SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-K

Annual Report Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

 

 

Baldwin Technology Company, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Registrant’s telephone number, including area code: 203-402-1000

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No þ

 

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 þ  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

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 o               Accelerated filer o               Non-accelerated filer þ

 

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

 

Aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant’s common stock on December 31, 2005, as reported by the American Stock Exchange on that date was $55,076,922.

 

Number of shares of Common Stock outstanding at June 30, 2006:

 

 

Documents Incorporated by Reference

 

Items 10, 11, 12, 13 and 14 are incorporated by reference into Part III of this Form 10-K from the Baldwin Technology Company, Inc. Proxy Statement for the 2006 Annual Meeting of Stockholders. (A definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Form 10-K.)

 

 

TABLE OF CONTENTS

 

 

 

CAUTIONARY STATEMENT — This Annual Report on Form 10-K may contain “forward-looking” statements as that term is defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission (“SEC”) in its rules, regulations and releases. Baldwin Technology Company, Inc. (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 from estimates contained in the Company’s forward-looking statements are set forth in Item 1A “Risk Factors” and Exhibit 99 to this Annual Report on Form 10-K for the year ended June 30, 2006.

PART I

 

 

Baldwin Technology Company, Inc. (“Baldwin” or the “Company”) is a leading global manufacturer of accessories and controls for the printing and publishing industry. The Company offers its customers a broad range of products designed to enhance the quality, productivity and cost-efficiency of the print manufacturing process while addressing environmental concerns and safety issues. Baldwin’s products include cleaning systems, fluid management and ink control systems, web press protection systems and drying systems.

 

The Company sells its products both to printing press manufacturers who incorporate the Company’s products into their own printing press systems for sale to printers and publishers, as well as directly to printers and publishers to upgrade the quality and capability of their existing and new printing presses. The Company does not consider its business to be seasonal, however, customer order patterns and delivery schedules could cause revenue in select periods to fluctuate. The Company has product development and manufacturing facilities, and sales and service operations, in strategic markets worldwide.

 

Industry Overview

 

The Company defines its business as that of providing accessories and controls for the printing and publishing industry. The Company believes that as an independent company, it produces one of the most complete lines of accessories and controls products for this diverse industry.

 

The Company’s products are used by printers engaged in all commercial and newspaper printing processes including lithography, flexography and digital printing. The largest share of its business is in offset (lithographic) printing. Offset printing is the largest segment of the domestic and international printing market and is used primarily for general commercial printing as well as printing books, magazines, business forms, catalogs, greeting cards, packaging and newspapers. The Company’s products are designed to improve the printing process in terms of quality, the environment, safety, productivity and reduction of waste.

 

While offset printing represents a significant segment of the U.S. printing industry, it is also the dominant technology in the international printing market. The Company believes that the future growth of its international markets will be attributable in part to the increased use of offset printing. The Company has established operations in strategic geographic locations to take advantage of growth opportunities in these markets. Baldwin’s worldwide operations enable it to closely monitor market and new product developments in different printing markets and to introduce new products, or adapt existing ones, to meet the printing equipment requirements of specific local markets throughout the world.

 

Principal Products

 

The Company manufactures and sells many different products to printers and printing press manufacturers. Thus its product development efforts are focused on the needs of printers and the printing press manufacturers. Typically, it takes a new product several years after its introduction to make a significant contribution to the Company’s net sales. As a product progresses through its life cycle, the percentage of sales to printing press manufacturers generally increases as the product’s acceptance by the printing industry increases and printers begin to specify certain of the Company’s products as part of their accessory and controls equipment package selected when ordering new printing presses. Historically, the Company’s products have had a long life cycle as the Company continually upgrades and refines its product lines to meet customer needs and changes in printing press technology. The Company’s principal

products generally range in unit price from under $100 to approximately $50,000. Baldwin’s principal products are described below:

 

Cleaning Systems.  The Company’s Cleaning Systems and related consumables products clean the cylinders of an offset press and include the Press Washer, Automatic Blanket Cleaner, Newspaper Blanket Cleaner, Chill Roll Cleaner, Digital Plate Cleaner and Guide Roll Cleaner, all of which reduce paper waste, volatile organic compound (“VOC”) emissions and press downtime, as well as improve productivity, print quality and safety of operation for the press operator. In the fiscal years ended June 30, 2006, 2005 and 2004, net sales of Cleaning Systems represented approximately 54.2%, 55.0% and 52.6% of the Company’s net sales, respectively.

 

Fluid Management Systems.  The Company’s Fluid Management Systems control the supply, temperature, cleanliness, chemical composition and certain other characteristics of the fluids used in the lithographic printing process. Among the most important of these products are the Company’s Refrigerated Circulators and Spray Dampening Systems. In the fiscal years ended June 30, 2006, 2005 and 2004, net sales of Fluid Management Systems represented approximately 23.4%, 23.2% and 23.2% of the Company’s net sales, respectively.

 

Other Accessory and Control Products.  The Company’s Web Press Protection Systems (web severers and web catchers), designed in response to the increasing number of web leads used in printing today’s colorful newspapers as well as to the growing demand for high speed commercial web presses, provide an auto-arming electronic package offering high quality press protection in the event of a web break. The Company’s Ink Control Systems regulate many aspects of the ink feed system on a printing press. These products include Ink Agitators, Ink Mixers and Ink Level Systems, which reduce ink and paper waste. Other products include Ultraviolet and Infrared Dryers and Gluing Systems. In the fiscal years ended June 30, 2006, 2005 and 2004, net sales of Other Accessory and Control Products represented approximately 22.4%, 21.8% and 24.2% of the Company’s net sales, respectively.

 

Worldwide Operations

 

The Company believes that it is one of the few manufacturers of accessories and controls for the printing and publishing industry, which has complete product development, manufacturing and marketing capabilities in the Americas, Europe and Asia. The Company, as an international business, is subject to various changing competitive, economic, political, legal and social conditions. The Company currently has subsidiaries in 12 countries, and its results of operations may be adversely or positively affected by currency fluctuations. The results of the operations and financial positions of the Company’s subsidiaries outside of the United States are reported in the relevant foreign currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in the Company’s consolidated financial statements. The exchange rates between the currencies and the U.S. dollar may fluctuate substantially. Because the Company generates a significant percentage of its revenues and operating expenses in currencies other than the U.S. dollar, fluctuations in the value of the U.S. dollar against other currencies may have a material effect on the Company’s operating income. The Company’s results and financial condition are particularly affected by changes in the value of the U.S. dollar in relation to the euro, Japanese yen and Swedish krona. Since the Company’s foreign subsidiaries primarily manufacture, incur expenses and earn revenue in the local countries in which they reside, the impact from cross currency fluctuations is somewhat mitigated.

