This section should be read in conjunction with our condensed consolidated financial statements included elsewhere herein and our Annual Report on Form 10-K for the fiscal year ended
January 31, 2022. We are a multinational enterprise that leverages our proprietary data visualization technologies to design, develop, manufacture, distribute and service a broad range of products that acquire, store, analyze and present data in multiple formats. We organize our structure around a core set of competencies, including research and development, manufacturing, service, marketing and distribution. We market and sell our products and services through the following two segments:
• Product Identification (“PI”): Offers color and monochromatic digital images
label printers, direct-to-package printers and custom OEM printers. PI also provides software to design, manage and print labeling and packaging images locally and across networked printing systems, as well as all related printing supplies such as pressure sensitive labels, tags, inks, toners and thermal transfer ribbons used by digital printers. PI also provides on-site and remote service, spare parts and various service contracts.
• Test and Measurement (“T&M”) – offers a suite of products and services
that acquire data from local and networked data streams and sensors as well as wired and wireless networks. The T&M segment includes a line of aerospace printers that are used to print hard copies of data required for the safe and efficient operation of aircraft including navigation maps, clearances, arrival and departure procedures, flight itineraries, weather maps, performance data, passenger data, and various air traffic control data. Aerospace products also include aircraft networking systems for high-speed onboard data
to transfer. T&M
also provides repairs, service and spare parts. We market and sell our products and services globally through a diverse distribution structure of direct sales personnel, manufacturers' representatives and authorized dealers that deliver a full complement of branded products and services to customers in our respective markets. Our growth strategy centers on organic growth through product innovation made possible by research and development initiatives, as well as strategic acquisitions that fit into or complement existing core businesses. 17
Table of Contents COVID-19 Update-Overview All of our global operations have been materially adversely affected by the worldwide COVID-19 pandemic during the past two years. We expect this adverse impact to continue to a degree that we cannot predict. We made significant modifications to our global operations because of the COVID-19 pandemic. We initially required most non-production related team members to work remotely. Although this is no longer required for health and safety reasons, for many of our team members, remote work has become a preference and we believe we have to a large degree successfully adapted to it through the use of technology and changed management practices, but further adaptations, may be required. We expect that our operations and modalities of on-site and remote work will be impacted permanently, as will our increased safety protocols and the other adaptations undertaken during the pandemic, but our practices and plans are still developing, and we cannot predict the results yet. Since the COVID-19 pandemic began we have experienced difficulties in obtaining raw materials and components for our products. Some of the structural dislocations in the global economy caused by the pandemic are deepening and prolonging these difficulties. We have had to incur additional costs, such as expedited and express shipping fees (i.e., air rather than ocean freight). These difficulties have also negatively impacted our efficiency, delayed shipments and caused product shortages . We are currently monitoring the world-wide delays in transit time, as freight carriers continue to experience significant delays in overseas shipments. We are addressing these issues through long range planning and procuring higher inventory on severely allocated items to help mitigate potential shortages whenever practicable. We are also monitoring and reacting to extended lead times on electronic components and utilizing a variety of strategies, including blanket orders, vendor-bonded inventories, extended commitments to our supply base, and seeking alternative suppliers. Additionally, we have taken actions to increase regular contact with our essential vendors and increased our forecasting horizon for our products to help us better manage our supply chain. In some cases, we are working with our vendors to help them procure components. Our strategies to counteract the impact of the pandemic and the related supply chain dislocations have increased the amount of inventory we maintain to support our product sales. We have also experienced several situations where component shortages and scarcity have required us to pay significantly higher costs to obtain those components. We will continue to monitor our supply chain going forward and update our mitigation strategies as we determine appropriate. We are not able to predict how current supply chain difficulties will develop in the future, and if the steps we are taking are not effective, it could have a material adverse impact on our results of operations.
