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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: September 30, 2012

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 001-12075

 

BOLT TECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

At November 2, 2012, there were 8,596,671 shares of Common Stock, without par value, outstanding.

 

 
 

 

BOLT TECHNOLOGY CORPORATION

 

INDEX

 

   

Page

Number

     
Part I - Financial Information:  
     
Item 1. Financial Statements  
     
  Consolidated Statements of Income (Unaudited) -  
  Three months ended September 30, 2012 and 2011 3
     
  Consolidated Balance Sheets -  
  September 30, 2012 (Unaudited) and June 30, 2012 4
     
  Consolidated Statements of Cash Flows (Unaudited) -  
  Three months ended September 30, 2012 and 2011 5
     
  Notes to Consolidated Financial Statements (Unaudited) 6-23
     
Item 2. Management’s Discussion and Analysis of Financial  
  Condition and Results of Operations 24-32
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 32
     
Item 4. Controls and Procedures 33
     
Part II - Other Information:  
     
Item 1. Legal Proceedings 34
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
     
Item 6. Exhibits 34
     
Signatures 35
     
Exhibit Index 36

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1 – Financial Statements

 

BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

   Three Months Ended 
   September 30, 
   2012   2011 
         
Sales  $14,268,000   $9,572,000 
           
Costs and Expenses:          
Cost of sales   7,670,000    4,912,000 
Research and development   620,000    563,000 
Selling, general and administrative   3,385,000    3,179,000 
Interest income   (28,000)   (46,000)
           
    11,647,000    8,608,000 
           
Income before income taxes   2,621,000    964,000 
Provision for income taxes   917,000    244,000 
Net income  $1,704,000   $720,000 
           
Earnings per share:          
Basic  $0.20   $0.08 
Diluted  $0.20   $0.08 
           
Average number of common shares outstanding:          
Basic   8,576,586    8,521,633 
Diluted   8,580,891    8,557,444 

  

Refer to Notes to Consolidated Financial Statements (Unaudited).

 

3
 

 

BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   September 30,     
   2012   June 30, 
   (Unaudited)   2012 
         
ASSETS          
Current Assets:          
Cash and cash equivalents  $26,332,000   $24,613,000 
Accounts receivable, less allowance for uncollectible accounts of $637,000 at September 30, 2012 and $404,000 at June 30, 2012   8,619,000    8,869,000 
Inventories   17,135,000    17,708,000 
Deferred income taxes   530,000    391,000 
Other current assets   1,029,000    889,000 
Total current assets   53,645,000    52,470,000 
Property, Plant and Equipment, net   5,098,000    4,860,000 
Goodwill, net   17,227,000    17,227,000 
Other Intangible Assets, net   7,653,000    7,902,000 
Other Assets   250,000    255,000 
Total assets  $83,873,000   $82,714,000 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current Liabilities:          
Accounts payable  $1,570,000   $1,890,000 
Accrued expenses   2,181,000    2,735,000 
Contingent earnout liability   2,400,000    1,700,000 
Dividends payable   601,000    429,000 
Income taxes payable   830,000    413,000 
Total current liabilities   7,582,000    7,167,000 
Non-Current Portion of Contingent Earnout Liability   2,600,000    3,300,000 
Deferred Income Taxes   2,494,000    2,429,000 
Total liabilities   12,676,000    12,896,000 
           
Stockholders’ Equity:          
Common stock   31,570,000    31,294,000 
Retained earnings   41,553,000    40,450,000 
Treasury stock, at cost   (1,926,000)   (1,926,000)
Total stockholders’ equity   71,197,000    69,818,000 
Total liabilities and stockholders’ equity  $83,873,000   $82,714,000 

 

Refer to Notes to Consolidated Financial Statements (Unaudited).

 

4
 

 

BOLT TECHNOLOGY CORPORATION AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

  

Three Months Ended

September 30,

 
   2012   2011 
Cash Flows From Operating Activities:          
Net income  $1,704,000   $720,000 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   423,000    373,000 
Deferred income taxes   (74,000)   (91,000)
Stock-based compensation expense   184,000    200,000 
Change in operating assets and liabilities:          
Accounts receivable   250,000    1,324,000 
Inventories   573,000    (1,331,000)
Other assets   (140,000)   77,000 
Accounts payable   (320,000)   777,000 
Accrued expenses   (554,000)   (375,000)
Income taxes payable   417,000    36,000 
Net cash provided by operating activities   2,463,000    1,710,000 
Cash Flows From Investing Activities:          
Purchase of SeaBotix Inc.   -    (1,560,000)
Capital expenditures and other non-current assets   (407,000)   (200,000)
Net cash used by investing activities   (407,000)   (1,760,000)
Cash Flows From Financing Activities:          
Dividends paid   (429,000)   - 
Exercise of stock options   69,000    - 
Purchases of treasury stock   -    (297,000)
Tax benefit (liability) from vested restricted stock   23,000    (4,000)
Net cash used by financing activities   (337,000)   (301,000)
           
Net increase (decrease) in cash and cash equivalents   1,719,000    (351,000)
Cash and cash equivalents at beginning of period   24,613,000    31,683,000 
Cash and cash equivalents at end of period  $26,332,000   $31,332,000 
           
Supplemental Disclosure of Cash Flow Information:          
Cash transactions:          
Income taxes paid  $552,000   $102,000 
Non cash transactions:          
Transfer of property, plant and equipment to inventory  $-   $627,000 

 

Refer to Notes to Consolidated Financial Statements (Unaudited).

 

5
 

 

BOLT TECHNOLOGY CORPORATION AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 – Basis of Presentation

 

The Consolidated Balance Sheet as of September 30, 2012, the Consolidated Statements of Income for the three month periods ended September 30, 2012 and 2011 and the Consolidated Statements of Cash Flows for the three month periods ended September 30, 2012 and 2011 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal, recurring items. Interim results are not necessarily indicative of results for a full year. These Consolidated Financial Statements (Unaudited) should be read in conjunction with the Consolidated Financial Statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

 

Note 2 – Description of Business and Significant Accounting Policies

 

The Company develops, manufactures and sells marine seismic data acquisition equipment and underwater remotely operated robotic vehicles, and consists of four operating units (each a separate reportable segment): Bolt Technology Corporation (“Bolt”), A-G Geophysical Products, Inc. (“A-G”), Real Time Systems Inc. (“RTS”) and SeaBotix Inc. (“SBX”). The Bolt seismic energy sources segment develops, manufactures and sells marine seismic energy sources (air guns) and replacement parts. The A-G underwater cables and connectors segment develops, manufactures and sells underwater cables, connectors, hydrophones, depth and pressure transducers and seismic source monitoring systems (“SSMS”). The RTS seismic energy source controllers segment develops, manufactures and sells air gun controllers/synchronizers, data loggers and auxiliary equipment. The SBX underwater robotic vehicles segment develops, manufactures and sells underwater remotely operated robotic vehicles used for a variety of underwater tasks. Refer to Note 14 to Consolidated Financial Statements (Unaudited) for additional information concerning reportable segments.