The following table sets forth the percentages of the Company’s net sales attributable to its geographic regions for the fiscal years ended June 30, 2006, 2005 and 2004:

 

 

In the Americas, the Company operates in North, Central and South America through its U.S. subsidiaries and a sales office in Brazil. In Europe, the Company operates through its subsidiaries in Germany, Sweden, France, England, Italy and the Netherlands. In Asia, the Company operates through its subsidiaries in India, Japan, China and Australia. All of the Company’s subsidiaries are wholly owned except for two subsidiaries, one in which the Company holds a 90% interest, and another in which the Company holds an 80% interest.

 

Acquisition Strategy

 

As part of its growth strategy, the Company intends to investigate potential strategic acquisitions of companies and product lines in related business areas. This strategy would involve: (i) acquiring entities that will strengthen the Company’s position in the field of accessories and controls and related consumables for the printing and publishing industry and whose products can be sold through the Company’s existing distribution network; (ii) entering new end-user market segments and extending existing markets; and (iii) acquiring companies which contribute new products to the Company and which can benefit from the Company’s manufacturing and marketing expertise and financial support. Subsequent to an acquisition, the Company’s intention would be to integrate the processes and controls of the acquired company with those of the Company with a view towards enhancing sales, productivity and operating results.

 

Marketing, Sales and Support

 

Marketing and Sales.  While the Company markets its products in most countries throughout the world, the product mix and distribution channels vary from country to country. The Company has approximately 79 employees devoted to marketing and sales activities in its three principal worldwide markets and more than 150 dealers, distributors and representatives worldwide. The Company markets its products throughout the world through these direct sales representatives, distributors and dealer networks to printing press manufacturers (“OEMs”), newspaper publishers, and commercial printers. For the fiscal year ended June 30, 2006, approximately 52% of the Company’s net sales were to OEMs and approximately 48% were directly to printers.

 

Support.  The Company is committed to after-sales service and support of its products throughout the world. Baldwin employs approximately 79 service technicians, who are complemented by product engineers, to provide field service for the Company’s products on a global basis.

 

Backlog.  Backlog represents unfilled product orders which Baldwin has received from its customers under valid contracts or purchase orders. The Company’s backlog was $49,200,000 as of June 30, 2006, $48,114,000 as of June 30, 2005 and $44,923,000 as of June 30, 2004.

 

Customers.  For the fiscal year ended June 30, 2006, one customer accounted for more than 10% of the Company’s net sales. Koenig and Bauer Aktiengesellschaft (“KBA”) accounted for approximately 18% of the Company’s net sales. The ten largest customers of Baldwin (including KBA) accounted for

approximately 50%, 53% and 52%, respectively, of the Company’s net sales for the fiscal years ended June 30, 2006, 2005 and 2004. Sales of Baldwin’s products are not considered seasonal.

 

Engineering and Development

 

The Company believes its engineering and development, including research, efforts have been an important factor in establishing and maintaining its leadership position in the field of accessories and controls for the printing and publishing industry. The Company has won six Intertech Awards from the Graphic Arts Technical Foundation. The Intertech Award was established to recognize technologies that are predicted to have a major impact on the graphic communications industry, but is not yet in widespread use in the marketplace. Baldwin has devoted substantial efforts to adapt its products to almost all models and sizes of printing presses in use worldwide.

 

The Company has product development functions at several of its locations in addition to centers of competency for commercial printing located in Germany and for newspaper printing located in Sweden. The Company believes that this approach to engineering and development has helped the Company to react quickly to meet the needs of its customers and coordinate the Company’s product development activities. The engineering and development organization focuses attention on opportunities within the respective markets, while avoiding duplicative efforts within the Company.

 

Baldwin employs approximately 109 persons whose primary function is new product development, application engineering or modification of existing products. The Company’s total expenditures for engineering research and development for the fiscal years ended June 30, 2006, 2005 and 2004 were approximately 8.5%, 9.2% and 8.6% of the Company’s net sales in each fiscal year, respectively.

 

Patents

 

The Company owns a number of patents and patent applications relating to a substantial number of Baldwin’s products, and patented products represent a significant portion of the Company’s net sales for all periods presented. The Company’s patents expire at different times during the next twenty years; however, one group of patents, which provided the Company’s royalty income, expired in February 2005. The expiration of patents in the near future is not expected to have a material adverse effect on the Company’s net sales; however, royalty income and cash flows were negatively impacted by the expiration of the afore-mentioned group of patents. The Company has also relied upon and intends to continue to rely upon unpatented proprietary technology, including the proprietary engineering required to adapt its products to a wide range of models and sizes of printing presses. The Company believes its rights under, and interests in, its patents and patent applications, as well as its proprietary technology, are sufficient for its business as currently conducted.

 

Manufacturing

 

The Company conducts its manufacturing operations through a number of operating subsidiaries. In North America, the Company has a manufacturing facility in Kansas. In Europe, the Company has subsidiaries with manufacturing and assembly facilities in Germany and Sweden. In Asia, Baldwin has manufacturing and assembly facilities in India and Japan.

 

In general, raw materials required by the Company can be obtained from various sources in the quantities desired. The Company has no long-term supply contracts and does not consider itself dependent on any individual supplier. In addition, the Company uses various subcontractors to provide required services, but is not dependent on any individual subcontractor.

The nature of the Company’s operations is such that there is little, if any, negative effect upon the environment, and the Company has not experienced any substantive problems in complying with environmental protection laws and regulations.

 

Competition

 

Within the diverse market for accessories and controls for the printing and publishing industry, the Company produces and markets what it believes to be the most complete line of accessories and controls. Numerous companies, including vertically integrated printing press manufacturers, manufacture and sell products which compete with one or more of the Company’s products. The printing press manufacturers generally have larger staffs and greater financial resources than the Company.

 

The Company competes by offering customers a broad technologically advanced product line, coupled with a well-known reputation for the reliability of its products and its commitment to service and after-sale support. The Company’s ability to compete effectively in the future will depend upon the continued reliability of its products, after-sale support, its ability to keep its market position with new proprietary technology and its ability to develop new products which meet the demands of the printing and publishing industry.

 

Employees

 

At June 30, 2006, the Company employed 513 persons (plus 38 temporary and part-time employees); of which 182 are production employees, 79 are marketing, sales and customer service employees, 188 are research, development, engineering and technical service employees and 64 are management and administrative employees. In Europe, some employees are represented by various unions under contracts with indefinite terms: in Sweden, approximately 20 of the Company’s 80 employees are represented by either Ledarna (SALF), Metall, or Svenska Industritjanstemanna Forbundet unions; in Germany, approximately 40 of the Company’s 192 employees are represented by the IG Metall (Metalworker’s Union). The Company considers relations with its employees and with its unions to be good.

