Item 1. Business The Company, organized as a corporation in 1962, consists of three operating units that manufacture and sell marine seismic data acquisition equipment: Bolt Technology Corporation (“Bolt”), A-G Geophysical Products, Inc. (“A-G”) and Real Time Systems Inc. (“RTS”). Each of these operating units is reported as a separate reportable segment for all periods presented in the Consolidated Financial Statements. Bolt develops, manufactures and sells marine seismic energy sources (air guns) and replacement parts and is referred to as the “seismic energy sources” segment. A-G develops, manufactures and sells underwater cables, connectors, hydrophones, depth and pressure transducers and seismic source monitoring systems and is referred to as the “underwater cables and connectors” segment. RTS develops, manufactures and sells air gun controllers/synchronizers, data loggers and auxiliary equipment and is referred to as the “seismic energy source controllers” segment. These three reportable segments were previously referred to as the “oilfield services equipment” or “geophysical equipment” segment. See “Segment Financial Information” below and Note 14 to Consolidated Financial Statements for additional information concerning our segments and customers.
The Company provides critical products to the marine seismic exploration industry. Marine seismic exploration typically involves sophisticated ocean-going vessels deployed by large, multi-national firms to acquire data about the geological formations under the ocean bed. The industry standard to acquire such data is to use an energy source to create acoustic waves that penetrate the ocean bed, capture the waves as they reflect back to the ocean surface, transmit data to the seismic vessel and then, using complex computer models, create a visualization of the structures under the ocean bed. The visualization is interpreted by geoscientists to identify subsurface formations conducive to the retention of hydrocarbons.
The Company’s products provide critical components for the acquisition of marine seismic data: the seismic energy source (air guns), the connection between the energy source and the vessel (underwater cables and connectors, including hydrophones, depth and pressure transducers and seismic source monitoring systems (“SSMS”)), and the controller that controls and synchronizes the performance of the energy source (air gun controllers/synchronizers, including data loggers and auxiliary equipment).
Sales of the Company’s 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. In fiscal year 2010, the price of oil and the continuing global economic slowdown contributed to a decrease in demand for marine seismic surveys. For fiscal years ended June 30, 2010, 2009 and 2008, sales attributable to the seismic energy sources reportable segment were $14,801,000, $23,445,000 and $36,960,000, respectively, and sales attributable to the underwater cables and connectors reportable segment were $12,624,000, $20,629,000 and $19,210,000, respectively. Sales attributable to the seismic energy source controllers reportable segment were $4,060,000, $4,802,000 and $5,465,000 for fiscal years ended June 30, 2010, 2009 and 2008, respectively.
In May 2008, the Company sold substantially all of the assets of Custom Products Corporation (“Custom”), a wholly-owned subsidiary of Bolt, for $5,250,000, subject to adjustments for certain liabilities. Custom, a developer, manufacturer and seller of miniature industrial clutches and brakes and seller of sub-fractional horsepower electrical motors, formerly constituted the Company’s industrial products segment. As a result of this sale, amounts related to Custom have been reported as discontinued operations in fiscal year 2008. All prior fiscal year information relating to Custom has been restated as discontinued operations, and all information reported or discussed in this Form 10-K reflects the treatment of Custom as discontinued operations.
Segment Financial Information As of June 30, 2009, we changed our segment reporting for all periods presented in the Consolidated Financial Statements from a single segment (formerly referred to as the oilfield services equipment or the geophysical equipment segment) to three reportable segments aligned with each of our product lines:
• The seismic energy sources reportable segment (Bolt) develops, manufactures and sells marine seismic energy sources (air guns) and replacement parts.
• The underwater cables and connectors reportable segment (A-G) develops, manufactures and sells underwater cables, connectors, hydrophones, depth and pressure transducers and seismic source monitoring systems.
• The seismic energy source controllers reportable segment (RTS) develops, manufactures and sells air gun controllers/synchronizers, data loggers and auxiliary equipment.
This change has no impact on our consolidated results of operations. All of the Company’s products are affected by the level of worldwide oil and gas exploration and development activity, which is dependent, primarily, on oil and gas prices. See Item 1A
Item 1A. Risk Factors An investment in our Common Stock involves various risks. Set forth below are the risks that we believe are material to our investors. When considering an investment in our Common Stock, you should consider carefully all of the risk factors described below, as well as other information included and incorporated by reference in this Annual Report. The risks described below could materially and adversely affect our business, financial condition and results of operations and the actual outcome of matters as to which forward-looking statements are made in this Annual Report. The risk factors described below are not the only ones we face. Our business, financial condition and results of operations may also be affected by additional factors that are not currently known to us or that we currently consider immaterial or that are not specific to us, such as general economic or political conditions.
You should refer to the explanation of the qualifications and limitations on forward-looking statements on page 1 of this Report. All forward-looking statements made by us are qualified by the risk factors described below.
The current global economic recession could materially and adversely impact our liquidity, results of operations and financial condition. The global economic recession has caused a decrease in the demand for oil and gas. This, in turn, has caused a significant decrease in the price of these commodities, resulting in a slowdown in marine seismic exploration activity and a decrease in the demand for many of the Company’s products. If economic conditions continue to deteriorate or do not improve, it could result in further reductions in marine seismic exploration activity, resulting in further declines in demand for the Company’s products.
Depressed economic conditions could negatively impact the ability of the Company’s customers to pay for products provided by the Company either on a timely basis or at all. The Company may incur goodwill impairment losses if depressed economic conditions and reduced marine seismic exploration activity result in lower demand for products manufactured and sold by the Company’s subsidiaries. Consequently, the fair value of those subsidiaries may decrease below their carrying value, resulting in the recording of a goodwill impairment provision. Any of the foregoing could have a material adverse effect on the Company’s liquidity
and/or results of operations and financial condition. Further, it is difficult to predict how long the current economic downturn will continue, to what extent it will worsen and to what extent it will continue to affect the Company. In addition, if depressed economic conditions and tight credit market conditions continue to worsen, the market value of the Company’s Common Stock could remain at its current level or even decrease further unrelated to the Company’s operating performance or prospects.
Volatility of oil and natural gas prices, which is affected by factors outside of our control, affects demand for our products. Sales of our products correlate highly with oil and natural gas price trends, which are typically cyclical. If oil and natural gas prices are high, marine seismic activity increases. This increases demand for our products. If oil and natural gas prices are low, the level of marine seismic activity decreases. This decreases demand for our products. In extreme cases, when oil and natural gas prices are significantly lower, older seismic vessels may be decommissioned and our equipment on those ships may be removed and put into storage for future use. Under such a scenario, our revenues could further decrease while our customers deplete stored inventories prior to placing new orders. Accordingly, a decrease in oil and natural gas prices could decrease our customers’ activity and decrease demand for our products. Any decrease in demand for our products could have a material adverse effect on our results of operations and financial condition.
Oil and gas prices and trends are typically cyclical and are affected by many factors. These include:
• the level of worldwide oil and gas production and exploration activity
• worldwide economic conditions and their effect on worldwide demand for energy
• the policies of the Organization of Petroleum Exporting Countries
• the cost of producing oil and gas
• the cost of capital and interest rates
• technological advances affecting hydrocarbon consumption
• environmental regulation
• the level of oil and gas inventories
• tax policies
• weather-related factors that may disrupt oil and gas exploration
• the policies of national governments
• war, civil disturbances and political instability
We expect prices for oil and natural gas to continue to be volatile due to circumstances outside of our control and to continue to affect our customers’ level of activity and the demand for our products.
The Deepwater Horizon rig explosion in the Gulf of Mexico may lead to other restrictions or regulations on offshore exploration in the U.S. Gulf of Mexico and in other areas around the world which may impact our business. We do not yet know the extent to which the Deepwater Horizon rig explosion in the Gulf of Mexico may cause the United States or other countries to restrict or further regulate offshore drilling. This event and its aftermath have resulted in proposed legislation and regulation in the United States that could result in additional governmental regulation of the offshore oil and gas exploration and production industry. Any additional governmental regulation could cause substantial increases in costs or delays in drilling or other operations, including marine seismic exploration activities, which would result in a reduced demand for the Company’s products. The Company cannot predict with any certainty the substance or effect of any new or additional regulations.