 

Principles of Consolidation

 

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

 

Cash and Cash Equivalents

 

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

 

6
 

 

Allowance for Uncollectible Accounts

 

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

 

Inventories

 

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

 

Property, Plant and Equipment

 

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

 

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

 

Goodwill represents the unamortized excess cost over the value of net assets acquired in business combinations. In September 2011, the Financial Accounting Standards Board issued new accounting guidance for testing goodwill for impairment. The guidance provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test, otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether an entity chooses to perform the qualitative assessment or proceeds directly to the two-step quantitative impairment test.

 

7
 

 

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

 

In conjunction with management’s annual review of goodwill for the year ended June 30, 2012, the Company adopted the new guidance at June 30, 2012. In accordance with the new guidance, the Company conducted an assessment of qualitative factors regarding the A-G reporting unit at June 30, 2012. The qualitative assessment indicated no impairment of the goodwill balance.

 

For the RTS reporting unit, the Company performed the quantitative impairment test. The estimated fair value of the RTS reporting unit was determined utilizing the capitalized cash flow method and the market price method. The capitalized cash flow method relies on historical financial performance, an estimate of the long-term growth rate in free cash flows and a determination of the weighted average cost of capital for the unit. The market price method gives consideration to the prices paid for publicly traded stocks of comparable companies. Goodwill related to the RTS acquisition was tested for impairment at June 30, 2012, and the test indicated no impairment of the goodwill balance.

 

Goodwill relating to the SBX acquisition was initially tested at December 31, 2011 using the capitalized cash flow method and the market price method, as well as the discounted cash flow method, and the test indicated no impairment of the goodwill balance. The discounted cash flow method relies on the estimated future cash flows that are discounted back to their present value using a risk-adjusted discount rate to arrive at an estimated value of the reporting unit.

 

The Company’s reviews of A-G, RTS and SBX goodwill as of September 30, 2012 did not result in any indicators of impairment, and therefore no impairment tests were performed.

 

Intangible assets with indefinite lives must be tested annually, or more frequently if there are indicators of impairment, to determine if events and circumstances still justify the carrying value of such asset. The test consists of a comparison of the fair value of the asset to its carrying amount. If the carrying amount exceeds the fair value, an impairment loss is recognized equal to the excess of the carrying amount over the fair value. Any such loss would be recognized in the period in which the impairment loss arose. The SBX intangible asset with an indefinite life was tested for impairment at December 31, 2011 and the test indicated no impairment. The Company reviewed intangible assets with indefinite lives at September 30, 2012 and June 30, 2012 and such reviews did not result in any indicators of impairment, and therefore no impairment tests were performed.

 

8
 

 

 

The Company’s other long-lived assets consist of property, plant and equipment, other intangible assets with definite lives and other non-current assets. The Company reviews for the impairment of these assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount is considered impaired when anticipated undiscounted cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Any such impairment is measured based on the difference between the fair value and the carrying value of the asset and would be recognized in the Company’s results of operations in the period in which the impairment loss arose. The Company’s reviews as of September 30, 2012 and June 30, 2012 did not result in any indicators of impairment, and therefore no impairment tests were performed.

 

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

 

Revenue Recognition and Warranty Costs

 

The Company recognizes sales revenue when it is realized and earned. The Company’s reported sales revenue is based on meeting the following criteria: (1) manufacturing products based on customer specifications; (2) establishing a set sales price with the customer; (3) delivering product to the customer before the close of the reporting period, whereby delivery results in the transfer of ownership risk to the customer; (4) collecting the sales revenue from the customer is reasonably assured; and (5) no contingencies exist.

 

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

 

Income Taxes

 

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

 

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

 

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

 

9
 

 

Use of Estimates

 

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

 

Valuation of Acquisitions

 

The Company allocates the amounts it pays for each acquisition to the assets it acquires and the liabilities it assumes based on estimated fair values at acquisition date. The Company determines the estimated fair values of identifiable intangible assets based on valuations that use historical information and market assumptions. The Company allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill. The use of different valuation assumptions, including estimated cash flows and discount rates, or different estimated useful life assumptions could result in different purchase price allocations and intangible asset amortization expense in current and future periods.

 

Contingent Earnout Liability

 

The Company is obligated under an earnout arrangement to make cash payments to the former SBX stockholders if certain revenue and gross profit margin thresholds are achieved. The Company recorded a contingent earnout liability at the acquisition date at its estimated fair value, which takes into account the range and probability of projected future revenues of the acquired entity over the earnout period. The Company revalues the contingent earnout liability at the close of each accounting period and records any change in the estimated fair value in the Consolidated Statement of Income as “adjustment of contingent earnout liability.”

 

Increases or decreases in the fair value of the SBX contingent earnout liability can result from changes in assumed revenues, probabilities of achieving revenue and gross profit margin thresholds and discount rates. Significant judgment is used in determining the appropriateness of fair value assumptions at the acquisition date and in subsequent periods. As result, actual contingent earnout payments can differ from estimates, and the differences could be material.

 

Computation of Earnings Per Share

 

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period including common share equivalents (which includes stock option grants) assuming dilution. Unvested shares of restricted stock are included in computing basic earnings per share because they contain rights to receive non-forfeitable dividends. The following is a reconciliation of basic earnings per share to diluted earnings per share for the three month periods ended September 30, 2012 and 2011:  

 

10
 

 

  

Three Months Ended

September 30,

 
   2012   2011 
         
Net income available to common stockholders  $1,704,000   $720,000 
           
Divided by:          
Weighted average common shares   8,576,586    8,521,633 
Weighted average common share equivalents   4,305    35,811 
Total weighted average common shares and common share equivalents   8,580,891    8,557,444 
           
Basic earnings per share  $0.20   $0.08 
Diluted earnings per share  $0.20   $0.08 

 

For the three month periods ended September 30, 2012 and 2011, the calculations do not include options to acquire 40,250 shares and 127,000 shares, respectively, since the inclusion of these shares would have been anti-dilutive.