 

 

Set forth below and elsewhere in this Annual Report on Form 10-K and in other documents that the Company files with the SEC are risks that should be considered in evaluating the Company’s Common Stock, as well as risks and uncertainties that could cause the actual future results of the Company to differ from those expressed or implied in the forward-looking statements contained in this Report and in other public statements the Company makes. Additionally, because of the following risks and uncertainties, as well as other variables affecting the Company’s operating results, the Company’s past financial performance should not be considered an indicator of future performance.

 

Company Risk

 

Intellectual property and proprietary technology is important to the continued success of the Company’s business.  Failure to protect or defend this proprietary technology may impair the Company’s competitive position. The Company’s success and ability to compete depend to a certain extent on the Company’s proprietary technology since that is one of the methods by which the Company persuades customers to buy its products, both present and future. The Company currently relies on copyright and trademark laws, trade secrets, confidentiality procedures, contractual provisions and patents to protect proprietary technology. The Company may have to engage in litigation to protect patents and other intellectual property rights, or to determine the validity or scope of the proprietary rights claimed by others. This kind of litigation can be time-consuming and expensive, regardless of

whether the Company wins or loses. Because it is important to the Company’s success that the Company is able to prevent competitors from copying the Company’s innovations, the Company will usually continue to seek patent and trade secret protection for the Company’s technologies. The process of seeking patent protection can be long and expensive and the Company cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, they will be of sufficient strength and scope to provide it with meaningful protection or commercial advantage. Further, others may develop technologies that are similar or superior to the Company’s technology or design around the Company’s patents. The Company also relies on trade secret protection for its technology, in part through confidentiality agreements with the Company’s employees, consultants and third parties. These agreements may be breached, and if they are, depending upon the circumstance, the Company may not have adequate remedies. In any case, others may come to know about the Company’s trade secrets in various ways. In addition, the laws of some countries in which the Company manufactures or sells products may not protect the Company’s intellectual property rights to the same extent as the laws of the United States.

 

Despite the Company’s efforts, intellectual property rights, particularly existing or future patents, may be invalidated, circumvented, challenged, rendered unenforceable or infringed or required to be licensed to others. Furthermore, others may develop technologies that are similar or superior to the Company’s, duplicate or reverse engineer the Company’s technology or design around patents owned or licensed by the Company. If the Company fails to protect technology so that others may use or copy it, the Company would be less able to differentiate its products and revenues could decline.

 

The Company’s operating results are subject to fluctuations from period-to-period, which could cause it to miss expectations about these results and, consequently, could adversely affect the trading price of the Company’s stock.  The results of the Company’s operations for any quarter are not necessarily indicative of results to be expected in future periods. The Company’s operating results have in the past been, and will continue to be, subject to quarterly fluctuations as a result of factors such as increased competition in the printing equipment industry, the introduction and market acceptance of new technologies and standards, changes in general economic conditions and changes in economic conditions specific to the Company’s industry. Further, the Company’s revenues may vary significantly from quarter to quarter as a result of, among other factors, the timing of shipments by customers, changes in demand and mix of the Company’s products and consumables, and the timing of new product announcements and releases by the Company or its competitors.

 

The Company relies on subcontractors to help manufacture its products and if they are unable to adequately supply components and products, the Company may be unable to deliver products to customers on time or without defects.  The Company employs a number of unaffiliated subcontractors to manufacture components for the Company’s products. Because the Company relies on subcontractors, however, the Company cannot be sure that it will be able to maintain an adequate supply of components or products. Moreover, the Company cannot be sure that the components the Company purchases will satisfy the Company’s quality standards and be delivered on time. The Company’s business could suffer if it fails to maintain its relationships with its subcontractors or fails to develop sufficient alternative sources for its purchased components.

 

The Company’s business is subject to risks from international conditions.  A significant portion of the Company’s business is conducted internationally. Accordingly, future results could be materially adversely affected by a variety of uncontrollable and changing factors including, among others, regulatory, political or economic conditions in a specific country or region, trade protection measures and other regulatory requirements, business and government spending patterns, and natural disasters. Because the Company generates revenues and expenses in various currencies, including the U.S. dollar, Euro, SEK and Yen, the Company’s financial results are subject to the effects of fluctuations of currency

exchange rates. The Company cannot predict, however, when exchange or price controls or other restrictions on the conversion of foreign currencies could impact the Company’s business. Any or all of these factors could have an adverse impact on the Company’s business and results of operations.

 

The Company’s growth strategy may include licenses or acquisitions of technologies or businesses, which entail a number of risks.  As part of the Company’s strategy to grow the business, the Company may pursue licenses of technologies from third parties or acquisitions of complementary product lines or companies, and such transactions entail a number of risks. The Company may expend significant costs in investigating and pursuing such transactions, and such transactions may not be consummated. If such transactions are consummated, the Company may not be successful in integrating the acquired technology or business into the existing business to achieve the desired synergies. Integrating acquired technologies or businesses may also require a substantial commitment of the Company’s management’s time and attention. The Company may expend significant funds to acquire such technologies or businesses, and may incur unforeseen liabilities in connection with any acquisition of a technology or business. Any of the foregoing risks could result in an adverse effect on the Company’s business, results of operations and financial conditions.

 

The Company’s ability to maintain its competitive position depends to a certain extent on the efforts and abilities of its senior management and the ability to attract highly skilled employees.  The Company’s senior management possesses significant managerial, technical and other expertise in the printing industry. Their expertise would be difficult to quickly replace, and if the Company loses the services of one or more of its executive officers, or if one or more of them decided to join a competitor or otherwise compete directly or indirectly with the Company, the Company’s business could be seriously harmed. In addition, the Company’s ability to develop, market and sell its products and services and to maintain its competitive position depends on its ability to attract, retain and motivate highly skilled technical, sales and marketing and other personnel. If the Company fails to recruit these personnel, its ability to develop new products and provide service could suffer.

 

Reliance on one significant customer.  In fiscal 2006, the Company had one significant customer that individually accounted for 18% of net sales. The Company anticipates, but cannot assure, that this customer will continue to be significant in fiscal 2007. The loss of, or a significant decrease in sales to, this customer could have a material adverse effect on the Company’s financial condition and results of operation.

 

Industry Risk

 

If the United States and global economies slow down, the demand for the Company’s products could decrease and the Company’s revenue may be materially adversely affected.  The demand for the Company’s products is dependent upon various factors, many of which are beyond the Company’s control. For example, general economic conditions may affect or delay expenditures for advertising and printing, which may in turn affect the overall capital spending by publishers and printers, particularly for capital equipment such as printing presses. If, as a result of general economic uncertainty or otherwise, companies reduce their capital spending levels, such a decrease in spending could reduce demand for the Company’s products and have a material adverse effect on the Company’s business.

