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(1) Overview
On September 25, 2015, Astro-Med, Inc. announced it would immediately begin doing business as AstroNova on a worldwide basis. The name change is part of the plan to modernize the Company and effectively communicate our strategy. The AstroNova name and brand emphasizes our traditional strengths in aerospace and acknowledges our expanding presence in test & measurement, product identification and other new areas where we can apply our data visualization technology. On May 18, 2016, the name change was formally approved by the Company’s shareholders, and the Company’s Restated Articles of Incorporation were amended to officially change the Company’s name to AstroNova, Inc. The Company’s common stock trades on the NASDAQ Global Market stock exchange under its new name, AstroNova, Inc., using the ticker symbol, ALOT.
Headquartered in West Warwick, Rhode Island, AstroNova, Inc. leverages its expertise in data visualization technologies to design, develop, manufacture and distribute a broad range of specialty printers and data acquisition and analysis systems. Our products are distributed through our own sales force and authorized dealers in the United States. We also sell to customers outside of the United States primarily through our Company offices in Canada, China, Europe, Mexico and Southeast Asia as well as through independent dealers and representatives. AstroNova, Inc. products are used around the world in a wide range of aerospace, apparel, automotive, avionics, chemical, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging and transportation applications.
The business consists of two segments, Product Identification (previously known as our QuickLabel segment), which includes products sold under the QuickLabel® brand name, and Test & Measurement which includes products sold under the AstroNova™ brand name.
Products sold under the QuickLabel brand are used in industrial and commercial product packaging and automatic identification applications to digitally print custom labels and other visual identification marks on demand. Products sold under the AstroNova Test & Measurement brand acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed and analyzed and then stored and presented in various visual output formats. In the aerospace market, the Company has a long history of using its data visualization technologies to provide high-resolution printers for use in airborne applications.
Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and “us” in this Quarterly Report on Form 10-Q refer to AstroNova, Inc. and its consolidated subsidiaries.
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(2) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods included herein. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with footnotes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2016.
Results of operations for the interim periods presented herein are not necessarily indicative of the results that may be expected for the full year.
The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. Some of the more significant estimates relate to the allowances for doubtful accounts and credits, inventory valuation, impairment of long-lived assets and goodwill, income taxes, share-based compensation, accrued expenses and warranty reserves. Management’s estimates are based on the facts and circumstances available at the time estimates are made, historical experience, risk of loss, general economic conditions and trends, and management’s assessments of the probable future outcome of these matters. Consequently, actual results could differ from those estimates.
Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year’s presentation.
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(3) Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
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(4) Acquisition
On June 19, 2015, the Company completed the acquisition of the aerospace printer product line for civil and commercial aircraft from Rugged Information Technology Equipment Corporation (RITEC) under the terms of an Asset Purchase Agreement dated June 18, 2015. The products of RITEC consist of aerospace printers for use in commercial aircraft sold primarily to aircraft manufacturers, tier one contractors and directly to airlines around the world. AstroNova’s aerospace printer product line is part of the Test & Measurement (T&M) product group and is reported as part of the T&M segment. The Company began shipment of the RITEC products in the third quarter of fiscal 2016.
The purchase price of the acquisition was $7,360,000 which was funded using available cash and investment securities. Of the $7,360,000 purchase price, $750,000 was being held in escrow for twelve months following the acquisition date to support an indemnity to the Company in the event of any breach in the representations, warranties or covenants of RITEC. During this year’s fiscal second quarter, the Company recovered $99,000 of the escrow amount which was recorded as other income in the condensed consolidated statements of income for the three and six months period ended July 30, 2016.
The assets acquired from RITEC consist principally of accounts receivable and certain intangible assets. Acquisition related costs of approximately $109,000 were included in the general and administrative expenses in the Company’s consolidated statements of income for fiscal year ended January 31, 2016. The acquisition was accounted for under the acquisition method in accordance with the guidance provided by FASB ASC 805, “Business Combinations.”
AstroNova also entered into a Transition Services Agreement, under which RITEC will provide transition services and continue to manufacture products in the acquired product line until the Company transitions the manufacturing to its West Warwick, Rhode Island facility, which the Company anticipates will be completed by the third quarter of fiscal 2017. Upon expiration of the Transition Services Agreement, AstroNova will purchase any inventory held by RITEC at its book value (net of reserves), which the Company estimates will be approximately $200,000.
Also as part of the Asset Purchase Agreement, we entered into a 5-year License Agreement, which grants RITEC certain rights to use the intellectual property acquired by the Company in the design, development, marketing, manufacture, sale and servicing of aerospace printers for aircraft sold to the military end-user market and printers sold to other non-aircraft market segments. RITEC will pay royalties equal to 7.5% of the selling price on all products sold into the military end-user aircraft market during the License Agreement period.