 

Recent Accounting Developments

 

Testing Indefinite-Lived Intangible Assets for Impairment

 

In July 2012, the Financial Accounting Standards Board issued Accounting Standards Update 2012-02 (“ASU 2012-02”), Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The purpose of ASU 2012-02, which amends the guidance to Topic 350, Intangibles — Goodwill and Other, is to simplify the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. ASU 2012-02 allows an entity to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test. The amendments in ASU 2012-02 permit an entity to first assess qualitatively whether it is more likely than not (more than 50%) that an indefinite-lived intangible asset is impaired, thus necessitating that it perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

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Note 3 – SeaBotix Inc. Acquisition

 

The Company acquired all of the outstanding shares of capital stock of SeaBotix Inc. effective January 1, 2011. At closing, $9,500,000 was paid and a $500,000 purchase price holdback was accrued by the Company. Additional post closing earnout payments are to be made if SBX achieves certain revenue and gross profit margin thresholds during the four-year period ending December 31, 2014.

 

The total purchase price paid or accrued, after the measurement period adjustment of $301,000 in fiscal year 2012, consisted of the following:

 

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

 

The final purchase price allocation was as follows:

 

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

 

 

* None of the goodwill is deductible for income tax purposes.

 

In the fourth quarter of fiscal year 2012, the Company increased the contingent earnout liability by $4,500,000 and the amount was charged to the Consolidated Statement of Income. The charge is not deductible for income tax purposes. This amount is not included in the total purchase price of $16,060,000.

 

The fair values of SBX’s assets and liabilities as of acquisition date were determined based on estimates and assumptions that management believes are reasonable. During the three month period ended September 30, 2011, the preliminary estimate of goodwill relating to the SBX acquisition was increased by $301,000 from the amounts previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011. This change was due to an increase in the actual pro forma working capital adjustment over the preliminary amount included in accrued expenses at June 30, 2011. In accordance with ASC 805, “Business Combinations,” the balances for goodwill and contingent earnout liability in the Consolidated Balance Sheet for June 30, 2011 have been retroactively adjusted to include the effect of this measurement period adjustment, which was based on information obtained subsequent to the acquisition date and June 30, 2011. The final determination of the fair value of certain assets and liabilities was completed and there were no further changes to the fair values of SBX’s assets and liabilities after the previously reported $301,000 adjustment.

 

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

 

Set forth below is a summary of the activity in the contingent earnout liability (all amounts represent fair values) from the date of closing to September 30, 2012:

 

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

 

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

 

As of September 30, 2012, the Company has paid $4,500,000 in earnout payments and has an accrual of $5,000,000 to cover anticipated earnout payments over the remaining earnout period which ends on December 31, 2014.

 

Future earnout payments equal to 15.5% of annual gross revenues are payable if SBX generates annual gross revenues in excess of $10,000,000 and maintains a certain gross profit margin for calendar years 2012 through 2014. If the Company estimates that it is more likely than not that these future earnout payments will exceed $5,000,000, the Company would have to increase the contingent earnout liability by the anticipated additional amount of the earnout payments (up to $10,500,000).

 

The $5,000,000 contingent earnout liability at September 30, 2012 and June 30, 2012 was estimated by the Company based upon projected SBX revenues and gross profit margin thresholds for calendar years 2012, 2013 and 2014 and an analysis using a probability weighted approach for three performance outcomes for these years. The performance outcomes were then discounted using an appropriate discount rate commensurate with the risk associated with SBX to arrive at the fair value of the contingent earnout liability at September 30, 2012 and June 30, 2012. The Company is required to reassess the fair value of the contingent earnout liability on a recurring basis. Should a determination be made that the contingent earnout liability requires adjustment, a charge or credit will made in the Consolidated Statement of Income in the period in which the adjustment is required.

 

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

 

Category  Life  Amount  

Annual

Amortization

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

 

Note 4 – Inventories

 

Inventories consist of the following:

 

  

September 30,

2012

  

June 30,

2012

 
         
Raw materials and sub-assemblies  $15,381,000   $15,928,000 
Work-in-process   2,341,000    2,299,000 
    17,722,000    18,227,000 
Less – Reserve for inventory valuation   (587,000)   (519,000)
   $17,135,000   $17,708,000 

 

A significant source of the Company’s revenue arises from the sale of replacement parts required by customers who have previously purchased products.  As a result, the Company maintains a large quantity of parts on hand that may not be sold or used in final assemblies for an extended period of time.  In order to recognize that certain inventory may become obsolete or that the Company may have supplies in excess of reasonably supportable sales forecasts, an inventory valuation reserve has been established.  The inventory valuation reserve is a significant estimate made by management based on experience and the exercise of professional judgment.  Actual results may differ from this estimate, and the difference could be material.

 

Management establishes the inventory valuation reserve by reviewing the inventory for items that should be reserved in full based on a lack of usage for a specified period of time and for which future demand is not forecasted and establishes an additional reserve for slow moving inventory based on varying percentages of the cost of the items.  The reserve for inventory valuation at September 30, 2012 and June 30, 2012 was $587,000 and $519,000, respectively.  At September 30, 2012 and June 30, 2012, approximately $842,000 and $808,000, 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 the 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 was 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.

 

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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.  During the three month period ended September 30, 2012, the inventory valuation reserve was increased by $68,000 and no items were scrapped or disposed.

 

Note 5 – Property, Plant and Equipment

 

Property, plant and equipment consist of the following:

 

  

September 30,

2012

  

June 30,

2012

 
         
Land  $253,000   $253,000 
Buildings   1,182,000    1,181,000 
Leasehold improvements   1,183,000    1,168,000 
Machinery and equipment   10,923,000    10,728,000 
    13,541,000    13,330,000 
Less -  accumulated depreciation   (8,443,000)   (8,470,000)
   $5,098,000   $4,860,000 

 

Note 6 – Goodwill

 

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

 

The composition of the net goodwill balance at September 30, 2012 and June 30, 2012 is as follows:

 

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

 

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Goodwill represents approximately 21% of the Company’s total assets at September 30, 2012 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.

