UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
[Mark one]
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For quarter ended September 30, 2006
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 1-9334
BALDWIN TECHNOLOGY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3258160
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Trap Falls Road, Suite 402, Shelton, Connecticut 06484
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203-402-1000
N/A
(Former name, former address and former fiscal year, if changed since
last report)
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 Act of 1934 during
the preceding 12 months (or 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 is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class October 31, 2006
----- ----------------
Class A Common Stock
$0.01 par value 13,908,457
Class B Common Stock
$0.01 par value 1,233,411
BALDWIN TECHNOLOGY COMPANY, INC.
INDEX
Page
-----
Part I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets at September 30, 2006
(unaudited) and June 30, 2006 1-2
Consolidated Statements of Income for the three months
ended September 30, 2006 (unaudited) and 2005
(unaudited) 3
Consolidated Statements of Changes in Shareholders'
Equity for the three months ended September 30, 2006
(unaudited) 4
Consolidated Statements of Cash Flows for the three
months ended September 30, 2006 (unaudited) and 2005
(unaudited) 5-6
Notes to Consolidated Financial Statements (unaudited) 7-11
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
Item 3 Quantitative and Qualitative Disclosures About Market
Risk 16
Item 4 Controls and Procedures 16
Part II Other Information
Item 1A Risk Factors 17
Item 2 Unregistered Sales of Equity Securities and Use of
Proceeds 17
Item 6 Exhibits 17
Signatures 18
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
September 30, 2006 June 30, 2006
------------------ -------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 14,696 $ 14,986
Accounts receivable trade, net of allowance for doubtful
accounts of $1,473 ($1,452 at June 30, 2006) 34,652 32,602
Notes receivable, trade 6,787 7,260
Inventories 23,120 22,657
Deferred taxes, net 521 475
Prepaid expenses and other 3,914 4,799
-------- --------
Total Current Assets 83,690 82,779
-------- --------
MARKETABLE SECURITIES:
Cost $565 at September 30, 2006 ($573 at June 30, 2006) 766 760
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land and buildings 1,004 1,024
Machinery and equipment 2,785 2,674
Furniture and fixtures 4,026 4,023
Capital leases 228 287
-------- --------
8,043 8,008
Less: Accumulated depreciation and amortization (4,490) (4,391)
-------- --------
Net Property, plant and equipment 3,553 3,617
-------- --------
PATENTS, TRADEMARKS AND ENGINEERING DRAWINGS, at
cost, less accumulated amortization of $5,083
($4,996 at June 30, 2006)
2,648 2,690
GOODWILL, less accumulated amortization of $3,336
($3,419 at June 30, 2006)
10,896 11,059
DEFERRED TAXES, NET 7,975 8,109
OTHER ASSETS 2,261 3,749
-------- --------
TOTAL ASSETS $111,789 $112,763
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
1
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2006 June 30, 2006
------------------ -------------
(unaudited)
CURRENT LIABILITIES:
Loans payable $ 3,386 $ 2,622
Current portion of long-term debt 828 853
Accounts payable, trade 16,728 16,809
Notes payable, trade 6,189 7,987
Accrued salaries, commissions, bonus and
profit-sharing 6,065 7,998
Customer deposits 5,256 4,113
Accrued and withheld taxes 1,493 2,036
Income taxes payable 1,488 1,015
Other accounts payable and accrued liabilities 9,796 9,581
-------- --------
Total current liabilities 51,229 53,014
-------- --------
LONG TERM LIABILITIES:
Long-term debt 6,912 7,080
Other long-term liabilities 6,708 6,736
-------- --------
Total long-term liabilities 13,620 13,816
-------- --------
Total liabilities 64,849 66,830
-------- --------
SHAREHOLDERS' EQUITY:
Class A Common Stock, $.01 par, 45,000,000
shares authorized, 17,431,215 shares issued
at September 30, 2006 and 17,376,215 shares
issued at June 30, 2006 174 174
Class B Common Stock, $.01 par, 4,500,000
shares authorized, 1,527,681 shares issued
at September 30, 2006 and 1,537,681 shares
issued at June 30, 2006 15 15
Capital contributed in excess of par value 58,229 57,943
Accumulated deficit (48) (1,374)
Accumulated other comprehensive income 2,021 2,626
Less: Treasury stock, at cost:
Class A - 3,630,202 shares at September 30,
