownership risk to the customer; (3) establishing a set sales price with the customer; (4) collecting the sales revenue from the customer is reasonably assured; and (5) no contingencies exist.
Warranty costs and product returns incurred by the Company have not been significant.
Income Taxes:
The provision for income taxes is
determined under the liability method. Deferred tax assets and liabilities are recognized based on differences between the book and tax bases of assets and liabilities using currently enacted tax rates. The provision (benefit) for income taxes is
the sum of the amount of income tax paid or payable for the period determined by applying the provisions of enacted tax laws to the taxable income for that period and the net change during the period in the Company’s deferred tax assets and
liabilities. See Note 4 to Consolidated Financial Statements (Unaudited) for additional information concerning the provision for income taxes and deferred tax accounts.
8
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 valuation reserves, goodwill impairment and the realization of deferred tax assets. Actual results could differ from those estimates.
Computation of Earnings Per Share:
Basic earnings per share is computed by dividing net income by the average number of
common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the average number of common shares outstanding assuming dilution, the calculation of which assumes that all stock options are exercised at
the beginning of the period and the proceeds used to purchase shares at the average market price for the period. The following is a reconciliation of basic earnings per share to diluted earnings per share for the three month periods ended
September 30, 2007 and 2006:
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Three Months Ended
September 30,
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|
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2007
|
|
2006
|
|
Net income available to common stockholders
|
|
$
|
3,455,000
|
|
$
|
2,002,000
|
|
|
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Divided by:
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Weighted average common shares outstanding (basic)
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|
5,721,065
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|
|
5,571,933
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Weighted average common share equivalents
|
|
|
445
|
|
|
104,798
|
|
|
|
|
|
|
|
|
|
Total weighted average common shares and common share equivalents (diluted)
|
|
|
5,721,510
|
|
|
5,676,731
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.60
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.60
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
9
Note 3 – Goodwill and Other Assets
Goodwill and other assets consists of the following:
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|
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|
|
|
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|
|
September 30,
2007
|
|
June 30,
2007
|
|
A-G Goodwill
|
|
$
|
7,679,000
|
|
$
|
7,679,000
|
|
Custom Products Goodwill
|
|
|
3,267,000
|
|
|
3,277,000
|
|
Real Time Systems Goodwill and Other Intangible Assets
|
|
|
3,583,000
|
|
|
—
|
|
Other noncurrent assets
|
|
|
124,000
|
|
|
123,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,653,000
|
|
$
|
11,079,000
|
|
|
|
|
|
|
|
|
Real Time Systems (RTS) goodwill and other intangible assets of $3,583,000 represents the amount
of the purchase price in excess of the net tangible assets acquired in the purchase of RTS effective as of July 1, 2007. The Company is in the process of determining the allocation between goodwill and other intangible assets acquired,
such as the RTS non-compete agreement and trade name. When the determination is finalized, certain acquired intangible assets may qualify for amortization and such amortization will be recorded at that time. Based on the Company’s preliminary
analysis, it does not appear that the amortization of other intangible assets will be significant. See Note 10 to Consolidated Financial Statements (Unaudited) for additional information concerning the RTS acquisition.
The acquisition of Custom Products generated tax deductible goodwill which exceeded the goodwill recorded for book purposes. The goodwill reduction for
Custom Products during the three month period ended September 30, 2007 of $10,000 is a result of the tax benefits generated by the goodwill deduction for tax purposes.
See Note 2 to Consolidated Financial Statements (Unaudited) for additional information concerning goodwill.
Note 4 – Income Taxes
Income tax expense
consists of the following for the three month periods ended September 30:
|
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|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,530,000
|
|
$
|
884,000
|
|
|
State
|
|
|
7,000
|
|
|
66,000
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
29,000
|
|
|
16,000
|
|
|
State
|
|
|
—
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
1,566,000
|
|
$
|
959,000
|
|
|
|
|
|
|
|
|
|
|
10
Effective July 1, 2007, the Company adopted FASB Interpretation No. 48 (“FIN 48”),
“Accounting for Uncertainty in Income Taxes.” Adoption of FIN 48 required the Company to review all open tax years in all tax jurisdictions to determine if there were any uncertain income tax positions that would require recognition in the
Company’s financial statements, including any penalties and interest, based on the “more-likely-than-not” criterion. This review is based on a two-step process. The first step is recognition. The Company determines whether it is more
likely than not that an income tax position will be sustained upon examination. If an income tax position meets the more-likely-than-not recognition threshold, such income tax position is then measured to determine the amount of additional income
tax expense or benefit to recognize in the financial statements. Based on its review, the Company has concluded that there were no significant income tax positions that would require the providing of additional income taxes or the recognition of any
tax benefit in the Company’s financial statements. There were no unallocated tax reserves at September 30, 2007. The Company’s policy is to record any interest and penalties as a component of income tax expense. The Company’s
federal income tax returns for fiscal years 2006 and 2007 are subject to examination by the Internal Revenue Service.