Changes in environmental requirements may result in a decline in oil and natural gas exploration and production. State and national governments and state, national and international agencies have been evaluating climate related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases. Because our business depends on the level of activity in the oil and natural gas industry, existing or future laws, regulations, treaties or international agreements related to greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws, regulations, treaties or international agreements reduce the worldwide demand for oil and natural gas. Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture and use of carbon dioxide that could also reduce the demand for oil and gas which may affect the demand for our products.
Technological change in the seismic industry may require us to make substantial research and development expenditures and may render our technology obsolete. The market for our products is characterized by changing technology and new product introductions. Our air gun technology may become obsolete due to the introduction of a superior technology. We may be required to invest substantial capital to develop and produce successfully and timely new and enhanced products to stay abreast of technological change. We have no assurance that we will receive an adequate rate of return on such investment. If we are unable to stay abreast of technological change, we will be unable to compete in the future. If we are not competitive, our business, results of operations and financial condition will be materially and adversely affected.
Loss of any major customer or consolidation among major customers could materially and adversely impact our results of operations and financial condition. We have a concentration of business with a small number of major customers who are independent contractors performing marine seismic surveys on behalf of major oil companies. Sales to these major customers are significant in relation to our consolidated revenues. In addition, a large percentage of our consolidated accounts receivable balance at the end of any accounting period is from these customers. Purchases of the Company’s products by these customers are typically based on a purchase order or contract relating to a specific order. The loss of any major customer or a significant decrease in the amount of its purchases could have a material and adverse impact on our results of operations and financial condition. This risk would increase if consolidation of oil service companies continues. Additional information relating to concentration of business with a small number of major customers is provided in Note 14 to Consolidated Financial Statements and in “Business - Major Customers” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
We derive a significant amount of our revenues from foreign sales, which pose additional risks, including economic, political and other uncertainties. Our foreign sales are significant in relation to consolidated sales. In fiscal 2010, sales outside of the United States accounted for approximately 78% of our consolidated net sales. We believe that export sales will remain a significant percentage of our revenue. Our sales contracts are denominated in U.S. dollars. Fluctuations in foreign exchange rates could make it more difficult for our overseas customers to meet their U.S. dollar obligations. In addition, sales of our products to customers operating in foreign countries that experience political/economic instability or armed conflict could result in difficulties in delivering and installing complete seismic energy source systems within those geographic areas and receiving payment from these customers. These factors could materially adversely affect our results of operations and financial condition. Refer to Note 14 to Consolidated Financial Statements for additional information relating to foreign sales.
We experience fluctuations in operating results. Complete air gun systems sales, which typically are large dollar amounts, do not occur in every accounting period. In certain periods, several complete air gun system sales may be recorded, and none in other periods. This “uneven” sales pattern is due largely to our customers’ schedules for the anticipated completion date for building a new seismic vessel or the target date for outfitting a conventional vessel to do
seismic work. In addition, customer demand for air gun replacement parts, underwater cables and connectors and seismic energy source controllers is ongoing, but the demand level for these products varies based on oil and gas prices and trends. Accordingly, our results of operations can vary significantly from one fiscal quarter to another and from one fiscal year to another. This may cause volatility in the price of the Company’s Common Stock.
An impairment of goodwill could reduce our earnings and stockholders’ equity. Our consolidated goodwill balance at June 30, 2010 accounts for 15% of consolidated assets at that date. Goodwill is recorded when the purchase price of a business exceeds the fair market value of the tangible and separately measurable intangible net assets of the business. Our goodwill balance relates exclusively to the acquisition of subsidiaries. Generally accepted accounting principles require us to test goodwill for impairment on an annual basis or when events or circumstances occur indicating that goodwill might be impaired. If we were to determine that any of our remaining balance of goodwill was impaired, we would record an immediate non-cash charge to earnings with a corresponding reduction in goodwill. Refer to Notes 1, 2 and 5 to Consolidated Financial Statements for additional information relating to goodwill.
Weak sales demand or obsolescence of our inventory may require an increase to our inventory valuation reserve. A significant source of our revenue arises from the sale of replacement parts required by customers who have previously purchased our products. As a result, we maintain a large quantity of parts on hand that may not be sold or used in final assemblies for a lengthy period of time. Management has established an inventory valuation reserve to recognize that certain inventory may become obsolete or supplies may be excessive. The inventory valuation reserve is a significant estimate made by management based on experience and the exercise of professional judgment. The actual results may differ from this estimate, and the difference could be material. The inventory valuation reserve is adjusted at the close of each accounting period based on management’s estimate of the valuation reserve required. This estimate is calculated on a consistent basis as determined by our 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. Weak sales demand or obsolescence may require an increase to the inventory valuation reserve. Such an increase may have a material and adverse impact on our results of operations with a corresponding decrease to inventory. Refer to Notes 1 and 7 to Consolidated Financial Statements for additional information relating to the inventory valuation reserve.
We may be unable to obtain broad intellectual property protection for our current and future products, which could result in loss of revenue and any competitive advantage we hold. Certain of the proprietary technologies used in our products are not patent protected. We rely on a combination of patents, common laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technologies. Our competitors may attempt to copy aspects of our products despite our efforts to protect our proprietary rights, or may design around the proprietary features of our products. Policing unauthorized use of our proprietary rights is difficult, and we are unable to determine the extent to which such use occurs. Also, the laws of certain foreign countries do not offer as much protection for proprietary rights as the laws of the United States. Further, obtaining, maintaining or defending intellectual property rights in many countries is costly. The costs of pursuing any intellectual property claim against a third party, whether in the United States or in a foreign country, could be significant.
From time to time third parties may claim that we have infringed upon their intellectual property rights. Addressing or defending any such claims, with or without merit, could be time consuming, result in costly litigation and possible injunctions, require product modifications, cause product shipment delays or require us to enter into royalty or licensing arrangements. Such claims could have a material adverse effect on our results of operations and financial condition.
The loss of any member of our senior management and other key employees may adversely affect our results of operations. Our success depends heavily on the continued services of our senior management and other key employees. Our senior management consists of a small number of individuals relative to larger companies. These individuals, as well as other key employees, possess sales and marketing, engineering, manufacturing, financial and administrative skills that are critical to the operation of our business. We generally do not have employment or non-competition agreements with members of our senior management or other key employees, except for employment agreements with our Chief Executive Officer and Executive Vice President. There is no assurance that any of our senior management or other key personnel will continue in such capacity for any particular period of time. If we lose the services of one or more of our senior management or other key employees, our operations may be materially adversely affected.
Provisions in our certificate of incorporation and bylaws could discourage a takeover attempt, which may reduce or eliminate the likelihood of a change of control transaction and, therefore, the ability of our stockholders to sell their shares for a premium. Our certificate of incorporation and bylaws contain certain provisions that could have the effect of delaying or preventing a third party from obtaining control of our Company. These provisions may reduce or eliminate our stockholders’ ability to sell their shares of Common Stock at a premium. They include a classified board, regulation of the nomination and election of directors, limiting who may call special stockholder meetings and requiring the vote of the holders of 95% of all shares of our stock to authorize certain business combinations.
Because we have no plans to pay any dividends for the foreseeable future, investors must look solely to stock appreciation for a return on their investment in us. We have not paid cash dividends on our Common Stock since 1985 and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain cash associated with future earnings to support our operations and growth, including any possible acquisitions and for stock repurchases pursuant to the stock repurchase program authorized by the Company. Any payment of cash dividends in the future will be dependent on the amount of funds legally available, our earnings, financial condition, capital requirements and other factors that our board of directors may deem relevant. Accordingly, investors must rely on sales of their Common Stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our Common Stock.
The market price of our Common Stock may be volatile. The market price of our Common Stock has experienced significant fluctuations and may continue to fluctuate significantly in the future. Many factors cause the market price of our Common Stock to fluctuate, including, but not limited to (i) the volume of trading in our Common Stock, (ii) purchases and sales of our Common Stock by large institutional investors, (iii) the price of oil, (iv) economic prospects for the marine seismic exploration industry, (v) the Company’s actual and projected operating results and (vi) general worldwide economic and political conditions. These market fluctuations may adversely affect the market price of our Common Stock.
Item 1B.
Item 1B. Unresolved Staff Comments None.
Item 2.
Item 2. Properties The following table sets forth certain information with respect to the Company’s principal properties.