2006 and June 30, 2005
Class B - 294,270 shares at September 30,
2006 and June 30, 2005 (13,451) (13,451)
-------- --------
Total shareholders' equity 46,940 45,933
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $111,789 $112,763
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
2
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the three months
ended September 30,
--------------------
2006 2005
------- -------
Net Sales $43,207 $42,645
Cost of goods sold 28,945 28,589
------- -------
Gross Profit 14,262 14,056
------- -------
Operating Expenses:
General and administrative 4,879 4,688
Selling 3,291 3,434
Engineering and development 3,977 3,780
------- -------
12,147 11,902
------- -------
Operating income 2,115 2,154
------- -------
Other (income) expense:
Interest expense 224 298
Interest income (31) (28)
Royalty income, net -- (200)
Other (income) expense, net (226) 67
------- -------
(33) 137
------- -------
Income before income taxes 2,148 2,017
Provision for income taxes 822 824
------- -------
Net income $ 1,326 $ 1,193
======= =======
Net income per share - basic and diluted
Income per share - basic $ 0.09 $ 0.08
Income per share - diluted $ 0.08 $ 0.08
======= =======
Weighted average shares outstanding:
Basic 15,003 14,923
======= =======
Diluted 15,726 15,474
======= =======
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES) (UNAUDITED)
Class A Class B Capital Accumulated
Common Stock Common Stock Contributed Other Treasury Stock
----------------- ----------------- In Excess Retained Comprehensive --------------------- Comprehensive
Shares Amount Shares Amount of Par Deficit Income Shares Amount Income
---------- ------ ---------- ------ ----------- -------- ------------- ----------- --------- -------------
Balance at
June 30,
2006 17,376,215 $174 1,537,681 $15 $57,943 $(1,374) $2,626 (3,924,472) $(13,451)
Net income for
the three
months
ended
September
30, 2006 1,326 $1,326
Translation
adjustment (556) (556)
Unrealized
gain on
available-
for-sale
securities,
net of tax 8 8
Amortization
stock
based
compensation 150
Unrealized
loss on
forward
contracts,
net of tax (145) (145)
Minimum
pension
liability 88 88
------
Comprehensive
income $ 721
======
Shares
converted
Class B to
Class A 10,000 (10,000)
Shares issued
under
stock
option plan 45,000 136
---------- ---- --------- --- ------- ------- ------ ---------- --------
Balance at
September
30, 2006 17,431,215 $174 1,527,681 $15 $58,229 $ (48) $2,021 (3,924,472) $(13,451)
========== ==== ========= === ======= ======== ====== ========== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the three months ended
September 30,
--------------------------
2006 2005
------- -------
Cash flows from operating activities:
Net income $ 1,326 $ 1,193
Adjustments to reconcile net income to net cash
Provided (used) by operating activities:
Depreciation and amortization 405 349
Accrued retirement pay 94 323
Provision for losses on accounts receivable 34 30
Stock based compensation 150 41
Deferred income taxes 3 30
Changes in assets and liabilities:
Accounts and notes receivable (2,356) 449
Inventories (748) (560)
Prepaid expenses and other 763 (1,310)
Other assets 1,403 335
Customer deposits 1,250 (457)
Accrued compensation (1,836) (1,815)
Accounts and notes payable, trade (1,604) 574
Income taxes payable 507 67
Accrued and withheld taxes (543) (31)
Other accounts payable and accrued liabilities 489 394
Interest payable (11) (40)
------- -------
Net cash (used for) operating activities (674) (428)
------- -------
Cash flows from investing activities:
Additions of property, plant and equipment (250) (163)
Additions of patents and trademarks (54) (215)
------- -------
Net cash (used for) investing activities (304) (378)
------- -------
Cash flows from financing activities:
Long-term and short-term debt borrowings 847 899
Long-term and short-term debt repayments -- (29)
Principal payments under capital lease obligations (36) (28)
Proceeds of stock option exercises 136 85
Other long-term liabilities (39) 14
------- -------
Net cash provided by financing activities 908 941
------- -------
Effects of exchange rate changes (220) (167)
------- -------
Net (decrease) in cash and cash equivalents (290) (32)
Cash and cash equivalents at beginning of period 14,986 15,443
------- -------
Cash and cash equivalents at end of period $14,696 $15,411
======= =======
The accompanying notes to consolidated financial statements
are an integral part of these statements.