Note 5 – Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
|
June 30,
2007
|
|
|
Raw materials and sub-assemblies
|
|
$
|
12,284,000
|
|
|
$
|
11,676,000
|
|
|
Work in process
|
|
|
1,227,000
|
|
|
|
769,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,511,000
|
|
|
|
12,445,000
|
|
|
Less - reserve for inventory valuation
|
|
|
(555,000
|
)
|
|
|
(524,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,956,000
|
|
|
$
|
11,921,000
|
|
|
|
|
|
|
|
|
|
|
|
A significant source of the Company’s revenue arises from the sale of replacement parts
required by customers who have previously purchased products. As a result, the Company maintains a large quantity of parts on hand that may not be sold or used in final assemblies for an extended period of time. In order to recognize that certain
inventory may become obsolete or that the Company may have supplies in excess of reasonably supportable sales forecasts, an inventory valuation reserve has been established. The inventory valuation reserve is a significant estimate made by
management. Actual results may differ from this estimate, and the difference could be material. Management establishes the inventory valuation reserve by reviewing the inventory for items that should be reserved in full based on a lack of usage for
a specified period of time and for which future demand is not forecasted and establishes an additional reserve for slow moving inventory based on varying percentages of the cost of the items. The reserve for inventory valuation at September 30,
2007 and June 30, 2007 was $555,000 and $524,000, respectively. At September 30, 2007 and June 30, 2007, approximately $1,452,000 and $1,401,000, respectively, of the raw materials and sub-assemblies inventory were considered
11
slow moving and subject to a reserve provision equal to all or a portion of the cost, less an estimate for scrap value. In certain instances, this inventory
has been unsold for more than five years from date of manufacture or purchase, and in other instances the Company has more than a five-year supply of inventory on hand based on recent sales volume. At September 30, 2007, the cost of inventory
for which the Company has more than a five-year supply on hand and the cost of inventory for which the Company has had no sales during the last five years amounted to approximately $721,000. Management believes that this inventory is properly valued
and appropriately reserved. Even if management’s estimate were incorrect, that would not result in a current cash charge since the cash required to manufacture or purchase the older inventory was expended in prior years.
The inventory valuation reserve is adjusted at the close of each accounting period, as necessary, based on management’s estimate of the valuation
reserve required. This estimate is calculated on a consistent basis as determined by the Company’s inventory valuation policy. Increases to the inventory valuation reserve result in a charge to cost of sales, and decreases to the reserve result
in a credit to cost of sales. The inventory valuation reserve is also decreased when items are scrapped or disposed of. During the three month period ended September 30, 2007, the inventory valuation reserve was increased by $31,000, and the
Company did not scrap or dispose of any items.