 

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

 

Note 7 – Other Intangible Assets

 

Other intangible assets consist of the following:

 

 

Category

 

 

Life

  

September 30,

2012

  

June 30,

2012

 
                
Trade name   Indefinite   $1,425,000   $1,425,000 
License   5.5 years    570,000    570,000 
Non-Compete agreements   6 years    647,000    647,000 
Technology   6 – 15 years    6,170,000    6,170,000 
Customer & distributor relationships   7 years    1,400,000    1,400,000 
Other   n.a.    70,000    64,000 
         10,282,000    10,276,000 
Less accumulated amortization        (2,629,000)   (2,374,000)
Total other intangible assets       $7,653,000   $7,902,000 

 

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

 

Fiscal years ended June 30,    
2013  $715,000 
2014  $812,000 
2015  $812,000 
2016  $812,000 
2017  $639,000 

 

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

 

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Note 8 – Accrued Expenses

 

Accrued expenses consist of the following:

 

  

September 30,

2012

  

June 30,

2012

 
         
Compensation and related taxes  $855,000   $1,133,000 
Compensated absences   630,000    615,000 
Commissions payable   159,000    216,000 
Accrued professional fees   165,000    281,000 
Customer deposits   188,000    280,000 
Other   184,000    210,000 
   $2,181,000   $2,735,000 

 

Note 9 – Income Taxes

 

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

 

   2012   2011 
Current:        
Federal  $939,000   $331,000 
State   52,000    4,000 
           
Deferred:          
Federal   (80,000)   (59,000)
State   6,000    (32,000)
Income tax expense  $917,000   $244,000 

 

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

 

   2012   2011 
         
Federal statutory rate   34%   34%
Exempt income from domestic manufacturer’s deduction   (3)   (4)
Research and development tax credit       (5)
Non-deductible expenses   3     
State taxes   1     
Effective tax rate   35%   25%

 

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ASC 740, “Income Taxes,” requires the Company to review all open tax years in all tax jurisdictions to determine if there are any uncertain income tax positions that require recognition in the Company’s financial statements, including any penalties and interest, based on the “more-likely-than-not” criterion.  Based on its review, the Company has concluded that there were no significant income tax positions that would require the recording of additional income taxes or the recognition of any tax benefit in the Company’s financial statements at September 30, 2012.  There were no unallocated tax reserves at September 30, 2012.  The Company’s federal income tax returns for fiscal years prior to fiscal year 2008 are no longer subject to examination by the Internal Revenue Service.

 

Note 10 — Fair Value Measurements

 

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

 

Fair Value Hierarchy

 

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

 

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

 

  Level 1 — Inputs to the valuation methodology are quoted market prices for identical assets or liabilities.
     
  Level 2 — Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs.
     
  Level 3 — Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.

 

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

 

  

Quoted

Market Prices

for

Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

   Total 
Liabilities                
At September 30, 2012 — Contingent earnout liability  $   $   $5,000,000   $5,000,000 
                     
At June 30, 2012 — Contingent earnout liability  $   $   $5,000,000   $5,000,000 

 

This liability relates to the estimated fair value of earnout payments to former SeaBotix Inc. stockholders for calendar years 2012, 2013 and 2014. Refer to Note 3 to Consolidated Financial Statements (Unaudited) for SeaBotix Inc. acquisition information.

 

There have been no changes in the total Level 3 liability of $5,000,000 from June 30, 2012 to September 30, 2012. However, the current portion was adjusted from $1,700,000 at June 30, 2012 to $2,400,000 at September 30, 2012, and the non-current portion was adjusted from $3,300,000 at June 30, 2012 to $2,600,000 at September 30, 2012.

 

The Company determined the fair value of the contingent earnout liability using a probability weighted approach. The principal inputs to the approach include expectations of SBX’s revenue in calendar years 2012 through 2014 and the probability of achieving required gross margin thresholds using an appropriate discount rate. Given the use of significant inputs that are not observable in the market, the contingent liability is classified within Level 3 of the fair value hierarchy.

 

Note 11 – Stock Options and Restricted Stock

 

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

 

The Bolt Technology Corporation 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.

 

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Stock Options

 

Stock option compensation expense, which is a non-cash item, was $64,000 and $87,000 for the three month periods ended September 30, 2012 and 2011, respectively. Unrecognized compensation expense for stock options at September 30, 2012 amounted to $461,000 and the weighted average period for recognizing this expense is 2.7 years.

 

A summary of changes in stock options during the three month period ended September 30, 2012 is as follows:

 

   Shares  

Weighted

Average

Exercise

Price

 
         
Options outstanding at June 30, 2012   180,863   $14.32 
Exercised   (5,313)  $12.96 
Forfeited   (3,750)  $16.36 
Options outstanding at September 30, 2012   171,800   $14.31 

 

At September 30, 2012, the aggregate intrinsic value for outstanding options was $12,000.

 

The weighted average remaining contractual life of options outstanding at September 30, 2012 was 2.5 years.

 

The expiration dates for the outstanding options at September 30, 2012 are as follows:

 

Expiration Date of Option  Number of
Shares
 
November 2012   7,500 
January 2013   13,500 
June 2013   19,250 
November 2013   3,750 
August 2014   42,500 
November 2014   15,000 
November 2015   7,500 
November 2016   22,500 
January 2017   40,300 
Total   171,800 

 

Options exercisable at September 30, 2012, totaled 81,500 shares, consisting of 28,233 non-qualified and 53,267 qualified options.

 

20
 

 

During the three month periods ended September 30, 2012 and 2011, the fair value of options that vested was $180,000 (12,188 shares) and $135,000 (12,500 shares), respectively. During the three month period ended September 30, 2012, 5,313 options were exercised. No options were exercised during the three month period ended September 30, 2011. The weighted average exercise price of exercisable options as of September 30, 2012 was $17.00. At September 30, 2012, there was no aggregate intrinsic value of exercisable options because the market price of the Company’s Common Stock at September 30, 2012 was less than the weighted average exercise price of exercisable options. The weighted average remaining contractual life of exercisable options at September 30, 2012 was 1.3 years.