 

The Company may not be able to adequately respond to changes in technology affecting the printing industry.  The Company’s continuing product development efforts have focused on refining and improving the performance of the Company’s products as they related to printing and the Company anticipates that it will continue to focus its efforts in this area. The printing and publishing industry has been characterized in recent years by rapid and significant technological changes and frequent new product introductions. Current competitors or new market entrants could introduce new or enhanced products with features, which render the Company’s technologies, or products incorporating the

Company’s technologies, obsolete or less marketable. The Company’s future success will depend, in part, on the Company’s ability to:

 

 

The Company may not be successful in effectively using new technologies, developing new products or enhancing its existing products and technology on a timely basis. The Company’s new technologies or enhancements may not achieve market acceptance. The Company’s pursuit of new technologies may require substantial time and expense. The Company may need to license new technologies to respond to technological change. These licenses may not be available to the Company on terms that the Company can accept. Finally, the Company may not succeed in adapting the Company’s products to new technologies as they emerge. Any of these factors, either individually or collectively could have an adverse impact on the Company’s business and results of operation.

 

Investment Risk

 

If the Company fails to implement and maintain or improve effective internal controls over financial reporting, the Company’s business, operating results and share price could be materially adversely affected.  Beginning with the Company’s annual report for the fiscal year ending June 30, 2007 (2008 if the Company continues as a non-accelerated filer at December 31, 2006), Section 404 of the Sarbanes-Oxley Act of 2002 will require a report by the Company’s management of its internal controls over financial reporting. This report must contain an assessment by management of the effectiveness of the Company’s internal controls over financial reporting as of the end of the Company’s fiscal year and a statement as to whether or not the Company’s internal controls are effective. The report must also contain a statement that the Company’s independent auditors have issued an attestation report of management’s assessment of such internal controls. Compliance by the Company with Section 404 is likely to result in significant costs, the commitment of time and operational resources and the diversion of management’s attention. If by the time the Company is required to comply with Section 404, the Company’s annual report includes a report that identifies one or more material weaknesses in the Company’s internal controls over financial reporting, the Company will be unable to assert that the Company’s internal controls are effective. If the Company is unable to assert that the Company’s internal controls over financial reporting are effective, or if the Company’s independent auditors are unable to attest that the Company’s management’s report is fairly stated or they are unable to express an opinion on the Company’s management’s evaluation or on the effectiveness of the Company’s internal controls, the Company’s stock price may fall. Market perception of the Company’s financial condition and the trading price of the Company’s stock may be adversely affected and customer perception of the Company’s business may suffer.

 

The Company’s stock price has been and could continue to be volatile.  The market price of the Company’s common stock has been subject to significant fluctuations. The securities markets have experienced, and are likely to experience in the future, significant price and volume fluctuations that

could adversely affect the market price of the Company’s common stock without regard to the Company’s operating performance. In addition, the trading price of the Company’s common stock could be subject to significant fluctuations in response to:

 

 

These factors may materially and adversely affect the Company’s stock price, regardless of the Company’s operating performance.

 

 

None

 

 

The Company owns and leases various manufacturing and office facilities aggregating approximately 319,000 square feet at June 30, 2006. The table below presents the locations and ownership of these facilities: (in thousands)

 

 

The Company believes that its facilities are adequate to carry on its business as currently conducted.

 

 

Baldwin is involved in various legal proceedings from time to time, including actions with respect to commercial, intellectual property and employment matters. The Company believes that it has meritorious defenses against the claims currently asserted against it and intends to defend them vigorously. However, the outcome of litigation is inherently uncertain, and the Company cannot be sure that it will prevail in any of the cases currently in litigation. The Company believes that the ultimate outcome of any such cases will not have a material adverse effect on its results of operations, financial position or cash flows; however, there can be no assurances that an adverse determination would not have a material adverse effect on the Company.

 

In addition to the aforementioned matters, the Company filed suit in the Regional Court in Dusseldorf, Germany claiming damages of approximately $41 million as a result of a patent infringement. A successful outcome in this case would have a materially favorable effect on results of operations, financial position and cash flow.

Information regarding legal proceedings is included in the Notes to Consolidated Financial Statements (see Note 16) and is incorporated herein by reference.

 

 

No matters were submitted to a vote of security holders since November 8, 2005.

 

PART II

 

 

Price Range of Class A Common Stock

 

The Company’s Class A Common Stock is traded on the American Stock Exchange (“AMEX”) under the symbol “BLD”. The following chart sets forth, for the calendar year periods indicated, the range of closing prices for the Company’s Class A Common Stock on the consolidated market, as reported by the AMEX.

 

 

Class B Common Stock

 

The Company’s Class B Common Stock has no established public trading market. However, Class B shares are convertible, one-for-one, into Class A shares, upon demand.

 

Conversion of Class B Common Stock

 

During the fiscal year ended June 30, 2006, several holders of the Company’s Class B Common Stock converted a total of 600,308 of such Class B shares into an aggregate of 600,308 shares of the Company’s Class A Common Stock. Under the Company’s restated certificate of incorporation, each share of Class B Common Stock is convertible at any time, at the option of the holder thereof, into one share of Class A Common Stock. The Company received no cash consideration for the issued Class A Shares which

were issued pursuant to an exemption from registration under the Securities Act of 1933, as amended, contained in Section 3(a)(9) of such Act.

 

Approximate Number of Equity Security Holders

 

As of August 31, 2006, the number of record holders (excluding those listed under a nominee name) of the Company’s Class A and Class B Common Stock totaled 251 and 21, respectively. The Company believes, however, that there are approximately 1,500 beneficial owners of its Class A Common Stock.

 

Dividends

 

Declarations of dividends depend upon the earnings and financial position of the Company and are within the discretion of the Company’s Board of Directors. However, the Company’s debt agreement prohibits the payment of dividends. No dividend in cash or property shall be declared or paid on shares of the Company’s Class B Common Stock unless simultaneously therewith there is declared or paid, as the case may be, a dividend in cash or property on shares of Class A Common Stock of at least 105% of the dividend on shares of Class B Common Stock (see Note 10 to the Consolidated Financial Statements).

 

Purchases of Equity Securities by Issuer and Affiliated Purchasers

 

There has been no activity under the Company’s stock repurchase program for the fiscal year ended June 30, 2006.