(1) Seismic Energy Source Segment
(2) Underwater Cables and Connectors Segment
(3) The Cypress, Texas facility is owned by the Company
(4) Seismic Energy Source Controllers Segment
The Company’s products are manufactured and assembled at facilities located in Norwalk, Connecticut (seismic energy sources), Cypress, Texas (underwater cables and connectors) and Fredericksburg, Texas (seismic energy source controllers). In the opinion of the Company’s management, the properties described above are in good condition and repair and are suitable and adequate for the Company’s purposes. The properties are currently fully utilized and, operating in conjunction with second shifts, overtime and strategic outsourcing, provide sufficient productive capacity.
Item 3.
Item 3. Legal Proceedings The Company is not aware of any material pending litigation or legal proceedings to which it or any of its subsidiaries is a party or to which any of its properties are subject.
Item 4.
Item 4. (Removed and Reserved) Executive Officers of Bolt Technology Corporation Set forth below are ages of and offices held by the Company’s executive officers as of September 10, 2010.
Name
Age
Present Position
Raymond M. Soto
Chairman, President, Chief Executive Officer and Director
Michael C. Hedger
Executive Vice President and Director; President A-G Geophysical Products, Inc.
Joseph Espeso
Senior Vice President - Finance, Chief Financial Officer, Treasurer, Assistant Secretary and Director
Joseph Mayerick, Jr.
Senior Vice President - Marketing, Assistant Secretary and Director
William C. Andrews
Vice President - Administration and Compliance and Secretary
PART II Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information On November 20, 2007, the Company’s Board of Directors approved a 3-for-2 stock split. The additional shares resulting from the stock split were distributed on January 30, 2008 to shareholders of record on January 16, 2008. Share and per share amounts reflected throughout the Consolidated Financial Statements and notes thereto and elsewhere in this Annual Report on Form 10-K have been restated to reflect the stock split.
The Company’s Common Stock is traded on the NASDAQ Global Select Market under the symbol “BOLT.” The following table sets forth the high and low sales prices for our Common Stock for the quarters indicated:
Holders The number of stockholders of record at September 3, 2010 was 374. We believe that the number of beneficial owners is substantially greater than the number of record holders, because a large portion of our Common Stock is held of record in broker “street names.”
Dividends We have not paid a dividend since 1985. We do not intend to pay cash dividends on our Common Stock in the foreseeable future. Any decision to pay cash dividends will depend upon our growth, profitability, financial condition and other factors that the Board of Directors may deem relevant.
Issuer Purchases of Equity Securities The Company’s stock repurchase activity for the three months ended June 30, 2010 was as follows:
(1) On June 24, 2010, the Company’s Board of Directors approved a program to repurchase up to $10,000,000 of its Common Stock through open market and privately negotiated transactions. See Note 12 to Consolidated Financial Statements for additional information concerning the stock repurchase program.
Equity Compensation Plan Information The information required by this Item 5 with respect to Equity Compensation Plan Information is set forth in Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, contained in this Annual Report on Form 10-K and incorporated herein by reference.
Performance Graph The following graph and table compare total stockholder return on our Common Stock for the five-year period ending June 30, 2010, with the Standard & Poor’s SmallCap Index and ValueLine’s Oilfield Services/Equipment Index over the same period. This comparison assumes the investment of $100 on June 30, 2005. The information in the graph is being furnished pursuant to SEC rules, and the stockholder return set forth is not intended to forecast and is not necessarily indicative of possible future performance.
Comparison of Five-Year Cumulative Total Return*
Bolt Technology Corporation, Standard & Poor’s SmallCap Index
and ValueLine’s Oilfield Services/Equipment Index
(Performance Results Through June 30, 2010)
* Cumulative total return assumes reinvestment of dividends.
Assumes $100 invested at the close of trading on June 30, 2005 in Bolt Technology Corporation Common Stock, Standard & Poor’s SmallCap Index and ValueLine’s Oilfield Services/Equipment Index.
The information included under the caption “Performance Graph” shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as expressly set forth by specific reference in such a filing.
Item 6.
Item 6. Selected Financial Data The following table has been derived from the Company’s audited financial statements and sets forth selected consolidated financial data with respect to the Company and its subsidiaries. This information should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying notes provided elsewhere in this Annual Report on Form 10-K. This information differs from amounts previously reported on the Company’s Annual Report on Form 10-K filings for the years ended June 30, 2006 and June 30, 2007 as a result of restatements attributable to the sale of Custom Products Corporation (see Note 3 to Consolidated Financial Statements) and the 3-for-2 stock split to shareholders of record on January 16, 2008 (see Note 1 to Consolidated Financial Statements).
Item 7.
Item 7. 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 and accompanying notes and other detailed information appearing elsewhere in this Annual Report on Form 10-K. This discussion includes forward-looking statements about the demand for our products and future results. Please refer to the “Note Regarding Forward-Looking Statements” section of this Annual Report on Form 10-K.
Overview The Company has three operating units: seismic energy sources, underwater cables and connectors and seismic energy source controllers. Commencing in the fiscal year ending June 30, 2009, each of these operating units is considered to be a separate reportable segment. Prior to fiscal 2009, these operating units were reported in one reportable segment, which was referred to as the oilfield services equipment or geophysical equipment segment. Refer to Note 14 to Consolidated Financial Statements for further information on reportable segments. The Company’s products in all three segments share a common economic characteristic: sales are generally related to the level of worldwide oil and gas exploration and development activity. During the last half of calendar year 2008, the price of oil significantly decreased and worldwide energy demand decreased due to the global economic slowdown. These factors lowered the demand for marine seismic exploration surveys and as a result, the demand for the Company’s products has decreased. The Company’s sales decreased 21% in the fiscal year ended June 30, 2009 compared to the fiscal year ended June 30, 2008 and 36% in the fiscal year ended June 30, 2010 compared to the fiscal year ended June 30, 2009. Despite these sales decreases, all three reportable segments operated profitably during the fiscal years ended June 30, 2009 and 2010.
The outlook for fiscal year 2011 remains dependent on continued improvement in economic growth resulting in increased demand for marine seismic exploration. If economic conditions continue to improve, the Company anticipates increased demand for its products in all three segments. There are current indications that the demand for the Company’s products may improve in fiscal 2011. Sales and net income for the fourth quarter of fiscal year 2010 improved by 68% and 140%, respectively, over the third quarter of fiscal year 2010 and the level of customer quotations and inquiries for large seismic source systems has increased; however, there can be no assurance that the momentum in the fourth quarter of fiscal year 2010 will continue into fiscal year 2011. In addition, the Company cannot predict with any certainty the impact that the Deepwater Horizon incident in the Gulf of Mexico will have on the marine seismic exploration industry, including the Company.
Despite the 36% reduction in sales referred to above, the Company generated net income of $4,954,000 for the fiscal year ended June 30, 2010 and all three reportable segments operated profitably. The Company’s balance sheet continued to strengthen during the fiscal year ended June 30, 2010. Cash, cash equivalents and short-term investments increased from $27,737,000 at June 30, 2009 to $39,468,000 at June 30, 2010, and working capital increased from $49,935,000 at June 30, 2009 to $55,802,000 at June 30, 2010. In addition, the Company remained debt free at June 30, 2010. The Company believes that these factors position the Company to pursue its strategic objectives, which include acquisitions and the repurchase of its shares under the repurchase program approved by the Board of Directors during the fourth quarter of fiscal year 2010. (Refer to “Liquidity and Capital Resources” for further information on the Company’s stock repurchase program.)
Effective May 31, 2008, substantially all of the assets of Custom Products Corporation (“Custom”), a wholly owned subsidiary of Bolt, were sold for $5,250,000, subject to adjustments for certain liabilities. Custom, a developer, manufacturer and seller of miniature industrial clutches and brakes and seller of sub-fractional horsepower electrical motors, formerly constituted the Company’s industrial products segment. In the Consolidated Financial Statements, reported amounts relating to Custom have been reported as discontinued operations. During the year ended June 30, 2008, the Company recorded as discontinued operations the operating results of Custom for the eleven-month period ending May 31, 2008 of $575,000, net of income taxes, and a gain on the sale of the assets of Custom of $285,000, net of income taxes. In addition, prior year information relating to Custom was restated to report such information as discontinued operations. See the Consolidated Financial Statements and Note 3 to Consolidated Financial Statements for additional information concerning discontinued operations.