Note 6 – Property, Plant and Equipment
Property, plant and equipment are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
|
June 30,
2007
|
|
|
Land
|
|
$
|
253,000
|
|
|
$
|
253,000
|
|
|
Buildings
|
|
|
1,061,000
|
|
|
|
1,029,000
|
|
|
Leasehold improvements
|
|
|
414,000
|
|
|
|
409,000
|
|
|
Machinery and equipment
|
|
|
8,552,000
|
|
|
|
7,861,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,280,000
|
|
|
|
9,552,000
|
|
|
Less - accumulated depreciation
|
|
|
(6,449,000
|
)
|
|
|
(6,348,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,831,000
|
|
|
$
|
3,204,000
|
|
|
|
|
|
|
|
|
|
|
|
12
Note 7 – Segment Information
The Company’s reportable segments are “geophysical equipment” and “industrial products.” Bolt, A-G and, effective
July 1, 2007, RTS are in the geophysical equipment segment. Custom Products is in the industrial products segment. The following table provides selected financial information for each segment for the three month periods ended
September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geophysical
Equipment
|
|
Industrial
Products
|
|
Total
|
|
Sales
|
|
$
|
14,336,000
|
|
$
|
925,000
|
|
$
|
15,261,000
|
|
Interest income
|
|
|
58,000
|
|
|
—
|
|
|
58,000
|
|
Depreciation and amortization
|
|
|
93,000
|
|
|
8,000
|
|
|
101,000
|
|
Income before income taxes
|
|
|
4,763,000
|
|
|
258,000
|
|
|
5,021,000
|
|
Segment assets
|
|
|
46,334,000
|
|
|
4,843,000
|
|
|
51,177,000
|
|
Fixed asset additions
|
|
|
637,000
|
|
|
—
|
|
|
637,000
|
|
|
|
|
|
|
Three months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geophysical
Equipment
|
|
Industrial
Products
|
|
Total
|
|
Sales
|
|
$
|
9,046,000
|
|
$
|
955,000
|
|
$
|
10,001,000
|
|
Interest income
|
|
|
42,000
|
|
|
—
|
|
|
42,000
|
|
Depreciation and amortization
|
|
|
82,000
|
|
|
10,000
|
|
|
92,000
|
|
Income before income taxes
|
|
|
2,652,000
|
|
|
309,000
|
|
|
2,961,000
|
|
Segment assets
|
|
|
32,194,000
|
|
|
4,781,000
|
|
|
36,975,000
|
|
Fixed asset additions
|
|
|
87,000
|
|
|
26,000
|
|
|
113,000
|
The Company does not allocate income taxes to its segments.
Note 8 – Stock Options
Effective
July 1, 2005, the Company adopted SFAS 123 (Revised 2004), “Share Based Payment” (“SFAS 123 (R)”) utilizing the modified prospective approach. Under the modified prospective approach, SFAS 123 (R) applies to new awards
and to awards that were outstanding on July 1, 2005 that are substantially modified, repurchased or cancelled. Compensation cost to be recognized includes (i) compensation cost for all share-based payments granted prior to, but not yet
vested as of, July 1, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and (ii) compensation cost for all share-based payments granted subsequent to July 1, 2005, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123 (R).
The Company receives a tax deduction for certain stock
option exercises when the options are exercised, generally for the excess of the fair market value over the exercise price of the option. In accordance with SFAS 123 (R), the Consolidated Statements of Cash Flows reports tax benefits from the
exercise of stock options as financing cash flows.
The Bolt Technology Corporation 2006 Stock Option Plan (the “2006 Stock Option
Plan”) was approved by the Company’s stockholders at the November 21, 2006 Annual Meeting of Stockholders. The 2006 Stock Option Plan provides for the granting of options to non-employee
13
directors of the Company and officers and employees of the Company and its subsidiaries to purchase up to 500,000 shares of Common Stock of the Company at a
price not less than fair market value at date of grant. Options granted to employees are exercisable for a period of up to ten years. The 2006 Stock Option Plan also provides for the granting to each non-employee director of options to purchase
5,000 shares of Common Stock on the date of his or her election to the Company’s Board of Directors and each year of election thereafter ending with the Company’s 2015 Annual Meeting of Stockholders. Such options have a term of five years
from the date of grant.
The aggregate compensation expense, using the Black-Scholes option-pricing model, for outstanding grants under the
2006 Stock Option Plan was $690,000. This expense, which is a non-cash item, is being recognized in the Company’s income statement over the five-year vesting period. During the three month period ended September 30, 2007, $33,000 of such
compensation expense was recognized.
A summary of changes in the 2006 Stock Option Plan during the three month period ended
September 30, 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Contractual Life
|
|
Outstanding at June 30, 2007
|
|
43,000
|
|
$
|
28.28
|
|
4.6 years
|
|
Granted
|
|
—
|
|
|
—
|
|
—
|
|
Exercised
|
|
—
|
|
|
—
|
|
—
|
|
Expired
|
|
—
|
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding at Sept. 30, 2007
|
|
43,000
|
|
$
|
28.28
|
|
4.3 years
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value (market price at September 30, 2007 less the weighted
average exercise price) of outstanding stock options at September 30, 2007 was approximately $188,000. The expiration dates for the outstanding options at September 30, 2007 are: 25,000 shares in November 2011 and 18,000 shares in April
2012. Options outstanding at September 30, 2007, none of which were exercisable, consisted of 25,000 non-qualified and 18,000 qualified stock options.