5
BALDWIN TECHNOLOGY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
For the three months
ended September 30,
--------------------
2006 2005
---- ----
Cash paid during the period for:
Interest $235 $338
Income taxes $229 $766
The accompanying notes to consolidated financial statements
are an integral part of these statements.
6
BALDWIN TECHNOLOGY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Baldwin Technology Company, Inc. and its subsidiaries ("Baldwin" or the
"Company") are engaged primarily in the development, manufacture and sale of
accessories and controls for the printing industry.
The accompanying unaudited consolidated financial statements include the
accounts of Baldwin and its subsidiaries and have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and in compliance with the rules and
regulations of the Securities and Exchange Commission. These financial
statements reflect all adjustments of a normal recurring nature, which are in
the opinion of management, necessary to present a fair statement of the results
for the interim periods. These financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's latest Annual Report on Form 10-K for the fiscal year
ended June 30, 2006.
NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS:
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements", which established a framework for
measuring fair value and will be effective beginning July 1, 2008. The Company
is evaluating the impact, if any, that SFAS 157 will have on the financial
statements.
In September 2006, the FASB issued SFAS 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans". SFAS 158 requires
companies to recognize the over-funded and under-funded status of defined
benefit pension and other postretirement plans as assets or liabilities on their
balance sheets and to recognize changes in that funded status, in the year in
which changes occur, through comprehensive income in shareholders' equity. As of
June 30, 2006, the unrecognized defined benefit pension plan assets, consisting
primarily of unrecognized actuarial gains totaled $166,000. The Company will
adopt SFAS158 as of the end of the current fiscal year.
In September 2006, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements." SAB 108 established an approach that requires quantification of
financial statement errors based on the effects of an error on a company's
balance sheet and income statement and related disclosures. The Company is
required to apply the provisions of SAB 108 in connection with the preparation
of its annual financial statement for fiscal year ended June 30, 2007.
7
NOTE 3 - LONG TERM DEBT:
(IN THOUSANDS)
-----------------------------------------
SEPTEMBER 30, 2006 JUNE 30, 2006
------------------- -------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- ------- ---------
Revolving Credit Facility due October 1, 2008,
interest rate 3.775% plus three-month
euribor rate 3.253% (at September 30) ........ -- 6,507 -- 6,560
Term loan payable by foreign subsidiary
due September 2008, interest rate 1.81% ...... 282 282 291 364
Term Loan payable by foreign subsidiary
due December 8, 2006, interest rate 1.5% .. .. 423 -- 437 --
Note payable by foreign subsidiary
through 2008, interest rate 6.70% ............ 123 123 125 156
---- ------ ---- ------
$828 $6,912 $853 $7,080
==== ====== ==== ======
The Company maintains relationships with both foreign and domestic banks,
which combined have extended short and long term credit facilities to the
Company totaling $35,466 including $30,000 available under the Maple GmbH Credit
Agreement. As of September 30, 2006, the Company had $13,715 outstanding
(including letters of credit) under these credit facilities, including $9,095
under the Maple GmbH Credit Agreement.
NOTE 4 - NET INCOME PER SHARE:
Basic net income per share includes no dilution and is computed by dividing
net income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted net income per share reflects
the potential dilution of securities that could share in the earnings of an
entity. For the three months ended September 30, 2006 and 2005, the weighted
average shares outstanding used to compute diluted net income per share include
potentially dilutive securities of 723,000 and 551,000 shares, respectively.