 

(dollars in thousands except share and per share data)

 

The Company’s statement of operations and balance sheet data as it relates to the fiscal years ended June 30, 2006, 2005 and 2004 have been derived from the Company’s audited financial statements (including the Consolidated Balance Sheets of the Company at June 30, 2006 and 2005 and the related Consolidated Statements of Operations of the Company for the fiscal years ended June 30, 2006, 2005 and 2004 appearing elsewhere herein). Certain transactions have affected comparability, specifically, the Company’s disposal of assets of certain businesses. During fiscal year ended June 30, 2004, the Company released valuation allowance for net deferred tax assets associated with its German subsidiary. As a result of the release, the Company recorded an income tax benefit in fiscal year ended June 30, 2004. During fiscal year ended June 30, 2003, the Company recorded restructuring charges of $3,605 and other settlement and impairment charges of $1,250. During the fiscal year ended June 30, 2002, the goodwill associated with Baldwin Kansa subsidiary (“BKA”) exceeded the assessment of its fair value made by the Company, and the Company recorded a goodwill impairment charge of $5,434 in the fiscal year ended June 30, 2002. In September 2001, the Company sold substantially all of the assets of its Roll Handling Group (“RHG”) and its Print On-Demand (“POD”) business. The revenues and corresponding expenses attributable to these divested operations are included in the financial statements only for the periods that

the businesses were owned by the Company. The following information should be read in conjunction with the aforementioned financial statements and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

 

General.  The following is management’s discussion and analysis of certain factors, which have affected the consolidated financial statements of Baldwin Technology Company, Inc. (“Baldwin” or the “Company”).

 

Forward-looking Statements

 

Except for the historical information contained herein, the following statements and certain other statements contained herein are based on current expectations. Similarly, the press releases issued by the Company and other public statements made by the Company from time to time may contain language that is forward-looking. These forward-looking statements may be identified by the use of forward-looking words or phrases such as “forecast,” “believe,” “expect,” “intend,” “anticipate,” “should,” “plan,” “estimate,” and “potential,” among others. 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 are set forth in Item 1A “Risk Factors” and Exhibit 99 to this Annual Report on Form 10-K for the fiscal year ended June 30, 2006.

 

Critical Accounting Policies and Estimates

 

Baldwin’s discussion and analysis of its financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires Baldwin to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Baldwin continually evaluates its estimates, including those related to product returns, bad debts, inventories, investments, asset impairments, intangible assets, income taxes, warranty obligations, pensions and other post-retirement benefits, contingencies and litigation. Baldwin bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. Baldwin maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required

payments. If the financial condition of Baldwin’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required. Baldwin provides for the estimated cost of product warranties at the time revenue is recognized. While Baldwin engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, Baldwin’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from Baldwin’s estimates, revisions to the estimated warranty liability would be required. Baldwin writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Baldwin records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized. Baldwin has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event Baldwin were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset valuation allowance would increase income in the period such determination is made. Likewise, should Baldwin determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax asset valuation allowance would be recorded through a charge to income in the period such determination is made. Deferred tax assets and liabilities are determined using enacted tax rates for temporary differences between book and tax bases of assets and liabilities, as well as the effects of net operating losses carried forward in certain tax jurisdictions in which the Company operates that may be utilized to offset future taxable income and similar tax credits carried forward that may be utilized to reduce future taxes payable. The Company records valuation allowances on deferred tax assets when appropriate to reflect the expected future tax benefits to be realized. In determining the appropriate valuation allowances, certain judgments are made by management relating to recoverability of deferred tax assets, use of tax loss and tax credit carryforwards, levels of expected future taxable income and available tax planning strategies. The assumptions in making these judgments are updated periodically by management based on current business conditions that affect the Company and overall economic conditions. These management judgments are therefore subject to change based on factors that include, but are not limited to (1) changes in the profitability of the Company’s subsidiaries as well as for the Company as a whole, (2) the ability of the Company to successfully execute its tax planning strategies, and (3) the accuracy of the Company’s estimate of the potential effect that changes in tax legislation, in the jurisdictions where the Company operates, may have on the Company’s future taxable profits. Failure by the Company to achieve forecasted taxable income or to execute its tax planning strategies may affect the ultimate realization of certain deferred tax assets. Factors that may affect the Company’s ability to achieve sufficient forecasted taxable income or successfully execute its tax planning strategies include, but are not limited to, increased competition, general economic conditions, a decline in sales or earnings, loss of market share, delays in product availability or changes in tax legislation. In addition, Baldwin recognizes reserves for contingencies when it becomes probable that such a contingency exists.

 

The Company tests goodwill for impairment at the reporting unit level, at least annually, by determining the fair value of the reporting unit based on a discounted cash flow model, and comparing it with its book value. If, during the annual impairment review, the book value of the reporting unit exceeds its fair value, the implied fair value of the reporting unit’s goodwill is compared with the carrying amount of the unit’s goodwill. If the carrying amount exceeds the implied fair value, goodwill is written down to its implied fair value. SFAS 142 requires management to estimate the fair value of each reporting unit, as well as the fair value of the assets and liabilities of each reporting unit, other than goodwill. The implied

fair value of goodwill is determined as the difference between the fair value of a reporting unit, taken as a whole, and the fair value of the assets and liabilities of such reporting unit.

 

Other long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Events which could trigger an impairment review include, among others, a decrease in the market value of an asset, the asset’s inability to generate income from operations and positive cash flow in future periods, a decision to change the manner in which an asset is used, a physical change to the asset or a change in business climate. Baldwin calculates estimated future undiscounted cash flows, before interest and taxes, of the related operation and compares it to the carrying value of the asset in determining whether impairment potentially exists. If a potential impairment exists, a calculation is performed to determine the fair value of the long-lived asset. This calculation is based upon a valuation model and discount rate commensurate with the risks involved. Third party appraised values may also be used in determining whether impairment potentially exits. Future adverse changes in market conditions or poor operating results of a related reporting unit may require the Company to record an impairment charge in the future.

 

The impairment review process requires management to make significant estimates and judgments regarding the future cash flows expected to result from the use and, if applicable, the eventual disposition of the respective assets. The key variables that management must estimate in determining these expected future cash flows include sales volumes, sales prices, sales growth, production and operating costs, capital expenditures, working capital requirements, market conditions and other economic factors. Significant management judgment is involved in estimating these variables, and such estimates are inherently uncertain; however, the assumptions used are reasonable and consistent with the Company’s internal planning. Management periodically evaluates and updates the estimates based on conditions that influence these variables.

 

The assumptions and conditions for determining impairments of property, plant and equipment, goodwill and other intangible assets reflect management’s best assumptions and estimates, but these items involve inherent uncertainties as described above, many of which are not under management’s control. As a result, the accounting for such items could result in different estimates or amounts if management used different assumptions or if different conditions occur in future accounting periods.

 

Results of Operations

 

The following table sets forth certain of the items (expressed as a percentage of net sales) included in the Selected Financial Data and should be read in connection with the Consolidated Financial Statements of the Company, including the notes thereto, presented elsewhere in this report.

 

Overview

 

The Company 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, Connecticut, 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.