The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”), which are referred to as generally accepted accounting principles or “GAAP.” In the past, the FASB and other designated GAAP-setting bodies have issued standards in the form of FASB Statements, FASB Interpretations, FASB Staff Positions and other pronouncements. On July 1, 2009, the FASB released FASB Accounting Standards Codification (“ASC”), which requires that references to guidance issued by the FASB should be based on topics in the ASC and not on FASB Statements, FASB Interpretations, FASB Staff Positions or other pronouncements. This change was made effective by the FASB for accounting periods ending after September 15, 2009. Accordingly, references to GAAP in this Annual Report on Form 10-K reflect the guidance in the ASC. The ASC does not change how the Company accounts for its transactions or makes its disclosures in notes to the consolidated financial statements.
Liquidity and Capital Resources As of June 30, 2010, the Company believes that cash and cash equivalent balances and projected cash flows from operations in fiscal 2011 will be adequate to meet foreseeable operating needs and any purchases of Common Stock under the share repurchase program as summarized below.
In the fourth quarter of fiscal 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’s discretion will determine 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 intended to be structured to conform to the safe harbor provisions of Securities and Exchange Commission Rule 10b-18. As of June 30, 2010, the Company repurchased 9,492 of its shares at an aggregate cost of $83,000.
The Securities and Exchange Commission declared the Company’s shelf registration statement on Form S-3, relating to the sale of up to $50,000,000 of equity, debt or other types of securities described in the shelf registration statement, effective on January 29, 2010. The proceeds of the securities may be used for acquisitions, capital expenditures, repayment of debt the Company may incur in the future, working capital and other general corporate purposes. The specifics of any potential future offering, along with the prices, terms and use of proceeds of any securities offered by the Company, will be determined at the time of any applicable offering and will be described in a prospectus supplement at the time of such applicable offering. The Company has no current plans to offer securities under the shelf registration statement.
Year Ended June 30, 2010 At June 30, 2010, the Company had $39,468,000 in cash and cash equivalents. This amount is $13,772,000 or 54% greater than at June 30, 2009.
For the year ended June 30, 2010, cash provided from operating activities after changes in working capital was $12,699,000, primarily due to net income adjusted for non-cash items and lower accounts receivable and inventories, partially offset by lower current liabilities.
For the year ended June 30, 2010, cash provided from investing activities was $1,181,000 due to proceeds received from matured short-term investments of $2,041,000, partially offset by the final RTS earn-out payment of $627,000 and capital expenditures of $233,000 for new and replacement equipment.
For the year ended June 30, 2010, cash used for financing activities was $108,000, primarily due to the repurchase of 9,492 shares of the Company’s Common Stock at an aggregate cost of $83,000.
The Company anticipates that capital expenditures for the fiscal year ended June 30, 2011 will not exceed $500,000, which will be funded from operating cash flow. These anticipated capital expenditures will relate primarily to new and replacement production machinery.
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 June 30, 2010 and June 30, 2009, the five customers with the highest accounts receivable balances represented, in the aggregate, 59% and 53%, respectively, of the consolidated accounts receivable balances on those dates.
Year Ended June 30, 2009 At June 30, 2009, the Company had $25,696,000 in cash and cash equivalents. This amount was $6,559,000 or 34% higher than the amount of cash and cash equivalents at June 30, 2008.
For the year ended June 30, 2009, cash flow from operating activities after changes in working capital was $9,737,000, primarily due to net income adjusted for non-cash items and lower inventories, partially offset by higher accounts receivable and lower current liabilities.
For the year ended June 30, 2009, cash used for investing activities was $3,187,000 of which the Company used $2,041,000 to purchase short-term investments, $760,000 for payment under the RTS earn-out agreement and $386,000 for capital expenditures for new and replacement equipment.
Off-Balance Sheet Arrangements The Company has no off-balance sheet financing arrangements.
Contractual Obligations The Company had no long-term borrowings, capital leases, purchase obligations or other long-term liabilities at June 30, 2010. The Company is obligated for minimum lease payments as of June 30, 2010 under several operating leases for its facilities in Norwalk, Connecticut and Fredericksburg, Texas as follows:
Such amounts are exclusive of any additional costs for taxes, utilities or similar charges, under triple net leases. See Note 13 to Consolidated Financial Statements under “Lease Commitments” for further information regarding future payments and other information relating to such leases.
Results of Operations Year Ended June 30, 2010 Compared to Year Ended June 30, 2009 Consolidated sales for the year ended June 30, 2010 totaled $31,485,000, a decrease of $17,391,000 or 36% compared to the year ended June 30, 2009. Sales decreased in all three reportable segments: sales of seismic energy sources decreased by $8,644,000 (37%), sales of underwater cables and connectors decreased by $8,005,000 (39%), and sales of seismic energy source controllers decreased by $742,000 (15%). The above sales decreases are due to lower marine seismic exploration activity caused by the global economic slowdown.
Consolidated gross profit as a percentage of consolidated sales was 49% for the year ended June 30, 2010 unchanged from the year ended June 30, 2009. Despite the 36% decrease in consolidated sales, the consolidated gross profit percentage remained unchanged caused primarily by a reduction in the amount of manufacturing outsourcing, overtime and temporary help as well as sales mix. In the fiscal year ended June 30, 2010, replacement part sales were a greater proportion of total sales than in the prior year and replacement parts have a larger gross profit margin.
Research and development costs for the year ended June 30, 2010 increased by $84,000 or 29% compared to the year ended June 30, 2009. These costs were primarily for product development.
Selling, general and administrative expenses decreased by $459,000 or 5% for the year ended June 30, 2010 compared to the year ended June 30, 2009, primarily due to expense reductions in the following areas: bad debts ($150,000); compensation costs ($144,000); and freight out ($135,000).
The Company conducted an annual impairment test of goodwill balances, and the results of these tests indicated that there was no impairment of the June 30, 2010 and 2009 goodwill balances.
Interest income decreased by $18,000 or 4% for the year ended June 30, 2010 compared to the year ended June 30, 2009, primarily due to lower interest rates, partially offset by increases in the Company’s cash and cash equivalent balances.
The provision for income taxes for the year ended June 30, 2010 was $2,350,000, an effective tax rate of 32%. This rate was lower than the federal statutory rate of 34%, primarily due to the tax benefit associated with the domestic manufacturer’s deduction, partially offset by state income taxes. The provision for income taxes for year ended June 30, 2009 was $5,023,000, an effective tax rate of 32%. This rate was lower than the federal statutory rate of 34%, primarily due to the tax benefit associated with the domestic manufacturer’s deduction, partially offset by state income taxes.
The above mentioned factors resulted in income from continuing operations and net income for the year ended June 30, 2010 of $4,954,000 compared to income from continuing operations and net income of $10,501,000 for the year ended June 30, 2009.
Year Ended June 30, 2009 Compared to Year Ended June 30, 2008 Consolidated sales for the year ended June 30, 2009 totaled $48,876,000, a decrease of $12,759,000 or 21% compared to the year ended June 30, 2008. Sales decreased in two reportable segments: sales of seismic energy sources decreased by $13,515,000 (37%) and sales of seismic energy source controllers decreased by $663,000 (12%). Sales of underwater cables and connectors, however, increased by $1,419,000 (7%). Sales of underwater cables and connectors increased in each of the first three quarters of fiscal 2009 over the comparable quarter in the prior fiscal year, but decreased in the fourth quarter. The above sales decreases reflect the reduction in the number of additional seismic vessels placed into service and a slowdown in the level of marine seismic exploration activity in the year ended June 30, 2009 compared to the year ended June 30, 2008. Consolidated gross profit as a percentage of consolidated sales was 49% for the year ended June 30, 2009 compared to 46% for the year ended June 30, 2008. The improvement in the gross profit percentage was caused primarily by lower material costs and increased sales prices. In addition, the gross profit margin in fiscal 2008 was affected by lower gross profit associated with certain foreign sales in the seismic energy sources segment, which included sales of auxiliary equipment purchased from outside vendors that normally have a lower margin than the Company’s proprietary products.
Research and development costs for the year ended June 30, 2009 increased by $17,000 or 6% compared to the year ended June 30, 2008. These expenditures were associated with improvements to the Company’s Annular Port Air Guns and Seismic Source Monitoring System.
Selling, general and administrative expenses increased by $511,000 or 6% for the year ended June 30, 2009 compared to the year ended June 30, 2008, primarily due to higher compensation expense ($461,000).