Outstanding options to purchase 69,000 and 197,000 shares, respectively, of the
Company's common stock for the three months ended September 30, 2006 and 2005,
respectively, are not included in the above calculation to compute diluted net
income per share as their exercise prices exceeded their current market value of
these shares.
NOTE 5 -OTHER COMPREHENSIVE INCOME (LOSS):
Accumulated Other Comprehensive Income (Loss) ("AOCI") is comprised of
various items, which affect equity that result from recognized transactions and
other economic events other than transactions with owners in their capacity as
owners. AOCI is included in stockholders' equity in the consolidated balance
sheets. AOCI consists of the following:
(in thousands)
----------------------------------
September 30, 2006 June 30, 2006
------------------ -------------
Cumulative translation adjustments $2,032 $ 2,588
Unrealized gain on investments,
net of tax 117 109
Unrealized gain (loss) on forward
contracts, net of tax (106) 39
Minimum pension liability, net of tax (22) (110)
------ -------
$2,021 $ 2,626
====== =======
8
NOTE 6 - INVENTORIES:
Inventories consist of the following:
(in thousands)
----------------------------------
September 30, 2006 June 30, 2006
------------------ -------------
Raw materials $11,025 $11,285
In process 4,184 4,236
Finished goods 7,911 7,136
------- -------
$23,120 $22,657
======= =======
Foreign currency translation effects decreased inventories by $285 from
June 30, 2006 to September 30, 2006.
NOTE 7 -- GOODWILL AND OTHER INTANGIBLE ASSETS:
The changes in the carrying amount of goodwill for the three months ended
September 30, 2006 are as follows:
(in thousands)
---------------------------------
Gross Net
Carrying Accumulated Book
Amount Amortization Value
-------- ------------ -------
Balance as of July 1, 2006 $14,478 $3,419 $11,059
Effects of currency translation (246) (83) (163)
------- ------ -------
Balance as of September 30, 2006 $14,232 $3,336 $10,896
======= ====== =======
Intangible assets subject to amortization are comprised of the following:
(in thousands)
--------------------------------------------------
As of September 30, 2006 As of June 30, 2006
------------------------ -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Intangible Assets: Amount Amortization Amount Amortization
------------------ -------- ------------ -------- ------------
Patents and trademarks $7,731 $5,083 $7,686 $4,996
Other 1,596 820 1,397 778
------ ------ ------ ------
Total $9,327 $5,903 $9,083 $5,774
====== ====== ====== ======
Amortization expense associated with these intangible assets was $144 and
$121, respectively, for the three months ended September 30, 2006 and 2005. The
other category is included in "Other assets" on the accompanying consolidated
balance sheets.
9
NOTE 8 - PENSION AND OTHER POST-RETIREMENT BENEFITS:
The following table sets forth the components of net periodic benefit costs
for the Company's defined benefit plans for the three months ended September 30,
2006 and 2005:
(in thousands)
Pension Benefits
For the three months
Ended September 30,
-------------------
2006 2005
---- ----
Service cost $71 $64
Interest cost 12 12
Expected return on plan assets (4) (4)
Amortization of transition obligation (1) 3
Amortization of net actuarial gain (1) (3)
--- ---
Net periodic benefit cost $77 $72
=== ===
During the three months ended September 30, 2006 and 2005 the Company made
no contributions to the plans. During the quarter ended September 30, 2006, the
Company recognized $147,000 of income before tax, in other income, related to
the cancellation of an insurance contract in Japan, used to fund a supplemental
retirement obligation. Of the $147,000 of income before tax recognized, $143,000
($83,000 after tax) is related to income earned in prior periods.
NOTE 9 - CUSTOMERS:
During the three months ended September 30, 2006, one customer accounted
for more than 10% of the Company's net sales. Koenig and Bauer
Aktiengesellschaft ("KBA") accounted for approximately 21% and 17% of the
Company's net sales for the three months ended September 30, 2006 and 2005,
respectively.