Note 9 – Credit Line
In May 2007, the Company entered into a $4,000,000 unsecured revolving credit facility
with a bank to support general corporate purposes. The facility expires in May 2010, and the Company has an option to extend the maturity date for one year periods. Borrowings bear interest based on LIBOR plus 1%. The unpaid principal is repayable
on the earlier of an event of default or May 31, 2010, subject to extension. In addition, a commitment fee of 0.25% per year is payable based on the unused amount of the facility. The agreement requires, among other things, that the
Company maintain certain financial covenants. During the three month period ended September 30, 2007, there were no borrowings under this facility and, at September 30, 2007, the Company was in compliance with all of the covenants under
the agreement.
14
Note 10 – Real Time Systems Inc. Acquisition
In July 2007, the Company acquired substantially all of the net assets of Real Time Systems Inc. (RTS) for $4,615,000 in cash including acquisition costs
of $83,000. Additional payments may be due if RTS achieves net sales, in each of the two successive years beginning July 1, 2007, in excess of $2,000,000. Such additional payments will be calculated at 33% of net sales, in each year, in excess
of $2,000,000 but less than $2,500,000 and 20% of net sales, in each year, in excess of $2,500,000. Any additional purchase price will be added to goodwill. The results of RTS have been included in the consolidated financial statements in the
geophysical equipment segment effective from July 1, 2007.
The preliminary purchase price allocation is as follows:
|
|
|
|
|
|
Net current assets including cash of $147,000
|
|
$
|
941,000
|
|
Property and equipment
|
|
|
91,000
|
|
Goodwill and other intangible assets
|
|
|
3,583,000
|
|
|
|
|
|
|
|
|
$
|
4,615,000
|
|
|
|
|
|
See Note 3 to Consolidated Financial Statements (Unaudited) for additional information concerning
RTS goodwill and other intangible assets.
The following table summarizes, on an unaudited pro forma basis, the consolidated results of
operations of the Company for the three-month period ended September 30, 2006, assuming the acquisition of RTS was made on July 1, 2006.
|
|
|
|
|
|
Sales
|
|
$
|
11,069,000
|
|
|
|
|
|
|
Net income
|
|
$
|
2,263,000
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.41
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.40
|
|
|
|
|
|
The foregoing unaudited pro forma results are for informational purposes only and are not
necessarily indicative of the actual results of operations that might have occurred had the acquisition been consummated on July 1, 2006, nor are they necessarily indicative of results in the future.
Note 11 – Contingencies
From time to
time, the Company is a party to routine litigation and proceedings that are considered part of the ordinary course of its business. The Company is not aware of any material current or pending litigation.
15
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 Form 10-Q. This discussion includes
forward-looking statements about the demand for our products and future results. Please refer to the “Cautionary Statement for Purposes of Forward-Looking Statements” below.
Cautionary Statement for Purposes of Forward-Looking Statements
Forward-looking statements in this 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, business prospects, new products, anticipated energy industry activity, anticipated market performance, planned production
and shipping of products, expected cash needs and similar matters. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation (i) the risk of technological change relating to the
Company’s products and the risk of the Company’s inability to develop new competitive products in a timely manner, (ii) the risk of changes in demand for the Company’s products due to fluctuations in energy industry activity,
(iii) the Company’s reliance on certain significant customers, (iv) risks associated with a significant amount of foreign sales, (v) the risk of fluctuations in future operating results and (vi) 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” and similar expressions are intended to
identify forward-looking statements.