 

Restricted Stock

 

During the three month periods ended September 30, 2012 and 2011, 27,100 and 38,500 shares, respectively, 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 during the three month periods ended September 30, 2012 and 2011 was $403,000 and $412,000, respectively, as of the grant dates.  This compensation expense, which is a non-cash item, is being recognized in the Company’s financial statements over the five-year vesting period.  Restricted stock compensation expense was $120,000 and $113,000 for the three month periods ended September 30, 2012 and 2011, respectively.  Unrecognized compensation expense for restricted stock at September 30, 2012 amounted to $1,187,000.

 

A summary of changes in restricted stock awards during the three month period ended September 30, 2012 is as follows:

 

   Shares  

Weighted

Average

Grant Date

Fair Value

 
         
Unvested restricted stock awards outstanding at June 30, 2012   95,640   $12.14 
Granted   27,100   $14.89 
Vested   (20,100)  $12.61 
Unvested restricted stock awards outstanding at September 30, 2012   102,640   $12.78 

 

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

 

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Note 12 - Stockholders’ Equity

 

Changes in issued Common Stock and Stockholders’ Equity for the three month period ended September 30, 2012 were as follows:

 

   Common Stock   Treasury Stock   Retained     
   Shares   Amount   Shares   Amount   Earnings   Total 
Balance June 30, 2012   8,766,333   $31,294,000    202,075   $(1,926,000)  $40,450,000   $69,818,000 
Restricted stock grants   27,100                     
Stock based compensation expense       184,000                184,000 
Stock options exercised   5,313    69,000                69,000 
Tax liability from vested restricted stock       23,000                23,000 
Net income                   1,704,000    1,704,000 
Dividends ($0.07 per share)                   (601,000)   (601,000)
Balance September 30, 2012   8,798,746   $31,570,000    202,075   $(1,926,000)  $41,553,000   $71,197,000 

 

At September 30, 2012 and June 30, 2012, 20,000,000 shares of Common Stock, no par value, were authorized.

 

Note 13 – Concentrations and Contingencies

 

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

 

The Company does not hold or issue financial instruments for trading or hedging purposes, nor does it hold interest rate, leveraged or other types of derivative financial instruments. Fair value of accounts receivable, accounts payable, accrued expenses, contingent earnout liability, dividends payable and income taxes payable reflected in the September 30, 2012 and June 30, 2012 balance sheets approximate carrying values at those dates.

 

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

 

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Note 14 – Segment Information

 

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

 

The following table provides selected financial information for each reportable segment for the three month periods ended September 30, 2012 and 2011:

 

  

Seismic

Energy

Sources

  

Underwater

Cables &

Connectors

  

Seismic 

Energy

Source

Controllers

  

 

Underwater

Robotic

Vehicles

  

Corporate

Headquarters
&

Eliminations

   Consolidated 
                         
Three Months Ended September 30, 2012                              
Sales to external customers  $5,407,000   $4,355,000   $882,000   $3,624,000   $   $14,268,000 
Intersegment sales       49,000    102,000        (151,000)    
Depreciation and amortization   51,000    70,000    69,000    228,000    5,000    423,000 
Income (loss) before income taxes   759,000    1,821,000    371,000    694,000    (1,024,000)   2,621,000 
Fixed asset additions   36,000    331,000        39,000        406,000 
                               
Three Months Ended September 30, 2011                              
Sales to external customers  $4,829,000   $3,368,000   $267,000   $1,108,000   $   $9,572,000 
Intersegment sales       39,000    109,000        (148,000)    
Depreciation and amortization   5,000    65,000    72,000    226,000    5,000    373,000 
Income (loss) before income taxes   1,190,000    1,139,000    (13,000)   (488,000)   (864,000)   964,000 
Fixed asset additions   178,000    32,000        16,000        226,000 
                               
Balance Sheet Data at September 30, 2012                              
Segment assets  $19,376,000   $17,428,000   $5,779,000   $20,948,000   $20,342,000   $83,873,000 
Goodwill       7,679,000    3,278,000    6,270,000        17,227,000 
                               
Balance Sheet Data at June 30, 2012                              
Segment assets  $19,985,000   $15,990,000   $6,272,000   $21,421,000   $19,046,000   $82,714,000 
Goodwill       7,679,000    3,278,000    6,270,000        17,227,000 

 

The Company does not allocate income taxes to the segments.  

 

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following management’s discussion and analysis should be read together with the Consolidated Financial Statements (Unaudited) and accompanying notes and other detailed information appearing elsewhere in this Quarterly Report on Form 10-Q.  This discussion and certain other information in this Quarterly Report on Form 10-Q includes forward-looking statements, including statements about the demand for the Company’s products and future results.  Please refer to the “Cautionary Statement for Purposes of Forward-Looking Statements” set forth below.

 

In this Quarterly Report on Form 10-Q, we refer to Bolt Technology Corporation and its subsidiaries as “we,” “the registrant” or “the Company,” unless the context clearly indicates otherwise.

 

Cautionary Statement for Purposes of Forward-Looking Statements

 

Forward-looking statements in this Quarterly Report on Form 10-Q, future filings by the Company with the Securities and Exchange Commission, the Company’s press releases and oral statements by authorized officers of the Company are intended to be subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  These include statements about anticipated financial performance, future revenues or earnings, dividends, business prospects, new products, anticipated energy industry activity, anticipated market performance, planned production and shipping of products, expected cash needs and similar matters.  Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation (i) the risk of technological change relating to the Company’s products and the risk of the Company’s inability to develop new competitive products in a timely manner, (ii) the risk of changes in demand for the Company’s products due to fluctuations in energy industry activity, (iii) the Company’s reliance on certain significant customers, (iv) risks associated with a significant amount of foreign sales, (v) the risk of fluctuations in future operating results, (vi) risks associated with global economic conditions, (vii) risks of changes in environmental or regulatory matters, and (viii) other risks detailed in the Company’s filings with the Securities and Exchange Commission.  The Company believes that forward-looking statements made by it are based on reasonable expectations.  However, no assurances can be given that actual results will not differ materially from those contained in such forward-looking statements.  The words “estimate,” “project,” “anticipate,” “expect,” “predict,” “believe,” “may,” “could,” “should” and similar expressions are intended to identify forward-looking statements.