NOTE 10 - WARRANTY COSTS:
The Company's standard contractual warranty provisions are to repair or
replace, at the Company's option, product that is proven to be defective. The
Company estimates its warranty costs as a percentage of revenues on a product by
product basis, based on actual historical experience within the Company. Hence,
the Company accrues estimated warranty costs at the time of sale. In addition,
should the Company become aware of a specific potential warranty claim, a
specific charge is recorded and accounted for separate from the percent of
revenue discussed above.
(in thousands)
Warranty Amount
----------------
2006 2005
------ -------
Warranty reserve at June 30, 2006 and 2005 $3,049 $ 2,840
Additional warranty expense accruals 629 943
Payments against reserve (731) (1,005)
Effects of currency rate fluctuations (44) (7)
------ -------
Warranty reserve at September 30, 2006 and 2005 $2,903 $ 2,771
====== =======
10
NOTE 11 - ACQUISITION:
On October 4, 2006 the Company announced that it had signed a definitive
agreement to acquire Oxy-Dry Corporation. Oxy-Dry Corporation, a privately held
company with annual sales of approximately $38,000,000 produces accessories and
controls for the printing industry. The purchase price, subject to post closing
adjustments is $25,000,000 in cash. The acquisition is expected to close in mid
November subject to customary closing conditions. In conjunction with the
proposed transaction, the Company is in the process of negotiating a new credit
facility consisting of a term loan of $15,000,000 and a $35,000,000 revolving
line of credit at interest rates which approximate market interest rates. The
proceeds of the new credit facility will be used to finance the acquisition and
extinguish the Company's current revolving credit facility due October 1, 2008.
NOTE 12 - STOCK BASED COMPENSATION:
Pursuant to SFAS123(R) "Share-Based Payment", companies must recognize the
cost of employee services received in exchange for awards of equity instruments
based on the grant date fair value of those awards.
Total share-based compensation for the three months ended September 30,
2006 and 2005 are summarized in the following table:
(in thousands)
For the three months
ended September 30,
--------------------
2006 2005
---- ----
Share based compensation
Stock options $ 91 $41
Restricted stock 59 --
---- ---
Total share-based compensation $150 $41
==== ===
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of certain factors,
which have affected the consolidated financial statements of Baldwin.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the following
statements and certain other statements contained herein are based on current
expectations. Such statements are forward-looking statements that involve a
number of risks and uncertainties. The Company cautions investors that any such
forward-looking statements made by the Company are not guarantees of future
performance and that actual results may differ materially from those in the
forward-looking statements. Some of the factors that could cause actual results
to differ materially include, but are not limited to the following: (i) the
ability to obtain, maintain and defend challenges against valid patent
protection on certain technology, primarily as it relates to the Company's
cleaning systems, (ii) material changes in foreign currency exchange rates
versus the U.S. Dollar, (iii) changes in the mix of products and services
comprising revenues, (iv) a decline in the rate of growth of the installed base
of printing press units and the timing of new press orders, (v) general economic
conditions, either domestically or in foreign locations, (vi) the ultimate
realization of certain trade receivables and the status of ongoing business
levels with the Company's large OEM customers, (vii) competitive market
influences. Additional factors are set forth in Item 1A "Risk Factors" and
Exhibit 99 to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2006 which should be read in conjunction herewith.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For further information regarding the Company's critical accounting
policies, please refer to the Management's Discussion and Analysis section of
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2006. There have been no material changes during the three months ended
September 30, 2006.
OVERVIEW
Baldwin Technology Company, Inc. is a leading global manufacturer of press
accessories and controls for the commercial and newspaper printing industries.
Baldwin offers its customers a broad range of market-leading technologies,
products and systems that enhance the quality of printed products and improve
the economic and environmental efficiency of printing presses. Headquartered in
Shelton, CT, the Company has sales and service centers and product development
and manufacturing operations in the Americas, Asia and Europe. Baldwin's
technology and products include cleaning systems, fluid management and ink
control systems, web press protection systems and drying systems.
The Company manages its business as one reportable business segment built
around its core competency in accessories and controls.