Overview
Sales
of the Company’s geophysical products are generally related to the level of worldwide oil and gas exploration and development activity, which is dependent, primarily, on oil and gas prices. After an industry wide slowdown in marine seismic
activity in fiscal 2003, marine seismic exploration activity started to improve during fiscal 2004, and this improvement has continued during fiscal 2005 through 2007 and the first three months of fiscal 2008. The high price of oil, increased
worldwide energy demand and the depletion of proven oil and natural gas reserves have contributed to an increased demand for marine seismic surveys. As a result, the demand for the Company’s geophysical products continues to be strong. The
Company’s geophysical equipment sales increased 58% in the three month period ended September 30, 2007 compared to the three month period ended September 30, 2006 as customer orders for complete energy source systems, replacement
parts for energy source systems, the Company’s Seismic Source Monitoring System (“SSMS”) and underwater electrical connectors and cables increased
16
substantially. In addition, the acquisition of Real Time Systems Inc. (“RTS”) effective July 1, 2007, a manufacturer of air gun
controllers and synchronizers, contributed to the geophysical sales increase. The Company believes that the oil services industry will continue to experience growth in fiscal 2008 due to the continued imbalance between supply and demand for
hydrocarbons, low reserve replacement rates and high commodity prices. In addition, we anticipate increased use of more sophisticated technology, such as 4-D and wide-azimuth surveys, to more effectively manage proven oil and gas reservoirs. These
surveys create a need for a larger seismic vessel fleet because such surveys require significantly more vessel time than traditional 3-D or exploration surveys.
Sales in the industrial products segment decreased by 3% for the three month period ended September 30, 2007 compared to the three month period ended September 30, 2006, due to lower sales of sub-fractional horsepower electric
motors. The Company anticipates that industrial products sales should increase during the remaining quarters of fiscal 2008 due to the addition of new customers and pricing, although sales growth is expected to moderate due to slowing growth in the
U.S. economy.
Due primarily to the increase in the geophysical equipment business as described above, the Company’s balance sheet at
September 30, 2007 remained strong. Working capital at September 30, 2007 was $26.3 million, a small decrease from the $26.9 million at June 30, 2007. This decrease was due to the acquisition, for cash, of RTS, which was substantially
offset by working capital growth attributable to the Company’s geophysical equipment business.
Liquidity and Capital Resources
As of September 30, 2007, the Company believes that current cash and cash equivalents and projected cash flow from operations are adequate to meet foreseeable
operating needs in fiscal 2008.
In May 2007, the Company entered into a $4,000,000 unsecured revolving credit agreement with a bank to provide funds
for general corporate purposes should the need arise. During fiscal 2007 and the three months ended September 30, 2007, the Company has not borrowed against this facility. See Note 9 to Consolidated Financial Statements (Unaudited) for further
information concerning the revolving credit agreement.
Three Months Ended September 30, 2007
At September 30, 2007, the Company had $6,856,000 in cash and cash equivalents. This amount is $3,132,000 or 31% lower than the amount of cash and cash equivalents
at June 30, 2007. For the three month period ended September 30, 2007, cash flow from operating activities after changes in working capital items was $1,927,000, primarily due to net income adjusted for depreciation and deferred income
taxes plus higher current liabilities and lower other assets partially offset by increases in accounts receivable and inventories.
For the three month
period ended September 30, 2007, the Company used $4,468,000, net of $147,000 of cash acquired, for the acquisition of RTS and $637,000 for capital expenditures
17
funded from operating cash flow. These capital expenditures related to new and replacement equipment and a small expansion of the Cypress, Texas
manufacturing facility.
The Company estimates that capital expenditures for fiscal 2008 will approximate $750,000, which will be funded from operating
cash flow.
Since a relatively small number of customers account for the majority of the Company’s geophysical equipment segment sales, the
consolidated accounts receivable balance at the end of any period tends to be concentrated in a small number of customers. At September 30, 2007 and June 30, 2007, the five customers with the highest balances due represented 63% and 67%,
respectively, of the consolidated accounts receivable balances on those dates.
In October 1998, the Company’s Board of Directors approved a stock
repurchase program under which the Company was authorized to buy up to 500,000 shares of its Common Stock in open market or private transactions. Although the program remains authorized, the Company has not repurchased any shares and currently has
no plan to make repurchases.
Three Months Ended September 30, 2006
At September 30, 2006, the Company had $5,878,000 in cash and cash equivalents. For the three month period ended September 30, 2006, cash and cash equivalents increased by $1,298,000 or 28% from the amount
at June 30, 2006. For the three month period ended September 30, 2006, cash flow from operating activities after changes in working capital items was $1,411,000 primarily due to net income adjusted for depreciation and deferred income
taxes, lower accounts receivable and higher current liabilities partially offset by higher inventories.