 

Overview

 

The Company develops, manufactures and sells marine seismic data acquisition equipment and underwater remotely operated robotic vehicles. The Company’s four operating units, each of which is considered to be a separate reportable segment, consist of: seismic energy sources, underwater cables and connectors, seismic energy source controllers and underwater robotic vehicles. Sales of the Company’s products in the three segments dedicated to marine seismic data acquisition equipment (seismic energy sources, underwater cables and connectors and seismic energy source controllers) are generally related to the level of worldwide oil and gas exploration and development activity, which is based on current and projected crude oil and natural gas prices. Sales of the Company’s underwater robotic vehicles are generally related to the demand from governmental and quasi-governmental units. Refer to Note 14 to Consolidated Financial Statements (Unaudited) for further information on reportable segments.

 

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Sales for the three month period ended September 30, 2012 increased by $4,696,000 or 49% from the three month period ended September 30, 2011. The combined sales for the marine seismic data acquisition segments increased from $8,464,000 for the three month period ended September 30, 2011 to $10,644,000 for the three month period ended September 30, 2012. In addition, sales for underwater robotic vehicles increased from $1,108,000 for the three month period ended September 30, 2011 to $3,624,000 for the three month period ended September 30, 2012.

 

The Company is hopeful that sales in the marine seismic data acquisition segments and in the underwater robotic vehicles segment will continue to show strength during the remainder of fiscal year 2013. The fiscal year outlook is anticipated to be positive for the marine seismic data acquisition segments due to the current level of customer orders and inquiries and the planned market introduction in the current fiscal year of the Smart Energy Source, a digital gun controller that also provides sophisticated near field measurements. While the outlook for the underwater robotic vehicles segment is positive through December 31, 2012, sales growth beyond that date remains dependent on several factors, including demand from its major customer groups and government budget levels.

 

At September 30, 2012, the Company conducted an assessment of the contingent earnout liability of $5,000,000 and determined that no adjustment was required. However, the current portion of the contingent earnout liability was adjusted from $1,700,000 at June 30, 2012 to $2,400,000 at September 30, 2012 and the non-current portion of the contingent earnout liability was adjusted by a like amount from $3,300,000 to $2,600,000, based on anticipated governmental budgetary constraints and the global economic situation.

 

The Company has a joint development effort with WesternGeco, a product line of Schlumberger, to develop an environmentally sensitive energy source for marine seismic exploration surveys. The air gun is a bandwidth-controlled source of acoustic waves designed to reduce the potential impact of seismic signals on marine life. This is a multi-phase development project which, if successfully developed and commercialized, could be a significant new development in the marine seismic exploration industry. Expenditures made in support of this project are recorded as research and development expense in the Consolidated Statement of Income. During the three month periods ended September 30, 2012 and 2011, the Company recorded $320,000 and $140,000, respectively, as research and development expense in connection with the joint development efforts.

 

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The Company’s balance sheet remained strong during the three month period ended September 30, 2012. Working capital increased to $46,063,000 at September 30, 2012 from $45,303,000 at June 30, 2012. In addition, the Company remained debt free at September 30, 2012. The Company’s cash position increased to $26,332,000 at September 30, 2012 from $24,613,000 at June 30, 2012.

 

The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”), which are referred to as generally accepted accounting principles or “GAAP” as contained in the FASB Accounting Standards Codification.

 

Liquidity and Capital Resources

 

As of September 30, 2012, the Company believes that cash and cash equivalent balances and projected cash flow from operations will be adequate to meet foreseeable operating needs for the remainder of fiscal year 2013.

 

On August 21, 2012, the Company’s Board of Directors approved a dividend of $0.07 per common share, to be paid on October 4, 2012 to stockholders of record on September 6, 2012.

 

In the fourth quarter of fiscal year 2010, the Company’s Board of Directors authorized and approved a program to repurchase up to $10,000,000 of its Common Stock through open market and privately negotiated transactions. Pursuant to the terms of the repurchase program, management determines the timing and amount of any stock repurchase transactions depending on market conditions, share prices, capital availability and other factors. The Company is not obligated to purchase any shares under the repurchase program. The repurchase program does not have an expiration date and repurchases may be commenced or suspended at any time or from time to time without prior notice. The repurchase program is structured to conform to the safe harbor provisions of SEC Rule 10b-18. Through September 30, 2012, the Company had repurchased 202,075 of its shares under the repurchase program at an aggregate cost of $1,926,000. No shares were repurchased during the three month period ended September 30, 2012.

 

Three Months Ended September 30, 2012

 

At September 30, 2012, the Company had $26,332,000 in cash and cash equivalents, as compared to September 30, 2011, when it had $31,332,000 in cash and cash equivalents. The decrease in cash and cash equivalents was primarily due to dividend payments, payment of consideration relating to the acquisition of SBX and the stock repurchase program, partially offset by cash provided from operations.

 

For the three month period ended September 30, 2012, cash flow from operating activities after changes in working capital items was $2,463,000, primarily due to net income adjusted for non-cash items, lower accounts receivable and inventory, partially offset by lower current liabilities. For the three month period ended September 30, 2011, cash flow from operating activities after changes in working capital items was $1,710,000, primarily due to net income adjusted for non-cash items, lower accounts receivable and higher accounts payable, partially offset by higher inventories.

 

For the three month period ended September 30, 2012, cash used in investing activities was $407,000 primarily due to capital expenditures for new and replacement equipment. For the three month period ended September 30, 2011, cash used in investing activities was $1,760,000 primarily due to payments made to the former SBX stockholders.

 

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For the three month period ended September 30, 2012, cash used in financing activities was $337,000 due to cash dividends paid, partially offset by proceeds from the exercise of stock options. For the three month period ended September 30, 2011, cash used in financing activities was $301,000 due primarily to repurchases of the Company’s Common Stock.

 

The Company anticipates that capital expenditures for the remainder of fiscal year 2013 should not exceed $700,000 and will be funded from operating cash flow.

 

Since a relatively small number of customers account for the majority of the Company’s sales, the consolidated accounts receivable balance at the end of any period tends to be concentrated in a small number of customers.  At September 30, 2012 and June 30, 2012, the five customers with the highest accounts receivable balances represented 61% and 57% of the consolidated accounts receivable balances on those dates, respectively.