The purchase price of the acquisition has been allocated on the basis of the fair value as follows:
(In thousands) | ||||
Accounts Receivable |
$ | 50 | ||
Identifiable Intangible Assets |
3,780 | |||
Goodwill |
3,530 | |||
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Total Purchase Price |
$ | 7,360 | ||
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The fair value of the intangible assets acquired was estimated by applying the income approach. This fair value measurement is based on significant inputs that are not observable in the market and therefore, represent a Level 3 measurement as defined in ASC 820, “Fair Value Measurement and Disclosure,” which requires management judgment due to the absence of quoted market prices. Key assumptions include (1) a weighted average cost of capital of 15.5%; (2) a range of earnings projections from $110,000-$700,000 and (3) a range of contract renewal probability from 30%-100%.
Goodwill of $3,530,000, which is deductible for tax purposes, represents the excess of the purchase price over the estimated fair value assigned to the tangible and identifiable intangible assets acquired from RITEC. The carrying amount of the goodwill was allocated to the T&M segment of the Company.
The following table reflects the fair value of the acquired identifiable intangible assets and related estimated useful lives:
(In thousands) |
Fair Value |
Useful Life (Years) |
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Customer Contract Relationships |
$ | 2,830 | 10 | |||||
Non-Competition Agreement |
950 | 5 | ||||||
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Total |
$ | 3,780 | ||||||
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Assuming the acquisition of RITEC occurred on February 1, 2015, the impact on net sales, net income and earnings per share would not have been material to the Company for the period ended August 1, 2015.
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(6) Intangible Assets
Intangible assets are as follows:
July 30, 2016 | January 31, 2016 | |||||||||||||||||||||||
(In thousands) | Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
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Miltope: |
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Customer Contract Relationships |
$ | 3,100 | $ | (933 | ) | $ | 2,167 | $ | 3,100 | $ | (758 | ) | $ | 2,342 | ||||||||||
RITEC: |
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Customer Contract Relationships |
2,830 | (119 | ) | 2,711 | 2,830 | (31 | ) | 2,799 | ||||||||||||||||
Non-Competition Agreement |
950 | (206 | ) | 744 | 950 | (111 | ) | 839 | ||||||||||||||||
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Intangible Assets, net |
$ | 6,880 | $ | (1,258 | ) | $ | 5,622 | $ | 6,880 | $ | (900 | ) | $ | 5,980 | ||||||||||
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There were no impairments to intangible assets during the three or six months ended July 30, 2016 and August 1, 2015. Amortization expense of $179,000 and $105,000 related to the above acquired intangibles has been included in the condensed consolidated statement of income for the three months ended July 30, 2016 and August 1, 2015, respectively. Amortization expense of $358,000 and $194,000 related to the above acquired intangibles has been included in the condensed consolidated statement of income for the six months ended July 30, 2016 and August 1, 2015, respectively.
Estimated amortization expense for the next five years is as follows:
(In thousands) | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||||
Estimated amortization expense |
$715 | $774 | $769 | $803 | $ | 706 |
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(8) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and manufacturing overhead. The components of inventories are as follows:
(In thousands) | July 30, 2016 | January 31, 2016 | ||||||
Materials and Supplies |
$ | 11,993 | $ | 10,197 | ||||
Work-In-Process |
1,063 | 1,025 | ||||||
Finished Goods |
9,000 | 7,491 | ||||||
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22,056 | 18,713 | |||||||
Inventory Reserve |
(4,490 | ) | (3,823 | ) | ||||
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$ | 17,566 | $ | 14,890 | |||||
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(9) Income Taxes
The Company’s effective tax rates for the period, which are based on the projected effective tax rate for the full year, are as follows:
Three Months Ended | Six Months Ended | |||||||
Fiscal 2017 |
27.7 | % | 29.6 | % | ||||
Fiscal 2016 |
37.0 | % | 32.7 | % |
During the three months ended July 30, 2016, the Company recognized income tax expense of $496,000. The effective tax rate in this period was directly impacted by a $97,000 tax benefit relating to the filing of amended returns and a $39,000 tax benefit related to disqualifying dispositions of Company stock. During the three months ended August 1, 2015, the Company recognized income tax expense of $687,000.
During the six months ended July 30, 2016, the Company recognized income tax expense of $972,000. The effective tax rate in this period was directly impacted by a $97,000 tax benefit relating to the filing of amended returns; a $52,000 tax benefit related to the statute of limitations expiring on a previously uncertain tax position and a $39,000 tax benefit related to disqualifying dispositions of Company stock. During the six months ended August 1, 2015, the Company recognized income tax expense of $1,158,000. The effective tax rate in this period was directly impacted by a $135,000 tax benefit related to the statute of limitations expiring on a previously uncertain tax position.