 

For the year ended June 30, 2006 net sales were $179,380 representing approximately a 4% improvement over the previous year’s sales as reported. The increases in revenue are primarily attributable to the steady and stable growth in worldwide printing markets which has increased demand for the products supplied by the Company. In addition, improved relationships with customers and acceptance of the Company’s products by end users has led to an increase in the Company’s market share for accessories and controls.

 

Gross margins improved to approximately 33.6% versus the prior year’s margins of 33%. This increase was attributable to the increased sales volume noted above, favorable overhead absorption, and lower technical service and warranty costs.

 

Operating income increased to approximately 6% of sales for the year ended June 30, 2006 from approximately 5.4% of sales in the previous year primarily as a result of the increased revenue and improved gross margins partially offset by increased operating expenses.

 

In addition, the Company significantly reduced its interest expense versus the previous year’s corresponding period as a result of lower average debt levels and lower interest rates. Lower royalty income in the year has been recognized as patents, which provided the income stream, expired in February 2005.

 

Fiscal Year Ended June 30, 2006 Versus Fiscal Year Ended June 30, 2005

 

Consolidated Results

 

Net Sales.  Net sales of $179,380 for the fiscal year ended June 30, 2006 reflect an increase of $6,195 or 4% versus the fiscal year ended June 30, 2005. Currency rate fluctuations attributable to the Company’s overseas operations decreased net sales for the current period by $8,431. Excluding the effects of currency translation, net sales increased $14,626 or 8%.

 

The net sales increase primarily reflects increased revenue in Europe and the Americas partially offset by decreased revenue in Asia.

 

In Europe, sales (excluding the effects of currency translation) increased approximately $15,144. Improving printing equipment market conditions coupled with increased sourcing to selected OEMs led to an increased demand from press manufacturers and end user customers for the Company’s cleaning and spray dampening systems in the newspaper marketplace and increased demand in the commercial market for cleaning, water and web control systems.

 

In the Americas, particularly the U.S., sales increased approximately $5,423 primarily related to an increased demand in the commercial market for the Company’s cleaning systems.

In Asia, particularly Japan, sales declined approximately $5,941 (excluding the effects of currency translations). Softness in the Japanese commercial and newspaper markets coupled with downward pricing pressure primarily accounted for the decline in revenue.

 

Gross Profit.  Gross profit of $60,308 for the fiscal year ended June 30, 2006 reflects an increase of $3,071 or 5% versus the fiscal year ended June 30, 2005. Excluding the unfavorable foreign currency translation effect of $3,114, gross profit increased $6,185 or 11%. Gross margins improved to 33.6% from 33.0% primarily as a result of the higher volumes noted above, favorable sales mix, favorable cost absorption associated with the higher volume and lower service and warranty costs.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses of $34,526 for the fiscal year ended June 30, 2006 reflect an increase of $2,237 or 7%. Excluding the effects of foreign currency translation of $1,279, SG&A expenses increased $3,516 or 11%. G&A expenses of $19,821 for the fiscal year ended June 30, 2006 increased $1,437 or 8% versus the fiscal year ended June 30, 2005. Excluding the effects of currency translation of $563, G&A expenses increased $1,999 or 11%. This increase relates primarily to increased compensation costs, expenses associated with stock based compensation as required per the adoption of SFAS 123(R) approximately $500, vesting associated with deferred compensation plans approximately $250, and higher consulting/professional services costs related to implementation of the Sarbanes-Oxley Act of 2002, audit, tax and other financial services fees approximately $700.

 

Selling expenses of $14,705 for the fiscal year ended June 30, 2006 increased $800 or about 6%. Excluding the effects of currency translation of $716, selling expenses increased $1,517. The increase in selling expenses reflects the increased business level associated with the higher-level sales activity coupled with an increase in commissions and trade show costs.

 

Engineering and Development Expenses.  Engineering and development expenses of $15,181 for the year ended June 30, 2006 reflect a decrease of $739 or 5% versus the fiscal year ended June 30, 2005. Excluding foreign currency translation effects, engineering and development expenses remained virtually flat year over year.

 

Restructuring and Other Charges.  The Company had no restructuring related activities for the year ended June 30, 2006 as compared to income of $338 for the fiscal year ended June 30, 2005. The release in fiscal year 2005 of restructuring reserves related to facility lease costs avoided by relocation of the Company’s corporate office.

 

Interest and Other.  Interest expense of $1,074 for the fiscal year ended June 30, 2006 decreased $1,338 versus the period ended June 30, 2005. This decrease reflects lower average debt levels during the year ended June 30, 2006 coupled with lower interest rates for the period as a result of a second amendment to the credit agreement with Maple Bank GmbH, effective July 2005. Additionally, currency rate fluctuations decreased interest expense $73 in the current period. Interest income remained virtually flat year over year on a currency adjusted basis while royalty income declined $1,549. The decline in royalty income relates to the expiration of a group of patents in February 2005, which provided the royalty income stream.

 

Other income and expense, net, amounted to expense of $162 for the period ended June 30, 2006 and primarily reflects a net foreign exchange loss. In 2005, the expense of $89 primarily reflected a fixed asset write-off.

 

Income before income taxes.  Income before income taxes for the fiscal year ended June 30, 2006 of $9,690 compares to income before income taxes of $8,719 in fiscal year ended June 30, 2005. For the current fiscal year, currency rate fluctuations decreased income before income taxes $555. Increased

revenue, gross margin improvement and lower interest expense partially offset by higher operating expenses and lower royalty income primarily accounts for the increase.

 

Income Taxes.  The Company recorded an income tax provision of $3,432 for the fiscal year ended June 30, 2006. The effective tax rate of 35.4% for fiscal year ended June 30, 2006 and 42.2% for fiscal year ended June 30, 2005 differs from the statutory rate and reflects foreign income, taxed at rates higher than the U.S. statutory rate, no benefit recognized for losses incurred in certain countries as the realization of such benefits was not more likely than not and other tax return and reserve adjustments. The Company continues to assess the need for its deferred tax asset valuation allowance in the jurisdictions in which it operates. Any adjustment 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 United States, United Kingdom and France to determine if such trends could possibly require a reversal of valuation allowance in the upcoming fiscal year.

 

Net Income.  The Company’s net income amounted to $6,258 for the fiscal year ended June 30, 2006 and primarily reflects the improved income from operations coupled with lower interest expense when compared to net income of $5,035 for the fiscal year ended June 30, 2005. Currency translation negatively impacted net income by approximately $505.

 

Fiscal Year Ended June 30, 2005 Versus Fiscal Year Ended June 30, 2004

 

Consolidated Results

 

Net Sales.  Net sales of $173,185 for the fiscal year ended June 30, 2005 reflect an increase of $15,075 or 10% versus the fiscal year ended June 30, 2004. Currency rate fluctuations increased net sales for the current period by $7,628. Excluding the effects of currency translation, net sales increased $7,446 or 5%.