 

Off-Balance Sheet Arrangements

 

The Company had no off-balance sheet financing arrangements at September 30, 2012.

 

Contractual Obligations

 

The Company had no long-term borrowings, capital leases, purchase obligations or other long-term liabilities at September 30, 2012 except for the non-current portion of the contingent earnout liability.

 

Results of Operations

 

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

 

Consolidated sales for the three month period ended September 30, 2012 totaled $14,268,000, an increase of $4,696,000 or 49% from the three month period ended September 30, 2011. The change in net sales from the prior year period by reportable segment was as follows: seismic energy sources increased by $578,000 (12%), underwater cables and connectors increased by $987,000 (29%), seismic energy source controllers increased by $615,000 (230%), and underwater robotic vehicles increased by $2,516,000 (227%). 

 

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Sales for the Company’s three marine seismic data acquisition segments contributed 46% of the consolidated sales increase reflecting increased marine seismic activity and the lifting of moratoriums on exploration in the Gulf of Mexico. Many product categories reported higher sales, such as air gun spare parts, SSMS, and analog energy source controllers. SBX contributed 54% of the consolidated sales increase reflecting higher sales across many of its customer groups.

 

Consolidated gross profit as a percentage of consolidated sales was 46% for the three month period ended September 30, 2012 versus 49% for the three month period ended September 30, 2011.  The decrease in the gross profit percentage was caused primarily by higher manufacturing costs.

 

Research and development (“R&D”) costs for the three month period ended September 30, 2012 increased to $620,000 from $563,000 for the three month period ended September 30, 2011. The increase is primarily due to costs associated with the joint development effort with WesternGeco to develop an environmentally friendly seismic energy source.

 

Selling, general and administrative (“SG&A”) expenses increased by $206,000 or 6% in the three month period ended September 30, 2012 from the three month period ended September 30, 2011. The increase was primarily due to an increase in the allowance for uncollectible accounts.

 

Interest income decreased by $18,000 or 39% in the three month period ended September 30, 2012 from the three month period ended September 30, 2011 primarily due to lower average cash and cash equivalent balances.

 

The provision for income taxes for the three month period ended September 30, 2012 was $917,000, an effective tax rate of 35%.   This rate was higher than the federal statutory rate of 34% primarily due to state income taxes and nondeductible expenses offset by benefits associated with the domestic manufacturer’s deduction. The provision for income taxes for the three month period ended September 30, 2011 was $244,000, an effective tax rate of 25%.  This rate was lower than the federal statutory rate of 34% due to tax benefits associated with the domestic manufacturer’s deduction and the research and development tax credit.

 

The above mentioned factors resulted in an increase in net income for the three month period ended September 30, 2012 to $1,704,000, compared to net income of $720,000 for the three month period ended September 30, 2011.

 

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 those that are most important to the portrayal of the Company’s financial condition and results, and require the Company to make its most difficult and subjective judgments.

 

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Based on this definition, the Company’s most critical accounting policies include: revenue recognition, recording of inventory reserves, valuation of acquisitions, contingent earnout liability, deferred taxes, and the potential impairment of goodwill, intangible assets with indefinite lives and other long-lived assets.  These policies are discussed below.  The Company also has other key accounting policies, including the establishment of an allowance for uncollectible accounts.  The Company believes that these other policies either do not generally require it to make estimates and judgments that are as difficult or as subjective, or are less likely to have a material impact on the Company’s reported results of operations for a given period.

 

Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the end of each reporting period and involve inherent risks and uncertainties.  Actual results may differ significantly from the Company’s estimates and its estimates could be different using different assumptions or conditions.

 

Refer to Note 2 to Consolidated Financial Statements (Unaudited) for additional information concerning significant accounting policies.

 

Revenue Recognition

 

The Company recognizes sales revenue when it is realized and earned.  The Company’s reported sales revenue is based on meeting the following criteria: (1) manufacturing products based on customer specifications; (2) establishing a set sales price with the customer; (3) delivering product to the customer before the close of the reporting period, whereby delivery results in the transfer of ownership risk to the customer; (4) collecting the sales revenue from the customer is reasonably assured; and (5) no contingencies exist.

 

Inventory Reserves

 

A significant source of the Company’s revenue arises from the sale of replacement parts required by customers who have previously purchased products.  As a result, the Company maintains a large quantity of parts on hand that may not be sold or used in final assemblies for an extended period of time.  In order to recognize that certain inventory may become obsolete or that the Company may have supplies in excess of reasonably supportable sales forecasts, an inventory valuation reserve has been established.  The inventory valuation reserve is a significant estimate made by management based on experience and the exercise of professional judgment.  Actual results may differ from this estimate, and the difference could be material.

 

Management establishes the inventory valuation reserve by reviewing the inventory for items that should be reserved in full based on a lack of usage for a specified period of time and for which future demand is not forecasted and establishes an additional reserve for slow moving inventory based on varying percentages of the cost of the items.  The reserve for inventory valuation at September 30, 2012 and June 30, 2012 was $587,000 and $519,000, respectively.  At September 30, 2012 and June 30, 2012, approximately $842,000 and $808,000, 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 the 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.

 

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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.  During the three month period ended September 30, 2012, the inventory valuation reserve was increased by $68,000 and no items were scrapped or disposed.

 

Valuation of Acquisitions

 

The Company allocates the amounts it pays for each acquisition to the assets it acquires and the liabilities it assumes based on estimated fair values at acquisition date. The Company determines the estimated fair values of identifiable intangible assets based on valuations that use historical information and market assumptions. The Company allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill. The use of different valuation assumptions, including estimated cash flows and discount rates, or different estimated useful life assumptions could result in different purchase price allocations and intangible asset amortization expense in current and future periods.

 

Contingent Earnout Liability

 

The Company is obligated under an earnout arrangement to make cash payments to the former SBX stockholders if certain revenue and gross profit margin thresholds are achieved. The Company recorded a contingent earnout liability at the acquisition date at its estimated fair value, which takes into account the range and probability of projected future revenues of the acquired entity over the earnout period. The Company revalues the contingent earnout liability at the close of each accounting period and records any change in the estimated fair value in the Consolidated Statement of Income as “adjustment of contingent earnout liability.” This adjustment would be a non-deductible expense for income tax purposes.