The Company conducted an annual impairment test of goodwill balances, and the results of these tests indicated that there was no impairment of the June 30, 2009 and 2008 goodwill balances.
Interest income increased by $241,000 or 126% for the year ended June 30, 2009 compared to the year ended June 30, 2008, primarily due to increases in the amount of cash available for short-term investment with banks.
The provision for income taxes for the year ended June 30, 2009 was $5,023,000, an effective tax rate of 32%. This rate was lower than the federal statutory rate of 34%, primarily due to the tax benefit associated with the domestic manufacturer’s deduction, partially offset by state income taxes. The provision for income taxes for year ended June 30, 2008 was $6,453,000, an effective tax rate of 32%. This rate was lower than the federal statutory rate of 35%, primarily due to the tax benefit associated with the domestic manufacturer’s deduction.
The above mentioned factors resulted in income from continuing operations for the year ended June 30, 2009 of $10,501,000 compared to income from continuing operations of $13,709,000 for the year ended June 30, 2008.
Effective May 31, 2008, substantially all of the assets of Custom Products Corporation (“Custom”), a wholly owned subsidiary of Bolt, were sold for $5,250,000, subject to adjustments for certain liabilities. Custom, a developer, manufacturer and seller of miniature industrial clutches and brakes and seller of sub-fractional horsepower electrical motors, formerly constituted the Company’s industrial products segment. In the Consolidated Financial Statements, reported amounts relating to Custom have been reported as discontinued operations. During the year ended June 30, 2008, the Company recorded as discontinued operations the operating results of Custom for the eleven-month period ending May 31, 2008 of $575,000, net of income taxes, and a gain on the sale of the assets of Custom of $285,000, net of income taxes. In addition, prior year information relating to Custom was restated to report such information as discontinued operations. See the Consolidated Financial Statements and Note 3 to Consolidated Financial Statements for additional information concerning discontinued operations.
The above mentioned factors resulted in net income for the year ended June 30, 2009 of $10,501,000 compared to net income of $14,569,000 for the year ended June 30, 2008.
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 requires 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 valuation 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 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.
See Note 1 to Consolidated Financial Statements 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) 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 Valuation Reserves A significant source of the Company’s revenue arises from the sale of replacement parts required by customers who have previously purchased products. As a result, the Company maintains a large quantity of parts on hand that may not be sold or used in final assemblies for an extended period of time. In order to recognize that certain inventory may become obsolete or that the Company may have supplies in excess of reasonably supportable sales forecasts, an inventory valuation reserve has been established. The inventory valuation reserve is a significant estimate made by management based on experience and the exercise of professional judgment. Actual results may differ from this estimate, and the difference could be material.
Management establishes the inventory valuation reserve by reviewing the inventory for items that should be reserved in full based on a lack of usage for a specified period of time and for which future demand is not forecasted and establishes an additional reserve for slow moving inventory based on varying percentages of the cost of the items. The reserve for inventory valuation at June 30, 2010 and 2009 was $492,000 and $651,000, respectively. At June 30, 2010 and 2009, approximately $778,000 and $1,777,000, 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. Management believes that this inventory is properly valued and appropriately reserved. Even if management’s estimate were incorrect, that would not result in a cash outlay since the cash required to manufacture or purchase the older inventory was expended in prior years.
The inventory valuation reserve is adjusted at the close of each accounting period, as necessary, based on management’s estimate of the valuation reserve required. This estimate is calculated on a consistent basis as determined by the Company’s inventory valuation policy. Increases to the inventory valuation reserve result in a charge to cost of sales, and decreases to the reserve result in a credit to cost of sales. The inventory valuation reserve is also decreased when items are scrapped or disposed of. During the fiscal year ended June 30, 2010, the inventory valuation reserve was increased by $217,000, and the Company scrapped $376,000 of inventory.
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 June 30, 2010 and June 30, 2009 because future taxable income is believed to be sufficient to utilize any deferred tax asset.
Goodwill Impairment Testing As required by ASC 350, “Intangibles - Goodwill and Other,” the Company reviews goodwill for impairment annually or more frequently if impairment indicators arise. Goodwill was tested for impairment, and the tests indicated no impairment of the goodwill balances at June 30, 2010 and 2009.
Goodwill represents approximately 15% of the Company’s total assets at June 30, 2010 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 goodwill amounts arose out of acquisition accounting. See Notes 1, 2 and 5 to Consolidated Financial Statements for additional information concerning goodwill.
Recent Accounting Developments Business Combinations ASC 805, “Business Combinations,” requires the purchase method of accounting for business combinations and the identification and recognition of intangible assets separately from goodwill. ASC 805 requires, among other things, the buyer to: (1) fair value assets and liabilities acquired as of the acquisition date (i.e., a “fair value” model rather than a “cost allocation” model); (2) expense acquisition-related costs; (3) recognize assets or liabilities assumed arising from contractual contingencies at acquisition date using acquisition-date fair values; (4) recognize goodwill as the excess of the consideration transferred plus the fair value of any noncontrolling interest over the acquisition-date fair value of net assets acquired; (5) recognize at
acquisition any contingent consideration using acquisition-date fair values (i.e., fair value earn-outs in the initial accounting for the acquisition); and (6) eliminate the recognition of liabilities for restructuring costs expected to be incurred as a result of the business combination. ASC 805 also defines a “bargain” purchase as a business combination where the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus the fair value of any noncontrolling interest. Under this circumstance, the buyer is required to recognize such excess (formerly referred to as “negative goodwill”) in earnings as a gain. In addition, if the buyer determines that some or all of its previously booked deferred tax valuation allowance is no longer needed as a result of the business combination, ASC 805 requires that the reduction or elimination of the valuation allowance be accounted for as a reduction of income tax expense. ASC 805 is effective for fiscal years beginning on or after December 15, 2008. The Company will apply ASC 805 to any acquisitions that are made on or after July 1, 2009.
Item 7A.
Item 7A. 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 8.
Item 8. Financial Statements and Supplementary Data The information required under this Item 8 is set forth on pages through of this Report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.
Item 9A.
Item 9A. 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 Company’s disclosure controls and procedures as of June 30, 2010. Based upon the results of such evaluation, the chief executive officer and 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 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.
See page of this Report for Management’s Report on Internal Control Over Financial Reporting and page of this Report for the Report of Independent Registered Public Accounting Firm on the effectiveness of the Company’s internal control over financial reporting.
There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information None.
PART III Item 10.
Item 10. Directors, Executive Officers and Corporate Governance The information required by Item 10 is incorporated by reference to the information appearing under the captions “Election of Directors,” “Management,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “General Information Relating to the Board of Directors” in the Company’s definitive proxy statement relating to the 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K (the “Definitive Proxy Statement”).
Item 11.
Item 11. Executive Compensation The information required by Item 11 is incorporated by reference to the information appearing under the captions “Executive Compensation” and “General Information Relating to the Board of Directors” in the Definitive Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity Compensation Plan Information The following table sets forth aggregate information as of June 30, 2010, for the Bolt Technology Corporation 2006 Amended and Restated Stock Option and Restricted Stock Plan (the “Plan”), which was approved by the Company’s stockholders on November 20, 2007, and is the Company’s only equity compensation plan in effect as of June 30, 2010:
(1) The Plan provides that 750,000 shares of Common Stock may be used for grants of stock options and restricted stock awards, of which up to 225,000 shares of Common Stock may be used for restricted stock awards. During fiscal 2010, 49,750 shares of restricted stock were awarded at an average fair value of $12.61 at date of grant. As of June 30, 2010, 111,500 shares of Common Stock remained available for issuance of restricted stock awards under the Plan.
The information required by Item 12 with respect to the security ownership of certain beneficial owners and management is incorporated by reference to the information appearing under the captions “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Management” in the Definitive Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by Item 13 is incorporated by reference to the information appearing under the captions “Certain Relationships and Related Transactions” and “General Information Relating to the Board of Directors” in the Definitive Proxy Statement.
Item 14.
Item 14. Principal Accountant Fees and Services The information required by Item 14 is incorporated by reference to the information appearing under the caption “Relationship with Independent Accountants” in the Definitive Proxy Statement.
PART IV Item 15.
Item 15. Exhibits and Financial Statement Schedules The following are being filed as part of this Annual Report on Form 10-K:
(a) Financial Statements and Financial Statement Schedule
Schedules other than the Financial Statement Schedule listed above are omitted because they are not applicable, or the required information is shown in the financial statements or the notes thereto.