 

The net sales increase primarily reflects increased demand in Europe and Asia. In Europe, sales (excluding the effects of currency translation) increased approximately $4,100, particularly in Germany and the markets serviced by Sweden. Improving global market conditions in the Americas, Europe, and Asia led to an increased demand from press manufacturers for the Company’s cleaning and spray dampening systems in the commercial and newspaper marketplace. While downward pricing pressures continue, particularly in the OEM customer base, improving market conditions coupled with OEM outsourcing and some increase in market share led to the improved sales.

 

In Asia, sales increased approximately $3,800 (excluding the effects of currency translations). In Japan, increased OEM export production, mainly to China, increased demand for the Company’s commercial cleaning and water systems. In addition, the Company’s Australian subsidiary began shipments of a significant newspaper cleaning system order during the fourth quarter of 2005.

 

In the Americas, particularly the U.S., sales remained relatively flat year over year due in part to the internal shift of sales to certain European and Japanese manufactured press equipment with products supplied by the Company’s European and Japanese subsidiaries.

 

Gross Profit.  Gross profit of $57,237 for the fiscal year ended June 30, 2005 reflects an increase of $7,201 or 14% versus the fiscal year ended June 30, 2004. Excluding the favorable foreign currency translation effect of $2,764, gross profit increased $4,437 or 9%. Gross margins improved to 33% from 32% primarily on the strength of the improvement in sales volume, coupled with better control over material and labor costs. In addition, gross margins during the fourth quarter were favorably impacted approximately 1% due to customer cost reimbursement for an order which was substantially modified.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses of $32,289 for the fiscal year ended June 30, 2005 reflect an increase of $2,578 or 9%. Excluding the effects of foreign currency translation of $1,192, SG&A expenses increased $1,386 or 5%. G&A expenses of $18,384 for the fiscal year ended June 30, 2005 increased $1,107 or 6% versus the fiscal year ended June 30, 2004. Excluding the effects of currency translation of $563, G&A expenses increased $544 or 3%. This increase relates primarily to increased compensation costs commensurate with improved business performance coupled with higher consulting costs associated with the implementation of compliance with the requirements of the Sarbanes-Oxley Act of 2002.

 

Selling expenses of $13,905 for the fiscal year ended June 30, 2005 increased $1,471 or 12%. Excluding the effects of currency translation of $629, selling expenses increased $842. The increase in selling expenses reflects the increased business level associated with the higher-level sales activity and reflects an increase in commissions, and higher salaries, benefits and other employee related travel costs.

 

Engineering and Development Expenses.  Engineering and development expenses of $15,920 for the year ended June 30, 2005 reflect an increase of $2,302 or 17% versus the fiscal year ended June 30, 2004. Excluding foreign currency translation effects, engineering and development expenses increased $1,527 or 11%. The increase relates primarily to increased personnel and travel related expenses, particularly in Germany, due to planned investments in product development, and research and development projects.

 

Restructuring and Other Charges.  The Company released to income restructuring reserves of $338 for the year ended June 30, 2005 as compared to a charge of $448 for the fiscal year ended June 30, 2004. The release of restructuring reserves related to facility lease costs avoided by relocation of the Company’s corporate office. The $448 in fiscal year 2004 represented additional employment reductions in the United States and the United Kingdom associated with the August 2002 restructuring plan.

 

Interest and Other.  Interest expense of $2,412 for the fiscal year ended June 30, 2005 decreased $2,573 versus the period ended June 30, 2004. Lower average debt levels and lower interest rates as a result of the amended credit agreement with Maple Bank GmbH, entered into in September 2004, coupled with lower amortization of deferred financing costs during the period primarily account for the decrease. Additionally, currency rate fluctuations increased interest expense $173 in the current period. Interest income remained virtually flat year over year on a currency adjusted basis while royalty income declined $1,612. The decline in royalty income relates to the expiration of a group of patents, which provided the royalty income stream, in February 2005.

 

Other income and expense, net, amounted to expense of $89 for the period ended June 30, 2005 and primarily reflects a write-off of fixed assets. In 2004, the income of $559 primarily reflected foreign currency transaction and fair value exchange gains of $1,194 and $203, respectively. Partially offsetting these gains in 2004 were financial, legal and accounting fees amounting to $833 related to the termination of a proposed transaction with regard to the planned sale of the Company.

 

Income Taxes.  The Company recorded an income tax provision of $3,684 for the fiscal year ended June 30, 2005. The effective tax rate of 42.2% for fiscal year ended June 30, 2005 reflects strong foreign income, taxed at rates higher than the U.S. statutory rate. Additionally, no benefit was recognized for losses incurred in certain countries as the realization of such benefits was not more likely than not. For the fiscal year ended June 30, 2004, the Company recorded a tax benefit of $1,673 primarily as a result of the reversal of its valuation allowance for net deferred tax assets associated with its German subsidiary.

 

Income from Continuing Operations.  Income from continuing operations before taxes for the fiscal year ended June 30, 2005 of $8,719 compares to income from continuing operations of $5,313 in fiscal year ended June 30, 2004. For the fiscal year, currency rate fluctuations increased income from continuing operations $645. Increased revenue, gross margin improvement and lower interest expense

partially offset by higher operating expenses and lower royalty income primarily accounted for the increase.

 

Net Income.  The Company’s net income amounted to $5,035 for the fiscal year ended June 30, 2005 and reflects the improved income from operations. Net income of $6,986 for the fiscal year ended June 30, 2004 reflected improving income from operations coupled with the income tax benefit associated with the reversal of the German valuation allowance.

 

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.

 

Liquidity and Capital Resources

 

The Company’s cash flow from operating, financing and investing activities as reflected in the Consolidated Statement of Cash Flows are summarized in the tables below.

 

 

Net cash from operating activities for the year ended June 30, 2006 decreased $8,289 as compared to 2005. The decrease was primarily driven by an increase in accounts receivable. Due to the timing of shipments during the fourth quarter, accounts receivable days sales outstanding (DSO) increased to 62 days from 51 days in 2005. The Company expects to return to DSOs in the mid 50’s during the next several quarters. In addition the cash flow benefit from increased inventory turns in 2006 of 5.5 was not as great as in 2005 when inventory turns improved to 5.3 times in 2005 versus 4.6 times in 2004.

 

 

In 2006, cash used for additions amounted to $1,441 versus $1,018 in 2005 and $1,022 in 2004. The increase in 2006 primarily relates to higher property, plant and equipment additions.

 

 

The Company’s primary source of external financing is the Credit Agreement and its amendments (the “Credit Agreement”) with Maple Bank GmbH (“Maple” or “Lender”).