Net sales as reported for the three months ended September 30, 2006
increased by $562,000, or 1.3%, to $43,207,000 from $42,645,000 for the three
months ended September 30, 2005. The increase in revenue is attributable to
increases in the European markets, offset by a decline in demand in Asia, most
notably in Japan.
Gross profit for the three months ended September 30, 2006 was $14,262,000
(33.0% of net sales) as compared to $14,056,000 (33.0% of net sales) for the
three months ended September 30, 2005, an increase of $206,000 or 1.5%.
12
Operating income was unchanged from prior year at approximately 5% of sales
for the three months ended September 30, primarily as a result of the consistent
revenue, gross margins and operating expenses.
In addition, the Company reduced its interest expense in the three months
ended September 30, 2006 versus the previous year's corresponding periods as a
result of lower average debt levels.
THREE MONTHS ENDED SEPTEMBER 30, 2006 VS. THREE MONTHS ENDED SEPTEMBER 30, 2005
CONSOLIDATED RESULTS
NET SALES
Net sales for the three months ended September 30, 2006 increased by
$562,000, or 1.3%, to $43,207,000 from $42,645,000 for the three months ended
September 30, 2005. Currency rate fluctuations attributable to the Company's
overseas operations decreased net sales by $556,000 in the current period.
Excluding the effects of currency translation net sales were essentially
unchanged.
The net sales increase reflects increased sales in Europe of $2,619,000.
The increase is primarily attributable to increase in demand for the Company's
cleaning systems and spray dampening systems. Net Sales in the Americas
increased $348,000 due to higher shipments in the US commercial markets. Asia's
net sales decreased $2,405,000 as the result of lower sales in the commercial
market, primarily in cleaning systems. In Asia, sales were down to a lesser
extent in the newspaper market, where higher demand for the Company's cleaning
systems partially offset a decline in spray dampening systems.
GROSS PROFIT
Gross profit for the three months ended September 30, 2006 was $14,262,000
(33.0% of net sales) as compared to $14,056,000 (33.0% of net sales) for the
three months ended September 30, 2005, an increase of $206,000 or 1.5%. Currency
rate fluctuations increased gross profit by $312,000 in the current period.
Excluding the effects of currency rate fluctuation, gross profit would have
decreased by $106,000. Gross margin is favorably impacted by lower material
costs resulting from purchasing efficiencies, offset by higher installation and
technical service costs.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to $8,170,000 for the
three months ended September 30, 2006 as compared to $8,122,000 for the same
period in the prior fiscal year, (amounts representing 18.9% and 19.0% of
respective period sales) an increase of $48,000. Currency rate fluctuations
increased these expenses by $107,000 in the current period. Otherwise, selling,
general and administrative expenses would have decreased by $59,000. Selling
expenses decreased by $143,000, which is primarily the result non-recurring
trade show expense in the prior fiscal year. General and administrative expenses
increased by $191,000 primarily due to higher accruals for stock based
compensation, audit and compliance costs partially offset by lower deferred
compensation expense.
ENGINEERING AND DEVELOPMENT EXPENSES
Engineering and development expenses increased by $197,000 over the same
period in the prior fiscal year. Currency rate fluctuations increased these
expenses by $84,000 in the current period. Excluding the effects of currency
rate fluctuations, engineering and
13
development expenses would have increased by $113,000 in the current period.
This increase relates primarily to planned investment and increased activity in
product development in Europe, offset by lower spending in Japan. As a
percentage of net sales, engineering and development expenses increased to 9.2%
for the three months ended September 30, 2006 compared to 8.9% for the same
period in the prior fiscal year.
INTEREST AND OTHER
Interest expense for the three months ended September 30, 2006 was $224,000
as compared to $298,000 for the three months ended September 30, 2005. Currency
rate fluctuations had a negligible effect in the current period. This decrease
reflects the lower debt level of approximately $5.0 million versus the period
ended September 30, 2005. Interest income remained generally flat and amounted
to $31,000 and $28,000 for the three months ended September 30, 2006 and 2005,
respectively.