(b) Exhibits
* Filed herewith
 Management contract or compensatory plan
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: September 10, 2010
By:
/s/ Raymond M. Soto
Raymond M. Soto
(Chairman of the Board, President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING The management of Bolt Technology Corporation is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934.
Internal control over financial reporting, no matter how well designed, has inherent limitations. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting could vary over time.
The management of Bolt Technology Corporation, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of June 30, 2010 based upon criteria set forth in the “Internal Control - Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that, as of June 30, 2010, our internal control over financial reporting is effective.
The effectiveness of our internal control over financial reporting as of June 30, 2010 has been audited by McGladrey & Pullen, LLP, our independent registered public accounting firm, as stated in their report which appears on page of this Annual Report on Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders
Bolt Technology Corporation
We have audited Bolt Technology Corporation and subsidiaries’ internal control over financial reporting as of June 30, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Bolt Technology Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Bolt Technology Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Bolt Technology Corporation and subsidiaries as of June 30, 2010 and 2009, and the related consolidated statements of income and cash flows for each of the three years in the period ended June 30, 2010 and our report dated September 10, 2010 expressed an unqualified opinion.
/s/ McGladrey & Pullen, LLP
Stamford, Connecticut
September 10, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders
Bolt Technology Corporation
We have audited the accompanying consolidated balance sheets of Bolt Technology Corporation and subsidiaries as of June 30, 2010 and 2009, and the related consolidated statements of income and cash flows for each of the three years in the period ended June 30, 2010. Our audits also included the financial statement schedule of Bolt Technology Corporation listed in Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bolt Technology Corporation and subsidiaries as of June 30, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Bolt Technology Corporation and subsidiaries’ internal control over financial reporting as of June 30, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 10, 2010, expressed an unqualified opinion on the effectiveness of Bolt Technology Corporation and subsidiaries’ internal control over financial reporting.
/s/ McGladrey & Pullen, LLP
Stamford, Connecticut
September 10, 2010
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements.
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
See Notes to Consolidated Financial Statements.
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Note 2 to Consolidated Financial Statements for allocation of Real Time Systems Inc. purchase price.
See Notes to Consolidated Financial Statements.
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Description of Business and Significant Accounting Policies The Company manufactures and sells marine seismic data acquisition equipment and consists of three operating units: Bolt Technology Corporation (“Bolt”), A-G Geophysical Products, Inc. (“A-G”) and Real Time Systems Inc. (“RTS”), which was acquired on July 1, 2007 (see Note 2 to Consolidated Financial Statements). As of June 30, 2009, each of these operating units is reported as a separate reportable segment for all periods presented in the Consolidated Financial Statements. The seismic energy sources segment (“Bolt”) develops, manufactures and sells marine seismic energy sources (air guns) and replacement parts. The underwater cables and connectors segment (“A-G”) develops, manufactures and sells underwater cables, connectors, hydrophones, depth and pressure transducers and seismic source monitoring systems. The seismic energy source controllers segment (“RTS”) develops, manufactures and sells air gun controllers/synchronizers, data loggers and auxiliary equipment. See Note 14 to Consolidated Financial Statements for additional information concerning reportable segments.
On May 31, 2008, substantially all of the assets of Custom Products Corporation (“Custom”), a wholly owned subsidiary of Bolt, were sold. Custom, a developer, manufacturer and seller of miniature industrial clutches and brakes and seller of sub-fractional horsepower electrical motors, formerly constituted the Company’s industrial products segment. In the Consolidated Financial Statements, amounts relating to Custom have been reported as discontinued operations in fiscal year 2008. See Note 3 to Consolidated Financial Statements for additional information concerning discontinued operations.
On November 20, 2007, the Company’s Board of Directors approved a 3-for-2 stock split. The additional shares resulting from the stock split were distributed on January 30, 2008 to shareholders of record on January 16, 2008. Share and per share amounts reflected throughout the Consolidated Financial Statements and notes thereto have been restated to reflect the stock split.
Basis of Presentation: The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”), which are referred to as generally accepted accounting principles or “GAAP.” In the past, the FASB and other designated GAAP-setting bodies have issued standards in the form of FASB Statements, FASB Interpretations, FASB Staff Positions and other pronouncements. On July 1, 2009, the FASB released FASB Accounting Standards Codification (“ASC”), which requires that references to guidance issued by the FASB should be based on topics in the ASC and not on FASB Statements, FASB Interpretations, FASB Staff Positions and other pronouncements. This change was made effective by the FASB for accounting periods ending after September 15, 2009. Accordingly, references to GAAP in this Annual Report on Form 10-K reflect the guidance in the ASC. The ASC does not change how the Company accounts for its transactions or makes its disclosures in notes to the consolidated financial statements.
Principles of Consolidation: The Consolidated Financial Statements include the accounts of Bolt and its subsidiary companies. All significant intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Refer to “Concentration of Credit Risk” in Note 13 to Consolidated Financial Statements for additional information regarding cash and cash equivalent balances.
Short-term Investments: The Company considers all highly liquid investments with a maturity of over three months but less than one year when purchased to be short-term investments. Such short-term investments are carried at cost, which approximates fair value.
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Description of Business and Significant Accounting Policies - (continued) Allowance for Uncollectible Accounts: The allowance for uncollectible accounts is established through a provision for bad debts charged to expense. Accounts receivable are charged against the allowance for uncollectible accounts when the Company believes that collection of the principal is unlikely. The allowance is an amount that the Company believes will be adequate to absorb estimated losses on existing accounts receivable balances based on the evaluation of their collectability and prior bad debt experience. This evaluation also takes into consideration 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 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 7 to Consolidated Financial Statements for additional information concerning inventories.
Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation for financial accounting purposes is computed using the straight-line method over the estimated useful lives of 40 years for buildings, over the shorter of the term of the lease or the estimated useful life for leasehold improvements, and 5 to 10 years for machinery and equipment. Major improvements which 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 8 to Consolidated Financial Statements 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 assets acquired in business combinations. 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, and the tests indicated no impairment of the goodwill balances at June 30, 2010 and 2009.
The estimated fair value of the A-G reporting unit was determined solely by utilizing the capitalized cash flow method. The estimated fair value of the RTS reporting unit was determined utilizing the capitalized cash flow and the market price method. The capitalized cash flow method relies on historical financial performance, an estimate of the long-term growth rate in free cash flows and a determination of the weighted average cost of capital for the unit. The market price method gives consideration to the prices paid for publicly traded stocks of comparable companies. Based on the foregoing, the Company determined that there was no impairment as of June 30, 2010 and 2009.
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Description of Business and Significant Accounting Policies - (continued) The Company’s other long-lived assets consist of property, plant and equipment, other intangible assets 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 June 30, 2010 and 2009 did not result in any indicators of impairment, and therefore no impairment tests were performed on these other long-lived assets.
See Notes 2, 5 and 6 to Consolidated Financial Statements for additional information concerning goodwill and other intangible assets.
Revenue Recognition and Warranty Costs: The Company recognizes sales revenue when it is realized and earned. The Company’s reported sales revenue is based on meeting the following criteria: (1) manufacturing products based on customer specifications; (2) 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 for income taxes is the sum of the amount of income tax paid or payable for the year determined by applying the provisions of enacted tax laws to the taxable income for that year and the net change during the year in the Company’s deferred tax assets and liabilities. See Note 9 to Consolidated Financial Statements for additional information concerning the provision for income taxes and deferred tax accounts.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements, and the reported amounts of revenues and expenses during the reporting period. The most critical estimates made by the Company are those relating to inventory valuation reserves, goodwill impairment, long-lived assets and realization of deferred tax assets. Actual results could differ from those estimates.
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Description of Business and Significant Accounting Policies - (continued) 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 including common share equivalents (which includes stock option grants and restricted stock awards) assuming dilution. The following is a reconciliation of basic earnings per share to diluted earnings per share for each of the last three fiscal years:
For the fiscal years ended June 30, 2010 and 2009, the calculations do not include options to acquire 158,000 and 108,000 shares, respectively, since the inclusion of these shares would have been anti-dilutive.