 

Effective July 1, 2005 the Credit Agreement with Maple was amended (the second amendment). This amendment reduced the interest rates for the fiscal year ended June 30, 2006. Borrowings under the credit facility are subject to a borrowing base and bear interest at a rate equal to the three-month Eurodollar rate (as defined in the Credit Agreement) plus: (i) 3.375% (5.125% for the fiscal year ended June 30, 2005) for loans denominated in U.S. dollars and (ii) 3.775% (5.525% for the fiscal year ended June 30, 2005) for loans denominated in Euros.

 

The credit facility is collateralized by substantially all of the accounts and notes receivable of the Company and a portion of the Company’s inventory up to a maximum amount of $10,000. The Credit Agreement does not require the Company to meet any financial covenants, except for a limitation on annual capital expenditures, for which the Company received a waiver for the fiscal year ended June 30, 2006; however, it contains a material adverse effect clause, which provides that Maple would not be obligated to fund any loan, convert or continue any loan as a LIBOR loan or issue any new letters of credit in the event of a material adverse effect. Management does not anticipate that such an event will occur; however, there can be no assurance that such an event will not occur. In addition, the Credit Agreement granted to the Lender an option to acquire a maximum of $5,000 of equity securities (as defined in the Agreement) should the Company choose to issue any such equity securities.

 

The initial borrowings under the credit facility during the fiscal year ended June 30, 2004, amounted to $18,874, of which the Company utilized $16,243 to retire its previously existing debt, associated interest, closing costs and working capital purposes. During the fiscal years ended June 30, 2006 and 2005, cash flow from operations enabled the Company to reduce the amount outstanding under the Credit Agreement with Maple by approximately $5,300 in fiscal year 2006 and $8,100 in fiscal year 2005 included in total long and short term debt repayments of $6,563 and 9,213 in the table above.

 

During the quarter ended September 30, 2005, the Company obtained a three-year term loan with Mizuho Bank of YEN 100,000, (approximately $899 U.S. dollars) which matures in September 2008. This term loan is subject to quarterly principle payments of YEN 8,333 (approximately $75 U.S. dollars) and bears interest at the Tokyo Inter Bank Offered Rate (“TIBOR”) plus 0.75%. The Company entered into an interest rate swap agreement that converts the variable rate payable on the loan to a fixed rate of 1.81% and which has the same maturity date as the term loan.

 

The Company maintains relationships with both foreign and domestic banks, which combined have extended credit facilities totaling $35,744 at June 30, 2006, including amounts available under the Maple Credit Agreement. As of June 30, 2006, the Company had $14,075 outstanding under these credit facilities including $10,080 (including Letters of Credit) under the Maple Credit Agreement and Term Loan.

The Company believes that its cash flow from operations, along with the available bank lines of credit and alternative sources of borrowing are sufficient to finance its working capital and other capital requirements over the term of the current financing with Maple.

 

At June 30, 2006 and 2005, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose 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.

 

The following summarizes the Company’s contractual obligations at June 30, 2006 and the effect such obligations are expected to have on its liquidity and cash flow in future periods:

 

 

 

New Accounting Pronouncements

 

As more fully described in Notes 2 and 11 to the Consolidated Financial Statements, the Company adopted Statement of Financial Accounting Standards (“SFAS”) SFAS 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)), on July 1, 2005. This Statement requires that all stock-based compensation, including grants of employee stock options, be accounted for using the fair value-based method. SFAS 123(R) became effective for the Company for fiscal year beginning July 1, 2005. The Company elected to adopt SFAS 123(R) using the modified perspective method.

 

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation (“FIN”) FIN 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 addresses the accounting and disclosure of uncertain tax positions. The Company will adopt FIN 48 on July 1, 2007, and is evaluating the impact, if any, that FIN 48 will have on the Company’s financial statements.

 

FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, is expected to be issued in September 2006. The Company is evaluating the impact on its financial statements.

 

No other new accounting pronouncement issued or effective during the fiscal year has had or is expected to have a material impact on the consolidated financial statements.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

 

The Company operates internationally and is exposed to certain market risks arising from transactions that in the normal course of business include fluctuations in interest rates and currency exchange rates. While the Company occasionally uses derivative financial instruments in order to manage or reduce these risks, typically currency futures contracts and interest rate swap agreements, the Company does not enter into derivative or other financial instruments for trading or speculative purposes.

 

Interest Rate and Debt Sensitivity

 

As of June 30, 2006, the Company had debt totaling $10,555 most of which bears interest at floating rates.

 

The Company performed a sensitivity analysis as of June 30, 2006, assuming a hypothetical one percentage point increase in interest rates. Holding other variables constant (such as foreign exchange rates and debt levels), a one-percentage point increase in interest rates would affect the Company’s pre-tax income by approximately $100. However, actual increases or decreases in earnings in the future could differ materially from this analysis based on the timing and amount of both interest rate changes and amounts borrowed by the Company.

 

Currency Exchange Rate Sensitivity

 

The Company derived approximately 83% of its revenues from countries outside of the United States for the fiscal year ended June 30, 2006. Results were and continue to be affected by fluctuations in foreign currency exchange rates. The Company’s policy is to hedge the impact of currency rate fluctuations, which could have a material impact on the Company’s financial results. The Company utilizes foreign currency exchange forward contracts to hedge certain of these exposures. The Company also maintains certain levels of cash denominated in various currencies, which acts as a natural overall hedge.

 

The Company performed a sensitivity analysis as of June 30, 2006 assuming a hypothetical 10% adverse change in foreign currency exchange rates. Holding all other variables constant, the analysis indicated that such a market movement would affect the Company’s pre-tax income by approximately $800. However, actual gains and losses in the future could differ materially from this analysis based on the timing and amount of both foreign currency exchange rate movements and the Company’s actual exposures and hedges.

Item 8.  Financial Statements and Supplementary Data

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

BALDWIN TECHNOLOGY COMPANY, INC.

 

In our opinion, the consolidated Financial Statements listed in the accompanying index present fairly, in all material respects, the financial position of Baldwin Technology Company, Inc. and its subsidiaries at June 30, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 2 to the financial statements, the Company changed the manner in which it accounts for stock-based compensation as of July 1, 2005.

 

PricewaterhouseCoopers LLP

 

Stamford, Connecticut

September 28, 2006

BALDWIN TECHNOLOGY COMPANY, INC.

 

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

Assets

 

 

The accompanying notes to consolidated financial statements

are an integral part of these statements.

BALDWIN TECHNOLOGY COMPANY, INC.

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

Liabilities and Shareholders’ Equity

 

 

The accompanying notes to consolidated financial statements

are an integral part of these statements.

BALDWIN TECHNOLOGY COMPANY, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

The accompanying notes to consolidated financial statements

are an integral part of these statements.

 

BALDWIN TECHNOLOGY COMPANY, INC.

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands except for share and per share data)