For the three month period ended
September 30, 2006, the Company used $113,000 for capital expenditures funded from operating cash flow. These expenditures related to new and replacement equipment.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet financing arrangements.
Contractual Obligations
During the three month period ended
September 30, 2007, there were no changes in the operating leases described in the Company’s Annual Report on Form 10-K for the Fiscal Year Ended June 30, 2007. The Company had no long-term borrowings, capital leases,
purchase obligations or other long-term liabilities at September 30, 2007 and June 30, 2007. See Notes 9 and 10 to Consolidated Financial Statements (Unaudited) for information regarding the Company’s credit line and possible further
payments in connection with the RTS acquisition, respectively.
18
Results of Operations
Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
Consolidated sales for the three
month period ended September 30, 2007 totaled $15,261,000, an increase of $5,260,000 or 53% from the three month period ended September 30, 2006. Sales of geophysical equipment increased by $5,290,000 or 58%, due to higher volume of sales
of complete energy source systems ($1,135,000), air gun replacement parts ($2,401,000), underwater electrical connectors and cables and seismic source monitoring systems ($847,000) and, effective July 1, 2007, air gun controllers and
synchronizers ($907,000). Higher sales in the geophysical equipment business reflect the continuing strength in marine seismic activity and the RTS acquisition. Industrial products sales for the three month period ended September 30, 2007
decreased by $30,000 or 3% compared to the three month period ended September 30, 2006 due primarily to lower sales of sub-fractional horsepower electric motors.
Consolidated gross profit as a percentage of consolidated sales (“gross margin”) was 46% for the three month period ended September 30, 2007 unchanged from the three month period ended
September 30, 2006. Gross margin for the geophysical equipment segment was 46% for the three month period ended September 30, 2007 versus 45% for the three month period ended September 30, 2006. The geophysical equipment segment
gross margin improvement was due to higher manufacturing efficiencies associated with the 58% increase in sales and higher pricing, partially offset by higher material and labor costs. Gross margin for the industrial products segment decreased from
49% for the three month period ended September 30, 2006 to 47% for the three month period ended September 30, 2007, primarily due to higher material and labor costs and lower manufacturing efficiencies associated with the 3% sales
decrease.
Research and development costs for the three month period ended September 30, 2007 decreased by $12,000 or 15% from the three months ended
September 30, 2006. These expenditures are associated with work being done to improve the Company’s Annular Port Air Guns and Seismic Source Monitoring System (“SSMS”). The decrease is due primarily to lower spending for
improvements to SSMS. SSMS is utilized to measure air gun depth, air pressure, and “near field” energy output for each gun array and to provide high pressure air flow control, thereby enhancing the accuracy and therefore the usefulness of
marine seismic survey data. The Company continues to work on a more advanced stage of SSMS which will deliver further benefits to customers.
Selling,
general and administrative expenses increased by $469,000 for the three month period ended September 30, 2007 from the three month period ended September 30, 2006 due primarily to higher professional fees ($298,000), compensation expense
($72,000) and advertising and trade show expense ($24,000). The increase in professional fees reflects expenses incurred in the three month period ended September 30, 2007 relating to compliance with Section 404 of the Sarbanes-Oxley Act;
higher compensation expense was due primarily to salary increases and the addition of personnel; and higher advertising and trade show expense reflects increased expenditures associated with promoting the Company’s geophysical products in trade
shows.
19
The provision for income taxes for the three months ended September 30, 2007 was $1,566,000, an effective tax rate
of 31%. This rate was lower than the federal statutory rate of 35%, primarily due to tax benefits associated with the domestic manufacturer’s deduction, partially offset by state income taxes and income taxes attributable to goodwill
amortization for tax purposes. The provision for income taxes for the three months ended September 30, 2006 was $959,000, an effective tax rate of 32%. This rate was lower than the federal statutory rate of 35%, primarily due to tax benefits
associated with export sales and the domestic manufacturer’s deduction partially offset by state income taxes and income taxes attributable to goodwill amortization for tax purposes.
The above mentioned factors resulted in net income for the three month period ended September 30, 2007 of $3,455,000 compared to net income of $2,002,000 for
the three month period ended September 30, 2006.