Recent Accounting Developments: Business Combinations ASC 805, “Business Combinations,” requires the purchase method of accounting for business combinations and the identification and recognition of intangible assets separately from goodwill. ASC 805 requires, among other things, the buyer to: (1) fair value assets and liabilities acquired as of the acquisition date (i.e., a “fair value” model rather than a “cost allocation” model); (2) expense acquisition-related costs; (3) recognize assets or liabilities assumed arising from contractual contingencies at acquisition date using acquisition-date fair values; (4) recognize goodwill as the excess of the consideration transferred plus the fair value of any noncontrolling interest over the acquisition-date fair value of net assets acquired; (5) recognize at acquisition any contingent consideration using acquisition-date fair values (i.e., fair value earn-outs in the initial accounting for the acquisition); and (6) eliminate the recognition of liabilities for restructuring costs expected to be incurred as a result of the business combination. ASC 805 also defines a “bargain” purchase as a business combination where the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus the fair value of any noncontrolling interest. Under this circumstance, the buyer is required to recognize such excess (formerly referred to as “negative goodwill”) in earnings as a gain. In addition, if the buyer determines that some or all of its previously booked deferred tax valuation allowance is no longer needed as a result of the business combination, ASC 805
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Description of Business and Significant Accounting Policies - (continued) requires that the reduction or elimination of the valuation allowance be accounted for as a reduction of income tax expense. ASC 805 is effective for fiscal years beginning on or after December 15, 2008. The Company will apply ASC 805 to any acquisitions that are made on or after July 1, 2009.
Note 2 - Real Time Systems Inc. Acquisition In July 2007, the Company acquired substantially all of the net assets of Real Time Systems Inc. (RTS) for $6,006,000 including cash paid at closing of $4,532,000, acquisition costs of $87,000 and $1,387,000 under an earnout agreement through June 30, 2009. Effective July 1, 2007, the operations of RTS were included in the Company’s Consolidated Financial Statements.
The earnout agreement provided for additional payments if RTS’s net sales in each of fiscal years 2008 and 2009 were in excess of $2,000,000. Such payments are 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. Amounts earned under the earnout agreement were added to goodwill. Under the terms of the earnout agreement, the Company paid $627,000 and $760,000 for fiscal years 2009 and 2008, respectively.
The purchase price allocation is as follows:
See Notes 5 and 6 to Consolidated Financial Statements for additional information concerning RTS goodwill and other intangible assets, respectively.
Note 3 - Discontinued Operations Effective May 31, 2008, substantially all of the assets of Custom Products Corporation (“Custom”), a wholly-owned subsidiary of Bolt, were sold for $5,250,000, subject to adjustments for certain liabilities. Custom, a developer, manufacturer and seller of miniature industrial clutches and brakes and seller of sub-fractional horsepower electrical motors, formerly constituted the Company’s industrial products segment. Net cash proceeds from the sale were $5,078,000 after expenses associated with the disposition ($88,000) and adjustments for liabilities. The Company recorded a pre-tax gain of $473,000 ($285,000 net of tax) relating to this transaction.
The following amounts relating to Custom’s operations have been reported as discontinued operations in the consolidated statements of income in the fiscal year ending June 30, 2008:
See Note 1 to Consolidated Financial Statements for information regarding earnings per share, including earnings per share data relating to income from discontinued operations, net of taxes, which includes gain on sale of discontinued operations, net of taxes, in fiscal year 2008.
The consolidated statements of cash flows reflect discontinued operations for the fiscal year ended June 30, 2008.
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 - Short-Term Investments Short-term investments at June 30, 2009 consist of highly liquid investments with a maturity of over three months but less than one year from the date of investment. The Company’s intention is to hold short-term investments until maturity.
Note 5 - Goodwill The Company’s goodwill carrying amounts relate solely to the acquisitions of A-G in fiscal year 1999 and RTS in fiscal year 2008. A-G and RTS are two reporting units under ASC 350, “Intangibles - Goodwill and Other.” Bolt, the parent of A-G and RTS, is a third reporting unit and has no goodwill.
The composition of the net goodwill balance at June 30, 2010 and 2009 is as follows:
Goodwill represents approximately 15% of the Company’s total assets at June 30, 2010 and thus the evaluation of goodwill impairment is 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.
See Notes 1 and 2 to Consolidated Financial Statements for additional information concerning goodwill. See Note 14 to Consolidated Financial Statements for further information regarding goodwill in the reportable segments.
Note 6 - Other Intangible Assets Other intangible assets at June 30, 2010 and June 30, 2009 in the gross amount of $1,712,000 represent the intangible assets acquired in the purchase of RTS. The major portion of these assets ($1,487,000) is being amortized using the straight-line method over a period of six to nine and one-half years. Amortization cost of $240,000 was recorded in the fiscal years ended June 30, 2010, 2009 and 2008, respectively. Other intangible asset amortization is estimated to be $240,000 in fiscal years 2011 and 2012, $188,000 in fiscal year 2013 and $28,000 in fiscal years 2014 and 2015.
Note 7 - Inventories Inventories at June 30 consist of the following:
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.
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7 - Inventories - (continued) 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 June 30, 2010 and 2009 was $492,000 and $651,000, respectively. At June 30, 2010 and 2009, approximately $778,000 and $1,777,000, 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. Management believes that this inventory is properly valued and appropriately reserved. Even if management’s estimate were incorrect, that would not result in a cash outlay since the cash required to manufacture or purchase the older inventory was expended in prior years.
The inventory valuation reserve is adjusted at the close of each accounting period, as necessary, based on management’s estimate of the valuation reserve required. This estimate is calculated on a consistent basis as determined by the Company’s inventory valuation policy. Increases to the inventory valuation reserve result in a charge to cost of sales, and decreases to the reserve result in a credit to cost of sales. The inventory valuation reserve is also decreased when items are scrapped or disposed of. During the fiscal year ended June 30, 2010, the inventory valuation reserve was increased by $217,000, and the Company scrapped $376,000 of inventory.
Note 8 - Property, Plant and Equipment Property, plant and equipment at June 30 consist of the following:
Note 9 - Income Taxes Income tax expense consists of the following for the three years ended June 30:
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9 - Income Taxes - (continued) A reconciliation of the federal statutory rate to the effective tax rate reflected in the total provision for income taxes is as follows:
Deferred income taxes under the liability method reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the Company’s net deferred income tax asset and liability accounts were as follows at June 30:
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 June 30, 2010. There were no unallocated tax reserves at June 30, 2010. 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 prior to 2007 are no longer subject to examination by the Internal Revenue Service.
Note 10 - Benefit Plan The Company maintains a defined contribution retirement plan (the “Retirement Plan”) covering substantially all employees who satisfy the age and service requirements of the Retirement Plan. The Company’s contributions to the Retirement Plan are discretionary and for the years ended June 30, 2010, 2009 and 2008 amounted to $167,000, $184,000 and $177,000, respectively.
Note 11 - Stock Options and Restricted Stock The Company recognizes compensation costs for all share-based payments granted based on the grant-date fair value estimated in accordance with the provisions of ASC 718, “Compensation - Stock Compensation.” All share amounts in the following paragraphs and table have been adjusted to reflect the 3-for-2 stock split paid on January 30, 2008 to shareholders of record on January 16, 2008.
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11 - Stock Options and Restricted Stock - (continued) The Bolt Technology Corporation Amended and Restated 2006 Stock Option and Restricted Stock Plan (the “Plan”) provides that 750,000 shares of Common Stock may be used for awards under the Plan, of which up to 225,000 shares of Common Stock may be used for restricted stock awards. Options granted to employees can become vested over, and can be exercisable for, a period of up to ten years. The Plan also provides that each non-employee director is granted options to purchase 7,500 shares of Common Stock on the date of his or her election to the Board of Directors. Each such option granted to a non-employee director has an option term of five years from the date of grant and becomes exercisable with respect to 25% of the shares covered under the option in each of the second through fifth years of its term. Under the terms of the Plan, no options or restricted stock can be granted or awarded subsequent to June 30, 2016.
The aggregate compensation expense for stock options, using the Black-Scholes option-pricing model, for outstanding grants under the Plan was $1,730,000 as of the option grant dates. This expense, which is a non-cash item, is being recognized in the Company’s financial statements over the four-year vesting period. Stock option compensation expense was $325,000, $241,000 and $157,000 for the years ended June 30, 2010, 2009 and 2008, respectively. Unrecognized compensation expense for stock options at June 30, 2010 amounted to $950,000 and is expected to be recognized over the next five years.