Product ID Update
Our Product Identification business has been negatively impacted by the COVID-19 pandemic because our ability to meet with customers to demonstrate our products at trade shows and on-site in their facilities has been curtailed. We have partially countered this through a variety of virtual, on-line selling and digital marketing strategies, but the degree to which this will be successful to mitigate the lack of face-to-face selling is unclear. Test & Measurement Update The aerospace industry, which we serve through our aerospace product line, has also been significantly disrupted by the COVID-19 pandemic, both inside and outside of
the United Statesbecause of the severe decline in the demand for air travel and aircraft, and a general curtailment of aircraft production rates. This has had a material adverse impact on our financial results. While air travel demand and aircraft production demand has recovered to some extent, it remains unclear whether these demand factors will continue to recover and to what extent. The secondary impacts of the demand decline and resulting financial losses on the economic structure of the airline industry could become a negative factor for demand for aircraft due to industry consolidation. Individually or in combination, these factors may continue to have a material adverse impact on our business operations and financial results. 18
Three months completed
Revenue by Segment and Percentage Change Current Quarter vs. Prior Year for the Three Months Ended
% Change As a As a Compared April 30, % of May 1, % of to (Dollars in thousands) 2022 Revenue 2021 Revenue Prior Year Product Identification
$ 21,72470.1 % $ 23,09879.4 % (5.9 )% T&M 9,286 29.9 % 5,980 20.6 % 55.3 % Total $ 31,010100.0 % $ 29,078100.0 % 6.6 % Revenue for the first quarter of the current year was $31.0 million, representing a 6.6% increase compared to the previous year first quarter revenue of $29.1 million. Revenue through domestic channels for the first quarter of the current year was $19.7 million, an increase of 17.7% from the prior year's first quarter. International revenue for the first quarter of the current year was $11.4 million, representing 36.6% of our first quarter revenue and reflecting an 8.3% decrease from the previous year first quarter. Current year first quarter international revenue includes an unfavorable foreign exchange rate impact of $0.5 million. Hardware revenue in the current quarter was $9.3 million, a 21.6% increase compared to the prior year's first quarter revenue of $7.6 million. The increase is attributable to the T&M segment, as the aerospace printer product line sales revenue increased 91.9% compared to the first quarter of the prior year primarily attributed to growth in demand for new aircraft as air travel increased as COVID-19 restrictions lessened. The increase in current quarter hardware sales was also impacted, to a lesser degree, by increased data recorder product line sales in the T&M segment. The increase in current quarter hardware sales was partially offset by an overall 25.1% decrease in hardware sales in the PI segment. Supplies revenue in the current quarter was $17.9 million, a 1.5% decrease compared to the prior year's first quarter supplies revenue of $18.2 million. The decrease is primarily as a result of lower thermal film supplies sales in the QuickLabel product group and, to a lesser degree, a decline in sales of certain inks and media supplies in the Trojan Label product group, both of which are in the PI segment. The overall decrease in supplies revenue was slightly offset by an increase in sales of ink jet supplies in the QuickLabel product group in the PI segment and an overall increase in sales of supplies in the T&M segment.
Services and other income from
Current year first quarter gross profit was
$10.7 million, a 1.5% decrease compared to the prior year's first quarter gross profit. Current quarter gross profit margin of 34.6% reflects a 2.8 percentage point decrease from the prior year's first quarter gross profit margin of 37.4%. The lower gross profit margin for the current quarter compared to the prior year's first quarter is primarily attributable to increased period costs. Operating expenses for the current quarter were $10.0 million, a 1.9% decrease compared to the prior year's first quarter operating expenses. Current quarter selling and marketing expenses were $5.9 million, a 3.4% decrease compared to the first quarter of the prior year. The decrease for the current quarter was primarily due to the decrease in amortization expense related to the fiscal 2022 second quarter change in the remaining useful lives and amortization methods for certain of our customer relationship intangibles, as well as decreases in outside services for marketing activities and sales commission expenses. The decrease in current quarter selling and marketing expenses was partially offset by increases in employee wages and benefits and increased travel and entertainment expenses. Current quarter general and administrative expenses were $2.6 million, a 9.2% increase compared to the first quarter of the prior year primarily due to an increase in outside service fees. Research and development ("R&D") expenses were $1.5 millionin the current quarter, an 11.3% decrease compared to $1.7 millionin the first quarter of the prior year primarily due to decreases in supplies and repairs expenses and employee wage expenses. R&D spending as a percentage of revenue for the current quarter was 4.9% as compared to 5.9% for the same period in the prior year. Other expense in the first quarter of the current year was $0.3 millioncompared to $0.4 millionfor the same period in the prior year. Current quarter other expense includes interest expense on debt and the revolving line of credit of $0.2 millionand $0.1 millionof net foreign exchange loss. Other expense for the first quarter of the prior year also consisted primarily of interest expense on our debt of $0.2 millionand $0.2 millionof net foreign exchange loss. 19
We recognized a federal, state and foreign income tax provision for the first quarter of the current year of
$60,000, resulting in an effective tax rate of 12.4%. This rate was impacted by a $38,000tax benefit related to the expiration of the statute of limitations on a previously uncertain tax position and a $30,000tax benefit arising from windfall tax benefits related to the Company's stock. During the three months ended May 1, 2021, we recognized an income tax benefit of approximately $227,000. The effective tax rate in this period was directly impacted by a $276,000tax benefit related to the expiration of the statute of limitations on a previously uncertain tax position and a $37,000tax benefit arising from windfall tax benefits related to the Company's stock. We reported net income of $0.4 millionor $0.06per diluted share for the first quarter of the current year. On a comparable basis, net income for the prior year's first quarter was $0.6 millionor $0.08per diluted share. Return on revenue was 1.4% for the first quarter of fiscal 2023 compared to 2.0% for the first quarter of fiscal 2022.
