Summary of BOLT TECHNOLOGY CORP

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

The following management's discussion and analysis should be read together with the Consolidated Financial Statements (Unaudited) and accompanying notes and other detailed information appearing elsewhere in this Form 10-Q. This discussion and certain other information in this 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" 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 Form 10-Q, future filings by the Company with the Securities and Exchange Commission, the Company's press releases and oral statements by authorized officers of the Company are intended to be subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These include statements about anticipated financial performance, future revenues or earnings, business prospects, new products, anticipated energy industry activity, anticipated market performance, planned production and shipping of products, expected cash needs and similar matters. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation (i) the risk of technological change relating to the Company's products and the risk of the Company's inability to develop new competitive products in a timely manner, (ii) the risk of changes in demand for the Company's products due to fluctuations in energy industry activity,
(iii) the Company's reliance on certain significant customers, (iv) risks associated with a significant amount of foreign sales, (v) the risk of fluctuations in future operating results, (vi) risks associated with global economic conditions and (vii) 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 operates in the oilfield services equipment business and has three operating units: seismic energy sources, underwater cables and connectors and seismic energy source controllers. Commencing in the fiscal year ended June 30, 2009, each of these operating units is considered to be a separate reportable segment. Prior to fiscal 2009, the above operating units were reported in one reportable segment, which was referred to as the oilfield services equipment or geophysical equipment segment. Please refer to Note 12 to Consolidated Financial Statements (Unaudited) for further information on reportable segments.

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 when referring to guidance issued by the FASB, such referrals 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. In view of this change, the Company has changed its references to GAAP in this Quarterly Report on Form 10-Q to 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 consolidated financial statements.

The Company's products in all three segments share a common economic characteristic: sales are generally related to the level of worldwide marine 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 38% in the three month period ended September 30, 2009 compared to the three month period ended September 30, 2008. Longer term, we believe that the fundamentals for the industry remain strong due to the imbalance between supply and demand, low reserve replacement rates and increasing global demand. As economic conditions improve, we anticipate increased demand for the Company's products.

The Company's balance sheet continued to strengthen during the three month period ended September 30, 2009. Cash, cash equivalents and short-term investments increased from $27,737,000 at June 30, 2009 to $33,752,000 at September 30, 2009, and working capital increased from $49,935,000 at June 30, 2009 to $51,340,000 at September 30, 2009. The Company remained debt free at September 30, 2009.

Liquidity and Capital Resources

As of September 30, 2009, the Company believes that current cash and cash equivalent balances, short-term investments and projected cash flow from operations in fiscal 2010 will be adequate to meet foreseeable operating needs.

Three Months Ended September 30, 2009

At September 30, 2009, the Company had $33,752,000 in cash, cash equivalents and short-term investments. This amount is $6,015,000 or 22% greater than at June 30, 2009.

For the three month period ended September 30, 2009, cash flow from operating activities after changes in working capital items was $6,042,000, primarily due to net income adjusted for non cash items and lower accounts receivable, partially offset by lower current liabilities.

For the three month period ended September 30, 2009, cash flow from investing activities was $1,022,000 due to proceeds received from matured short-term investments of $1,041,000 and capital expenditures of $19,000 for new and replacement equipment.

The Company anticipates that capital expenditures for the remainder of fiscal 2010 will be less than $400,000 and will be funded from operating cash flow.

Since a relatively small number of customers account for the majority of the Company's sales, the consolidated accounts receivable balance at the end of any period tends to be concentrated in a small number of customers. At September 30, 2009 and June 30, 2009, the five customers with the highest accounts receivable balances represented 55% and 53% of the consolidated accounts receivable balances on those dates, respectively.

Three Months Ended September 30, 2008

At September 30, 2008, the Company had $20,337,000 in cash and cash equivalents. This amount was $1,200,000 or 6% higher than the amount of cash and cash equivalents at June 30, 2008.

For the three month period ended September 30, 2008, cash flow from operating activities after changes in working capital items was $1,420,000, primarily due to net income adjusted for non cash items and lower accounts receivable, partially offset by higher inventories and lower current liabilities.

For the three month period ended September 30, 2008, cash flow from investing activities was ($220,000) primarily relating to capital expenditures for new and replacement manufacturing equipment and leasehold improvements.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet financing arrangements.