A summary of changes in stock options during the fiscal year ended June 30, 2010 is as follows:
During the fiscal year ended June 30, 2010, stock option grants were awarded in August 2009 (50,000 shares) and November 2009 (15,000 shares). The fair value of options granted on these dates was $8.39 and $5.30, respectively, as estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11 - Stock Options and Restricted Stock - (continued) At June 30, 2010, there was no aggregate intrinsic value for outstanding options because the market price at June 30, 2010 was less than the weighted average exercise price of such options. The expiration dates for the outstanding options at June 30, 2010 are as follows:
Options outstanding at June 30, 2010, of which 73,125 shares were exercisable, consisted of 36,698 non-qualified and 36,427 qualified stock options.
The fair value of options vested during fiscal year 2010 (30,750 shares), 2009 (27,000 shares) and 2008 (15,375 shares) was $326,000, $217,000 and $352,000, respectively. No options were exercised during fiscal years 2010, 2009 or 2008. The weighted average exercise price of exercisable options as of June 30, 2010 was $16.15. At June 30, 2010, there was no aggregate intrinsic value of exercisable options because the market price at June 30, 2010 was less than the weighted average exercise price of exercisable options. The weighted average remaining contractual life of exercisable options at June 30, 2010 was 2.9 years.
During fiscal year 2010, 49,750 shares of restricted stock were granted. These shares vest over a five year period and the cost to recipients is zero. The aggregate compensation cost for restricted stock granted in fiscal year 2010, 2009 and 2008 was $628,000, $404,000 and $686,000 as of the grant dates, respectively. This compensation expense, which is a non-cash item, is being recognized in the Company’s financial statements over the five-year vesting period. Restricted stock compensation expense was $316,000, $200,000 and $57,000 for the years ended June 30, 2010, 2009 and 2008, respectively. Unrecognized compensation expense for restricted stock at June 30, 2010 amounted to $1,145,000.
A summary of changes in restricted stock awards during the fiscal year ended June 30, 2010 is as follows:
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. The Company also receives a tax deduction and/or liability when restricted stock vests based on the difference between the fair market value at the grant date versus the vesting date. The tax benefit and/or liability from the exercise of stock options and/or the vesting of restricted stock are reported as cash flows from financing activities in the Consolidated Statements of Cash Flows.
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12 - Stockholders’ Equity Changes in issued Common Stock and Stockholders’ Equity for each of the three years ended June 30, 2010, 2009 and 2008 were as follows:
* Adjusted for 3-for-2 stock split effective January 16, 2008.
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. Pursuant to the terms of the repurchase program, management’s discretion will determine 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 intended to be structured to conform to the safe harbor provisions of Securities and Exchange Commission Rule 10b-18. In fiscal year 2010, the Company purchased 9,492 shares of its Common Stock, representing 0.1% of the then outstanding shares, on the open
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12 - Stockholders’ Equity - (continued) market at an average price of $8.73 per share. All purchases were made with cash held by the Company and no debt was incurred. See Note 17 to Consolidated Financial Statements for further information concerning stock repurchases.
The Securities and Exchange Commission declared the Company’s shelf registration statement on Form S-3, relating to the sale of up to $50,000,000 of equity, debt or other types of securities described in the shelf registration statement, effective on January 29, 2010. The proceeds of the securities may be used for acquisitions, capital expenditures, repayment of debt the Company may incur in the future, working capital and other general corporate purposes. The specifics of any potential future offering, along with the prices, terms and use of proceeds of any securities offered by the Company, will be determined at the time of any applicable offering and will be described in a prospectus supplement at the time of such applicable offering. The Company has no current plans to offer securities under the shelf registration statement.
Note 13 - Commitments and Contingencies Concentration of Credit Risk: Financial instruments which potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, short term investments and trade accounts receivable. The Company maintains substantial cash and cash equivalent balances with various financial institutions in amounts which exceed the limit of FDIC insurance. The short term investments consist of tax exempt instruments of high credit quality. The Company believes that the risk of loss associated with cash, cash equivalents and short term investments 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.
Financial Instruments: The Company does not hold or issue financial instruments for trading or hedging purposes, nor does it hold interest rate, leveraged or other types of derivative financial instruments. Fair value of short-term investments, accounts receivable, accounts payable, accrued expenses and income taxes payable reflected in the June 30, 2010 and 2009 balance sheets approximate carrying values at those dates.
Lease Commitments: The following table presents the Company’s future minimum lease payments as of June 30, 2010 relating to its non-cancelable operating leases with terms in excess of one year:
Under such operating leases, rent expense amounted to $432,000, $444,000 and $418,000 for the years ended June 30, 2010, 2009 and 2008, respectively.
The Company’s leases for its Norwalk, Connecticut and Fredericksburg, Texas office and manufacturing facilities expire in fiscal years 2013 and 2014, respectively.
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13 - Commitments and Contingencies - (continued) Employment Severance Agreements: The Company has a severance compensation plan in which three executive officers of the Company, other than the President and the Executive Vice President, participate. The plan becomes operative upon their termination if such termination occurs within 24 months after a change in ownership of the Company, as defined in the plan.
The Company also has employment agreements with the President and the Executive Vice President which provide for severance in the case of voluntary or involuntary termination in certain circumstances. These employment agreements have terms through June 30, 2013, subject to extension as set forth in the agreements.
The aggregate maximum potential severance liability under the above-mentioned agreements approximates $8,214,000 at June 30, 2010. No amounts were due as of that date because no events had occurred which would have triggered payments under the severance compensation plan or severance payments under the employment agreements.
Litigation: 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.
Note 14 - Segment and Customer Information As of June 30, 2009, the Company changed its segment reporting from a single segment (formerly referred to as the oilfield services equipment or the geophysical equipment segment) to three reportable segments aligned with each of the Company’s product lines. The seismic energy sources segment develops, manufactures and sells marine seismic energy sources (air guns) and replacement parts. The underwater cables and connectors segment develops, manufactures and sells underwater cables, connectors, hydrophones, depth and pressure transducers and seismic source monitoring systems. The seismic energy source controllers segment develops, manufactures and sells air gun controllers/synchronizers, data loggers and auxiliary equipment.
Sales of the Company’s products in each reportable segment are generally related to the level of worldwide oil and gas exploration and development activity, which is dependent, primarily, on oil and gas prices.
The Company sold Custom Products Corporation (“Custom”) effective May 31, 2008. Custom formerly constituted the Company’s industrial products segment. See Note 3 to Consolidated Financial Statements for additional information concerning discontinued operations.
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14 - Segment and Customer Information - (continued) The following table provides selected financial information for each reportable segment for the fiscal years ended June 30, 2010, 2009 and 2008.
* Restated to conform with Fiscal Year 2010 presentation.
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14 - Segment and Customer Information - (continued) The following table reports sales by country for the fiscal years ended June 30, 2010, 2009 and 2008. Sales are attributed to each country based on the location of the customer. Total sales to all foreign countries for the fiscal years ended June 30, 2010, 2009 and 2008 were $24,704,000, $41,494,000 and $49,544,000, respectively. The Company has no assets outside of the United States. The Company does not allocate interest income and income taxes to segments.
A relatively small number of customers has accounted for the Company’s sales. Customers accounting for 10% or more of consolidated sales in fiscal years 2010, 2009 or 2008 are as follows:
* Restated to reflect an acquisition of an existing customer of the Company.
Note 15 - Accrued Expenses Accrued expenses at June 30, 2010 and 2009 consist of the following:
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16 - Quarterly Results (unaudited) The following table summarizes results for each of the four quarters in the fiscal years ended June 30, 2010 and 2009.
Note 17 - Subsequent Events Subsequent to June 30, 2010, the Company purchased 98,629 shares of its Common Stock in the open market at a total cost of $878,000 (average price of $8.90 per share) pursuant to the Company’s stock repurchase program. All purchases were made with cash held by the Company and no debt was incurred. See Note 12 to Consolidated Financial Statements for information regarding the Company’s stock repurchase program.
The Company has determined that there were no other events or transactions occurring subsequent to June 30, 2010 that would have a material impact on the Company’s results of operations or financial condition.
BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES Schedule II - Valuation and Qualifying Accounts
For the Three Years Ended June 30, 2010
(a) Accounts written-off.
(b) Scrapped inventory.
EXHIBIT INDEX
* Filed herewith
 Management contract or compensatory plan