We report two segments: Product Identification and Test & Measurement and evaluate segment performance based on the segment profit before corporate and financial administration expenses. Summarized below are the Revenue and Segment Operating Profit for each reporting segment: Three Months Ended Revenue Segment Operating Profit April 30, May 1, April 30, May 2, (In thousands) 2022 2021 2022 2020 Product Identification
$ 21,724 $ 23,098 $ 1,413 $ 2,729T&M 9,286 5,980 1,911 350 Total $ 31,010 $ 29,0783,324 3,079 Corporate Expenses 2,560 2,344 Operating Income 764 735 Other Expense, Net 279 369 Income Before Income Taxes 485 366 Income Tax Provision (Benefit) 60 (227 ) Net Income $ 425 $ 593Product Identification Revenue from the Product Identification segment decreased 5.9% in the first quarter of the current year, with revenue of $21.7 millioncompared to $23.1 millionin the same period of the prior year. The current quarter decrease in revenue is due to a net decrease in both hardware and supply revenue, slightly offset by increased sales of ink jet supplies. Product Identification's current quarter segment operating profit was $1.4 million, reflecting a profit margin of 6.5%. This compares to the prior year's first quarter segment profit of $2.7 millionand related profit margin of 11.8%. The decrease in Product Identification current year first quarter segment operating profit and margin is primarily due to lower revenue and higher manufacturing and operating costs.
Test & Measurement-T&M
Revenue from the T&M segment was
$9.3 millionfor the first quarter of the current fiscal year, representing a 55.3% increase compared to revenue of $6.0 millionfor the same period in the prior year. The increase in revenue for the current quarter is primarily attributable to strong hardware sales in our aerospace product lines as a result of the recertification of the Boeing 737 MAX and increase in demand for new aircraft due to increase in air travel as COVID-19 restrictions lessen. T&M's first quarter segment operating profit was $1.9 million, reflecting a profit margin of 20.6%, an increase compared to the prior year segment operating profit of $0.4 millionand related operating margin of 5.9%. The increase in T&M's current year first quarter segment operating profit and margin is primarily due to higher revenue and lower operating costs, along with a slightly better sales mix. 20
Cash and capital resources
Historically, our primary sources of short-term liquidity have been cash generated from operating activities and borrowings under our revolving credit facility. These sources have also usually funded the majority of our capital expenditures and contractual contingent consideration obligations. We have funded acquisitions by borrowing under bank term loan facilities. On
July 30, 2020, we entered into an Amended and Restated Credit Agreement (the "A&R Credit Agreement") with Bank of America, N.A. (the "Lender"), our wholly owned subsidiary ANI ApS, a Danish private limited liability company and ANI ApS'swholly-owned subsidiary TrojanLabel ApS, a Danish private limited liability company ("TrojanLabel"). The A&R Credit Agreement amended and restated the Credit Agreement dated as of February 28, 2017, by and among us, ANI ApS, TrojanLabel and the Lender. In connection with our entry into the A&R Credit Agreement, we entered into an Amended and Restated Security and Pledge Agreement and a mortgage in favor of the Lender with respect to our owned real property in West Warwick, Rhode Island. Under the A&R Credit Agreement, AstroNova, Inc.is the sole borrower, and, prior to the effectiveness of the Amendment (as defined below), its obligations were guaranteed by ANI ApSand TrojanLabel. The Amended Credit Agreement expires on September 30, 2025, a significant extension of tenor. It also eliminated a minimum adjusted EBITDA covenant, an asset coverage covenant and a minimum liquidity covenant, and, subject to ongoing covenant compliance, significantly reduced limitations on restricted payments such as dividends, eliminated restrictions on capital expenditures and increased operating flexibility with respect to funding our global operations. The Amended Credit Agreement provides for (i) a term loan in the principal amount of $10.0 million, and (ii) a $22.5 millionrevolving credit facility available for general corporate purposes. At the closing of the Amended Credit Agreement, we borrowed the entire $10.0 millionterm loan which was used to refinance in full the outstanding term loan under the A&R Credit Agreement. Under the Amended Credit Agreement, revolving credit loans may continue to be borrowed, at our option, in U.S.Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Kroner. While we expected that as a result of the impact of the COVID-19 pandemic, some of our customers would experience liquidity pressure and be unable to pay us for products on a timely basis, in general our recent receivables collection experience has been consistent with our historical experience and a significant deterioration in receivables collection has not occurred. In response to the COVID-19 pandemic and related economic dislocation, we have implemented and will continue to implement a variety of expense reduction and cash preservation initiatives. On April 27, 2020, our board of directors suspended our quarterly cash dividend beginning with the second quarter of our fiscal year 2021. At April 30, 2022, our cash and cash equivalents were $5.8 million. During the first quarter of the current year, we borrowed $3.0 millionon our revolving line of credit and at April 30, 2022, we have $19.5 millionavailable for borrowing under that facility. We believe that our available cash and credit facilities combined with our cash generated from operations will be sufficient to support our operating requirements including our capital expenditure commitments. Indebtedness Term Loan The Amended Credit Agreement requires that the term loan be paid in quarterly installments on the last day of each of our fiscal quarters with the final payment due on September 30, 2025. We may voluntarily prepay the term loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later than September 30, 2025, at which time any outstanding revolving loans will be due and payable in full, and the revolving credit facility will terminate. We may reduce or terminate the revolving line of credit at any time, subject to certain thresholds and conditions, without premium or penalty. The Amended Credit Agreement includes an uncommitted accordion provision under which the term loan and/or revolving credit facility commitments may be increased in an aggregate principal amount not exceeding $10.0 million, subject to obtaining the agreement of the Lender and the satisfaction of certain other conditions. As under the A&R Credit Agreement, the loans under the Amended Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from (a) net cash proceeds from certain dispositions of property, (b) net cash proceeds from certain issuances of equity, (c) net cash proceeds from certain issuances of additional debt and (d) net cash proceeds from certain extraordinary receipts. Amounts repaid under the revolving credit facility may be reborrowed, subject to continued compliance with the Amended Credit Agreement. No amount of the term loan that is repaid may be reborrowed. 21
December 14, 2021, we and Bank of America, N.A. entered into a LIBOR Transition Amendment (the "LIBOR Amendment") with regard to the Amended Credit Agreement. The LIBOR Amendment, among other things, (i) changes the rate under the Amended Credit Agreement for borrowings denominated in U.S.Dollars from a LIBOR-based rate to a BSBY (Bloomberg Short-Term Bank Yield Index)-based rate, subject to certain adjustments, (ii) changes the rate under the Amended Credit Agreement for borrowings denominated in British Pounds Sterling from a LIBOR-based rate to a SONIA (Sterling Overnight Index Average)-based rate, subject to certain adjustments, (iii) changes the rate under the Amended Credit Agreement for borrowings denominated in Euros from a LIBOR-based rate to a EURIBOR (Euro Interbank Offered Rate)-based rate, subject to certain adjustments, and (iv) updates certain other provisions of the Amended Credit Agreement regarding successor interest rates to LIBOR. The interest rates under the Amended Credit Agreement, giving effect to the LIBOR Amendment, are as follows: the term loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the BSBY Rate as defined in the LIBOR Amendment (or in the case of revolving credit loans denominated in a Pounds Sterling, Euros or another currency other than U.S.Dollars, the SONIA Rate as defined in the LIBOR Amendment, EURIOBOR Rate as defined in the LIBOR Amendment, or the applicable quoted rate, respectively), plus a margin that varies within a range of 1.60% to 2.30% based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50%, (ii) Bank of America's publicly announced prime rate, (iii) the BSBY Rate, SONIA Rate, EURIBOR Rate or other applicable quoted rate plus 1.00% or (iv) 0.50%, plus a margin that varies within a range of 0.60% to 1.30% based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15% and 0.30% based on our consolidated leverage ratio. We must comply with various customary financial and non-financial covenants under the Amended Credit Agreement. The financial covenants under the Amended Credit Agreement consist of a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. The minimum EBITDA, minimum consolidated asset coverage ratio, minimum liquidity and maximum capital expenditures covenants with which we were required to comply under the A&R Credit Agreement were eliminated by the Amendment. The primary non-financial covenants limit our and our subsidiaries' ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on their capital stock, to repurchase or acquire their capital stock, to conduct mergers or acquisitions, to sell assets, to alter their capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the Amended Credit Agreement, certain of which provisions were modified by the Amendment. The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Amended Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries' significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or a change of control. Our obligations under the Amended Credit Agreement continue to be secured by substantially all of our personal property assets (including a pledge of the equity interests held by our wholly-owned Danish subsidiary, ANI ApS), in our wholly-owned German subsidiary AstroNova GmbH, and in our wholly-owned French subsidiary AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property in West Warwick, Rhode Island. Pursuant to the Amendment, the guarantees of our obligations under the A&R Credit Agreement that were previously provided by ANI ApSand TrojanLabel were released.