 

Increases or decreases in the fair value of the SBX contingent earnout liability can result from changes in assumed revenues, probabilities of achieving revenue and gross profit margin thresholds and discount rates. Significant judgment is used in determining the appropriateness of fair value assumptions at the acquisition date and in subsequent periods. As a result, actual contingent earnout payments can differ from estimates, and the differences could be material.

 

At September 30, 2012, the Company conducted an assessment of the contingent earnout liability of $5,000,000 and determined that no adjustment was required. However, the current portion of the contingent earnout liability was adjusted from $1,700,000 at June 30, 2012 to $2,400,000 at September 30, 2012 and the non-current portion of the contingent earnout liability was adjusted by a like amount from $3,300,000 to $2,600,000, based on anticipated governmental budgetary constraints and the global economic situation.

 

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Deferred Taxes

 

The Company applies an asset and liability approach to accounting for income taxes.  Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities, using enacted tax rates in effect for the years in which the differences are expected to reverse.  

 

The recoverability of deferred tax assets is dependent upon the Company’s assessment of whether it is more likely than not that sufficient future taxable income will be generated in the relevant tax jurisdiction to utilize the deferred tax asset.  The Company reviews its internal forecasted sales and pre-tax earnings estimates to make its assessment about the utilization of deferred tax assets.  In the event the Company determines that future taxable income will not be sufficient to utilize the deferred tax asset, a valuation allowance is recorded. If that assessment changes, a charge or a benefit would be recorded in the Consolidated Statement of Income.  The Company has concluded that no deferred tax valuation allowance was necessary at September 30, 2012 and June 30, 2012 because future taxable income is believed to be sufficient to utilize any deferred tax asset.

 

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

 

The Company reviews goodwill for impairment annually or more frequently if impairment indicators arise. The Company conducted an assessment of qualitative factors regarding A-G at June 30, 2012 and the qualitative assessment indicated no impairment of the goodwill balance. RTS goodwill was tested for impairment and the test indicated no impairment of the goodwill balance at June 30, 2012. SBX goodwill was initially tested for impairment at December 31, 2011 and the test indicated no impairment of the goodwill balance. The Company’s reviews of A-G, RTS and SBX goodwill as of September 30, 2012 did not result in any indicators of impairment, and therefore no impairment tests were performed.

 

Goodwill represents approximately 21% of the Company’s total assets at September 30, 2012. The evaluation of goodwill is thus a significant estimate by management. Even if management’s estimate were incorrect, it would not result in a cash outlay because the goodwill amounts arose out of acquisition accounting. Refer to Notes 3 and 6 to Consolidated Financial Statements (Unaudited) for additional information concerning goodwill.

 

Intangible assets with indefinite lives must be tested annually, or more frequently if there are indicators of impairment, to determine if events and circumstances still justify the carrying value of such asset. The test consists of a comparison of the fair value of the asset to its carrying amount. If the carrying amount exceeds the fair value, an impairment loss is recognized equal to the excess of the carrying amount over the fair value. Any such loss would be recognized in the period in which the impairment arose. The SBX intangible asset with an indefinite life was tested for impairment at December 31, 2011 and the test indicated no impairment. The Company reviewed intangible assets with indefinite lives at September 30, 2012 and such reviews did not result in any indicators of impairment, and therefore no impairment tests were performed.

 

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The Company’s other long-lived assets consist of property, plant and equipment, other intangible assets with definite lives and other non-current assets. The Company reviews for the impairment of these assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount is considered impaired when anticipated undiscounted cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Any such impairment is measured based on the difference between the fair value and the carrying value of the asset and would be recognized in the Company’s results of operations in the period in which the impairment loss arose. The Company’s reviews as of September 30, 2012 did not result in any indicators of impairment, and therefore no impairment tests were performed.

 

Recent Accounting Developments

 

Testing Indefinite-Lived Intangible Assets for Impairment

 

In July 2012, the Financial Accounting Standards Board issued Accounting Standards Update 2012-02 (“ASU 2012-02”), Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The purpose of ASU 2012-02, which amends the guidance to Topic 350, Intangibles — Goodwill and Other, is to simplify the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. ASU 2012-02 allows an entity to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test. The amendments in ASU 2012-02 permit an entity to first assess qualitatively whether it is more likely than not (more than 50%) that an indefinite-lived intangible asset is impaired, thus necessitating that it perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

 

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

 

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Item 4 – Controls and Procedures

 

The chief executive officer and the chief financial officer, with the assistance of key employees throughout the Company, including its subsidiaries, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2012.  Based upon the results of such evaluation, the chief executive officer and the chief financial officer have concluded that such disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.

 

No changes in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2012 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 

 

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PART II – OTHER INFORMATION

 

Item 1 – Legal Proceedings

 

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

 

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

 

In June 2010, the Company’s Board of Directors authorized and approved a program to repurchase up to $10,000,000 of its Common Stock through open market and privately negotiated transactions. The Company did not repurchase any shares of its Common Stock during the three month period ended September 30, 2012. As of September 30, 2012, $8,074,000 remained available for repurchase under the existing repurchase authorization.

 

Item 6 – Exhibits  

 

31.1   Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).*
     
31.2   Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).*
     
32.1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).**
     
32.2   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).**
     
101.INS   XBRL Instance Document.***
     
101.SCH   XBRL Taxonomy Extension Schema Document.***
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.***
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.***
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.***
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.***

 

* Filed with this Form 10-Q.
** Furnished with this Form 10-Q.
*** In accordance with Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, is deemed not filed for purposes of section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    BOLT TECHNOLOGY CORPORATION
     
Date: November 9, 2012   /s/ Raymond M. Soto
   

Raymond M. Soto

Chairman of the Board

and Chief Executive Officer

(Principal Executive Officer)

     
Date: November 9, 2012   /s/ Joseph Espeso
   

Joseph Espeso

Senior Vice President-Finance and

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit 

No.

  Description  
       
31.1   Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).*
     
31.2   Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).*
     
32.1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).**
     
32.2   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).**
     
101.INS   XBRL Instance Document.***
     
101.SCH   XBRL Taxonomy Extension Schema Document.***
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.***
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.***
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.***
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.***

 

* Filed with this Form 10-Q.
** Furnished with this Form 10-Q.
*** In accordance with Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, is deemed not filed for purposes of section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.

 

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