Net royalty income for the three months ended September 30, 2006 was zero
as compared to $200,000 for the three months ended September 30, 2005. The
decline in royalty income relates to the expiration of a group of patents, which
were the source of the royalty income stream, in February 2005.
Other income (expense), net amounted to income of $226,000 for the three
months ended September 30, 2006 compared to expense of $67,000 for the three
months ended September 30, 2005.
Other income for the quarter ended September 30, 2006 reflects $147,000 of
income related to the cancellation of an insurance contract in Japan. Of the
$147,000, $143,000 ($83,000 after tax) is related to income earned in prior
periods.
INCOME TAXES
The Company recorded an income tax provision of $822,000 for the three
months ended September 30, 2006 as compared to $824,000 for the three months
ended September 30, 2005. The effective tax rate of 38.3% (40.9% for the quarter
ended September 30, 2005) for the three months ended September 30, 2006,
reflects taxable income in the higher tax jurisdictions in which tax loss
carryforwards are not available or are subject to limitations. The effective tax
rate for the three months ended September 30, 2006 differs from the statutory
rate as no benefit is recognized for losses incurred in certain countries as the
realization of such benefits was not more likely than not. The Company continues
to assess the need for its deferred tax asset valuation allowances in the
jurisdictions in which it operates. Any adjustments to the deferred tax asset
valuation allowance either positive or negative would be recorded in the income
statement of the period that the adjustment was determined to be required. In
particular, the Company is monitoring positive earnings trends and other
positive evidence in the U.S., U.K. and France to determine if such trends could
possibly require a reversal of valuation allowances related to those countries.
NET INCOME
The Company's net income amounted to $1,326,000 for the three months ended
September 30, 2006, compared to net income of $1,193,000 for the three months
ended September 30, 2005. Net income per share amounted to $0.09 basic and $0.08
diluted for the three months ended September 30, 2006 as compared to net income
per share of $0.08 basic and diluted for the three months ended September 30,
2005.
14
LIQUIDITY AND CAPITAL RESOURCES AT SEPTEMBER 30, 2006
Cash flows from operating, investing and financing activities, as reflected
in the Consolidated Statement of Cash Flows, are summarized as follows:
2006 2005
--------- ---------
Cash provided by (used for):
Operating activities $(674,000) $(428,000)
Investing activities (304,000) (378,000)
Financing activities 908,000 941,000
Effect of exchange rate changes on cash (220,000) (167,000)
--------- ---------
Net (decrease) in cash and cash equivalents $(290,000) $ (32,000)
========= =========
Cash used for operating activities increased $246,000 during the quarter
ended September 30, 2006 versus the prior year period. The decrease is the
result of an increase in accounts receivable and timing of payments for accounts
payable, offset by collection of non-trade receivables and higher customer
deposits. Days sales outstanding increased to 72 days at September 30, 2006,
compared to 52 days in the prior year period. The increase is partially due to
timing of shipments in the current period being weighted towards the end of the
quarter, while approximately 50% of the increase in DSO is due to the
reclassification in the current year of certain notes receivable to accounts
receivable. Management is working to return the DSO to expected levels.
Inventory turns are 5.0 times in FY 2007, which is essentially the same as in FY
2006 levels.
The Company utilized $304,000 and $378,000 for investing activities for the
three months ended September 30, 2006 and 2005 respectively, for additions to
property, plant and equipment and patents and trademarks.
The Company maintains relationships with both foreign and domestic banks,
which combined have extended credit facilities to the Company totaling
$35,466,000, including $30,000,000 available under the Maple GmbH Credit
Agreement. As of September 30, 2006, the Company had $13,715,000 outstanding
under these credit facilities including $9,095,000 under the Maple GmbH Credit
Agreement.
The Company believes that its cash flows from operations, along with the
available bank lines of credit and alternative sources of borrowings, if
necessary are sufficient to finance its working capital and other capital
requirements through the term of the credit agreement with Maple.