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, deferred taxes, and the potential impairment of goodwill. These policies are discussed below. The Company also has other key accounting policies, including the establishment of bad debt reserves. The Company believes that
these other policies either do not generally require it to make estimates and judgments that are as difficult or as subjective, or that it is less likely that they would have a material impact on the Company’s reported results of operations for
a given period.
Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the end of
each reporting period and involve inherent risks and uncertainties. Actual results may differ significantly from the Company’s estimates and its estimates could be different using different assumptions or conditions.
See Note 2 to Consolidated Financial Statements (Unaudited) for additional information concerning significant accounting policies.
20
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) delivering
product to the customer before the close of the reporting period, whereby delivery results in the transfer of ownership risk to the customer; (3) establishing a set sales price with 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. Actual results may differ from this estimate, and the difference could be
material. Management establishes the inventory valuation reserve by reviewing the inventory for items that should be reserved in full based on a lack of usage for a specified period of time and for which future demand is not forecasted and
establishes an additional reserve for slow moving inventory based on varying percentages of the cost of the items. The reserve for inventory valuation at September 30, 2007 and June 30, 2007 was $555,000 and $524,000, respectively. At
September 30, 2007 and June 30, 2007, approximately $1,452,000 and $1,401,000, respectively, of the raw materials and sub-assemblies inventory were considered slow moving and subject to a reserve provision equal to all or a portion of the
cost, less an estimate for scrap value. In certain instances, this inventory has been unsold for more than five years from date of manufacture or purchase, and in other instances the Company has more than a five-year supply of inventory on hand
based on recent sales volume. At September 30, 2007, the cost of inventory for which the Company has more than a five-year supply on hand and the cost of inventory for which the Company has had no sales during the last five years amounted to
approximately $721,000. Management believes that this inventory is properly valued and appropriately reserved. Even if management’s estimate were incorrect, that would not result in a cash charge since the cash required to manufacture or
purchase the older inventory was expended in prior years.
The inventory valuation reserve is adjusted at the close of each accounting period, as
necessary, based on management’s estimate of the valuation reserve required. This estimate is calculated on a consistent basis as determined by the Company’s inventory valuation policy. Increases to the inventory valuation reserve result
in a charge to cost of sales, and decreases to the reserve result in a credit to cost of sales. The inventory valuation reserve is also decreased when items are scrapped or disposed of. During the three month period ended September 30, 2007,
the inventory valuation reserve was increased by $31,000, and the Company did not scrap or dispose of any items.
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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 operations. The Company has concluded that no deferred tax valuation allowance was necessary at September 30, 2007 and June 30, 2007, because future taxable income is believed to be sufficient to utilize
any deferred tax asset.
Goodwill Impairment Testing
As required by SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company reviews goodwill for impairment annually or more frequently if impairment indicators arise. Goodwill was tested for impairment as of
July 1, 2007 and 2006 and the tests indicated no impairment. The tests were conducted by management. The Company’s goodwill carrying amounts relate solely to the acquisition of Custom Products, A-G and RTS, which are three
SFAS No. 142 reporting units. Bolt, the parent of Custom Products, A-G and RTS, is a fourth reporting unit and has no goodwill. Bolt, A-G and RTS are in the geophysical equipment segment, and Custom Products is in the industrial products
segment.
Goodwill represents a significant percentage of the Company’s total assets at September 30, 2007 and is thus a significant
estimate by management. Even if management’s estimate were incorrect, it would not result in a cash outlay because the Company’s goodwill amounts reflected on its balance sheet arose out of acquisition accounting. See Notes 2, 3 and 10 to
Consolidated Financial Statements (Unaudited) for additional information concerning goodwill.
Recent Accounting Developments
The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115
In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits companies to measure many financial instruments and certain other items at fair value. SFAS 159 is effective as of the beginning of
the Company’s first fiscal year that begins after November 15, 2007. The Company believes that SFAS 159 will not have an impact on the Company’s consolidated financial statements.
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Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures
about fair value measurements. SFAS 157 does not require new fair value measurements. The purpose of SFAS 157 is to provide a single definition of fair value and to provide additional guidance relative to fair value measurements. The end result of
SFAS 157 application will be consistency and comparability in fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company believes that it is unlikely that SFAS 157 will have any impact on the
Company’s consolidated financial statements because the Company does not deal in transactions requiring complex fair value measurements.