Contractual Obligations

During the three month period ended September 30, 2009, there were no changes in the operating leases described in the Company's Annual Report on Form 10-K for the Fiscal Year ended June 30, 2009. The Company had no long-term borrowings, capital leases, purchase obligations or other long term liabilities at September 30, 2009.

Results of Operations

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Consolidated sales for the three month period ended September 30, 2009 totaled $7,033,000, a decrease of $4,230,000 or 38% from the three month period ended September 30, 2008. Sales in all three reportable segments decreased: sales of seismic energy source systems decreased by $1,210,000 (26%), sales of underwater cables and connectors decreased by $2,466,000 (48%), and sales of seismic energy source controllers decreased by $554,000 (36%). 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 51% for the three month period ended September 30, 2009 versus 49% for the three month period ended September 30, 2008. The improvement in the gross profit percentage was caused primarily by a reduction in the amount of manufacturing outsourcing and lower raw material costs.

Research and development costs for the three month period ended September 30, 2009 increased by $10,000 or 16% from the three month period ended September 30, 2008. These expenditures were associated with new product development.

Selling, general and administrative expenses decreased by $255,000 or 12% in the three month period ended September 30, 2009 from the three month period ended September 30, 2008, primarily due to expense reductions in the following areas: advertising and trade show ($68,000); freight out ($54,000); compensation costs ($52,000); and professional fees ($38,000).

Interest income increased by $23,000 or 28% in the three month period ended September 30, 2009 from the three month period ended September 30, 2008 primarily due to increases in the Company's cash and cash equivalent balances.

The provision for income taxes for the three month period ended September 30, 2009 was $524,000, an effective tax rate of 31%. This rate was lower than the federal statutory rate of 34%, primarily due to tax benefits associated with the domestic manufacturer's deduction, partially offset by state income taxes. The provision for income taxes for the three month period ended September 30, 2008 was $1,121,000, an effective tax rate of 33%. This rate was lower than the federal statutory rate of 34%, primarily due to tax benefits associated with the domestic manufacturer's deduction partially offset by state income taxes.

The above mentioned factors resulted in net income for the three month period ended September 30, 2009 of $1,178,000 compared to net income of $2,280,000 for the three month period ended September 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 require the Company to make its most difficult and subjective judgments.

Based on this definition, the Company's most critical accounting policies include: revenue recognition, recording of inventory reserves, deferred taxes, and the potential impairment of goodwill. These policies are discussed below. The Company also has other key accounting policies, including the establishment of bad debt reserves. The Company believes that these other policies either do not generally require it to make estimates and judgments that are as difficult or as subjective, or 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 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) delivering product to the customer before the close of the reporting period, whereby delivery results in the transfer of ownership risk to the customer;
(3) establishing a set sales price with the customer; (4) collecting the sales revenue from the customer is reasonably assured; and (5) no contingencies exist.

Inventory Reserves

A significant source of the Company's revenue arises from the sale of replacement parts required by customers who have previously purchased products. As a result, the Company maintains a large quantity of parts on hand that may not be sold or used in final assemblies for an extended period of time. In order to recognize that certain inventory may become obsolete or that the Company may have supplies in excess of reasonably supportable sales forecasts, an inventory valuation reserve has been established. The inventory valuation reserve is a significant estimate made by management 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, 2009 and June 30, 2009 was $677,000 and $651,000, respectively. At September 30, 2009 and June 30, 2009, approximately $1,995,000 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. At September 30, 2009, the cost of inventory for which the Company has more than a five-year supply on hand and the cost of inventory for which the Company has had no sales during the last five years amounted to approximately $1,155,000. Management believes that this inventory is properly valued and appropriately reserved. Even if management's estimate were incorrect, that would not result in a cash 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 three month period ended September 30, 2009, the inventory valuation reserve was increased by $26,000, and the Company did not scrap or dispose of any items.

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, 2009 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. Management tested goodwill for impairment as of June 30, 2009 and 2008, and the tests indicated no impairment. The Company reviewed goodwill at September 30, 2009, and such review did not indicate impairment.

Goodwill represents approximately 15% of the Company's total assets at September 30, 2009 and the evaluation of goodwill impairment 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 2 and 6 to Consolidated Financial Statements (Unaudited) 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.