Our statements of cash flows for the three months ended
April 30, 2022and May 1, 2021are included on page 5 of this report. Net cash used by operating activities was $1.6 millionfor the first three months of fiscal 2023 compared to cash provided of $3.9 millionfor the same period of the previous year. The decrease in net cash provided by operations for the first three months of the current year is primarily due to the decrease in cash provided by working capital. The combination of changes in accounts receivable, inventory, income taxes payable, accounts payable and accrued expenses decreased cash by $3.3 millionfor the first three months of fiscal 2023, compared to an increase of $1.8 millionfor the same period in fiscal 2022. Our accounts receivable balance increased to $18.4 millionat the end of the first quarter compared to $17.1 millionat year end. Days sales outstanding for the first quarter of the current year also increased to 50 days compared to 45 days at prior year end. The inventory balance was $36.9 millionat the end of the first quarter of fiscal 2023, an increase compared to $34.6 millionat year end. Inventory days on hand increased to 164 days at the end of the current quarter from 156 days at the prior year end. The cash position at April 30, 2022, was $5.8 millioncompared to $5.3 millionat year end. The increase in cash during the current quarter was primarily a result of borrowings under the revolving line of credit of $3.0 million. This increase was offset by cash used from the working capital accounts, as discussed above. Cash outflows during the quarter also included principal payments on the long-term debt and the guaranteed royalty obligation of $0.3 millionand $0.5 million, respectively. 22
Contractual obligations, commitments and contingencies
There have been no material changes to our contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended
January 31, 2022other than those occurring in the ordinary course of business.
Critical Accounting Policies, Estimates and Certain Other Matters
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, 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. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate. While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. There have been no material changes to the application of critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended
January 31, 2022.
This Quarterly Report on Form 10-Q may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect our current expectations concerning future events and results. We generally use the words "believes," "expects," "intends," "plans," "anticipates," "likely," "continues," "may," "will," and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors which could cause actual results to differ materially from those anticipated include, but are not limited to (a) general economic, financial, industry and business conditions; (b) the impact of the ongoing COVID-19 pandemic on us, our customers, our suppliers and the global economy; (c) declining demand in the test and measurement markets, especially defense and aerospace; (d) our ability to develop and introduce new products and achieve market acceptance of these products; (e) our dependance on contract manufactures and/or single or limited source suppliers; (f) competition in the specialty printer or data acquisition industries; (g) our ability to obtain adequate pricing for our products and control our cost structure; (h) our ability to adequately enforce and protect our intellectual property, defend against assertions of infringement or loss of certain licenses; (i) the risk of incurring liabilities as a result of installed product failures due to design or manufacturing defects (j) the risk of a material security breach of our information technology system or cybersecurity attack impacting our business and our relationship with customers; (k) our ability to attract, develop and retain key employees; (l) economic, political and other risks associated with international sales and operations and the impact of changes in foreign currency exchange rates on the results of operations; (m) changes in tax rates or exposure to additional income tax liabilities; (n) our ability to comply with our current credit agreement or secure alternative financing and to otherwise manage our indebtedness; (o) our ability to successfully integrate acquisitions and realize benefits from divestitures; (p) our ability to maintain adequate self-insurance accruals or insurance coverage for employee health care benefits; (q) our compliance with customer or regulators certifications and our compliance with certain governmental laws and regulations; and (r) other risks included under "Item 1A-Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended
January 31, 2022. We assume no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
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