At September 30, 2006 and June 30, 2006, the Company did not have any
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance entities, special purpose
entities or variable interest entities, which would have been established for
the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, the Company is not exposed to
any financing, liquidity, market or credit risk that could arise if the Company
had engaged in such relationships.
On October 4, 2006 the Company announced that it had signed a definitive
agreement to acquire Oxy-Dry Corporation. Oxy-Dry Corporation, a privately held
company with annual sales of approximately $38,000,000 produces accessories and
controls for the printing industry. The purchase price, subject to post closing
adjustments is $25,000,000 in cash. The acquisition is expected to close in mid
November subject to customary closing conditions. In conjunction with the
proposed transaction, the company is in the process of negotiating a new credit
facility consisting of a term loan of $15,000,000 and $35,000,000 revolving line
of credit at interest rates, which
15
approximate market interest rates. The proceeds of the new credit facility will
be used to finance the acquisition and extinguish the Company's current
revolving credit facility due October 1, 2008.
The following summarizes the Company's contractual obligations at September
30, 2006 and the effect such obligations are expected to have on its liquidity
and cash flow in future periods (in thousands):
Fiscal Years ending June 30,
-------------------------------------------------------------------
Total at 2012
September and
30, 2006 2007* 2008 2009 2010 2011 thereafter
--------- ------ ------ ------ ------ ------ ----------
Contractual Obligations:
Loans payable $ 3,386 $3,386 $ -- $ -- $ -- $ -- $ --
Capital lease obligations 492 99 121 114 99 59 --
Long-term debt 7,740 798 334 6,608 -- -- --
Non-cancelable operating lease obligations 24,134 5,157 3,682 2,904 1,907 1,689 8,795
Interest expense (1) 1,223 490 604 129 -- -- --
------- ------ ------ ------ ------ ------ ------
Total contractual cash obligations $36,975 $9,930 $4,741 $9,755 $2,006 $1,748 $8,795
======= ====== ====== ====== ====== ====== ======
* Includes only the remaining nine months of the fiscal year ending June 30,
2007.
(1) the anticipated future interest payments are based on the Company's current
indebtedness and interest rates at September 30, 2006, with consideration
given to debt reduction as the result of expected payments.
IMPACT OF INFLATION
The Company's results are affected by the impact of inflation on
manufacturing and operating costs. Historically, the Company has used selling
price adjustments, cost containment programs and improved operating efficiencies
to offset the otherwise negative impact of inflation on its operations.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
A discussion of market risk exposures is included in Part II Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk" of the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2006. There have
been no material changes during the three months ended September 30, 2006.
ITEM 4: CONTROLS AND PROCEDURES:
The Company maintains disclosure controls and procedures designed to ensure
that the information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
these disclosure controls and procedures as of the end of our fiscal quarter
September 30, 2006, the period covered by this report. Based on that evaluation,
the Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures are effective to achieve
their stated purpose. However, there is no assurance that the Company's
disclosure controls and procedures will operate effectively under all
circumstances. No changes were
16
made to the Company's internal control over financial reporting during the
fiscal quarter ended September 30, 2006, that have materially affected, or are
reasonably likely to materially effect, the Company's internal control over
financial reporting.
PART II: OTHER INFORMATION
ITEM 1A. RISK FACTORS
Information regarding risk factors is contained in Item 1A "Risk Factors"
and Exhibit 99 filed with the Company's Report on Form 10-K for the fiscal year
ended June 30, 2006. There have been no material changes in the Company's risk
factors from those disclosed in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There has been no activity under the Company's stock repurchase program for
the quarter ended September 30, 2006.
ITEM 6. EXHIBITS
21 List of Subsidiaries of Registrant (filed herewith)
31.01 Certification of the Principal Executive Officer pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
31.02 Certification of the Principal Financial Officer pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.01 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350 (filed herewith).
32.02 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350 (filed herewith).
17
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.
BALDWIN TECHNOLOGY COMPANY, INC.
BY /s/ Vijay C. Tharani
-------------------------------------
Vice President, Chief Financial
Officer and Treasurer
Dated: November 14, 2006
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