As of July 30, 2016, the Company’s cumulative unrecognized tax benefits totaled $578,000 compared to $591,000 as of January 31, 2016. There were no other developments affecting unrecognized tax benefits during the quarter ended July 30, 2016.
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(10) Note Receivable and Line of Credit Issued
On January 30, 2012, the Company completed the sale of its label manufacturing operations in Asheboro, North Carolina to Label Line Ltd. The net sale price of $1,000,000 was received in the form of a promissory note issued by Label Line Ltd. which was secured by a first lien on various collateral, including the Asheboro plant and plant assets. The note bears interest at 3.75% and was payable in sixteen quarterly installments of principal and interest which commenced on January 30, 2013. In February 2016, the balance remaining on this note was paid in full.
The terms of the Asheboro sale also included an agreement for AstroNova to provide Label Line Ltd. with additional financing in the form of a revolving line of credit in the amount of $600,000. This line of credit is secured by a first lien on various collateral of Label Line Ltd., including the Asheboro plant and plant assets, and bears interest at a rate equal to the United States prime rate plus an additional margin of two percent on the outstanding credit balance. The term of this revolving line of credit has been extended through January 31, 2017. As of July 30, 2016, $140,000 remains outstanding on this revolving line of credit.
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(11) Segment Information
AstroNova reports two segments: Product Identification (previously the QuickLabel segment) and Test & Measurement (T&M). The Company evaluates segment performance based on the segment profit before corporate expenses.
Summarized below are the Net Sales and Segment Operating Profit for each reporting segment:
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
Net Sales | Segment Operating Profit | Net Sales | Segment Operating Profit | |||||||||||||||||||||||||||||
(In thousands) |
July 30, 2016 |
August 1, 2015 |
July 30, 2016 |
August 1, 2015 |
July 30, 2016 |
August 1, 2015 |
July 30, 2016 |
August 1, 2015 |
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Product Identification |
$ | 17,628 | $ | 17,100 | $ | 2,632 | $ | 2,720 | $ | 34,234 | $ | 32,744 | $ | 4,628 | $ | 4,698 | ||||||||||||||||
T&M |
7,711 | 6,838 | 1,141 | 897 | 15,215 | 13,400 | 2,343 | 1,825 | ||||||||||||||||||||||||
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Total |
$ | 25,339 | $ | 23,938 | 3,773 | 3,617 | $ | 49,449 | $ | 46,144 | 6,971 | 6,523 | ||||||||||||||||||||
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Corporate Expenses |
2,025 | 1,783 | 3,676 | 3,241 | ||||||||||||||||||||||||||||
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Operating Income |
1,748 | 1,834 | 3,295 | 3,282 | ||||||||||||||||||||||||||||
Other Income (Expense)—Net |
40 | 21 | (12 | ) | 254 | |||||||||||||||||||||||||||
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Income Before Income Taxes |
1,788 | 1,855 | 3,283 | 3,536 | ||||||||||||||||||||||||||||
Income Tax Provision |
496 | 687 | 972 | 1,158 | ||||||||||||||||||||||||||||
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Net Income |
$ | 1,292 | $ | 1,168 | $ | 2,311 | $ | 2,378 | ||||||||||||||||||||||||
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(12) Recent Accounting Pronouncements
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. In August 2015, the FASB modified ASU 2014-09 to be effective for annual reporting periods beginning after December 15, 2017 (Q1 fiscal 2019 for AstroNova), including interim periods within that reporting period. As modified, the FASB permits the adoption of the new revenue standard early, but not before annual periods beginning after December 15, 2016. Entities have the choice to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information.
In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606) –Principal versus Agent Consideration.” In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606) -Identifying Performance Obligations and Licensing.” In May 2016, the FASB issued ASU 2016-11, “Revenue from Contracts with Customers (Topic 606) and Derivatives and Hedging (Topic 815) – Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16” and ASU 2016-12, “Revenue from Contracts with Customers (Topic 606) –Narrow Scope Improvements and Practical Expedients.” All of these ASUs do not change the core principle of the guidance in Topic 606 (as amended by ASU 2014-09), but rather provide further guidance to improve the operability and understandability of the implementation guidance included in ASU 2014-09. The effective date for all of these ASUs is the same as the effective date of ASU 2014-09 as amended by ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within those years. The Company is currently evaluating the requirements of these ASUs along with ASU 2014-09 and has not yet determined its impact on the Company’s consolidated financial statements.
Share-Based Compensation
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods (Q1 fiscal 2018 for AstroNova). As permitted by ASU 2016-09, we adopted this guidance prospectively in fiscal 2017. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 supersedes current guidance related to accounting for leases and is intended to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities in the balance sheet for operating leases with lease terms greater than twelve months. The update also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (Q1 fiscal 2020 for AstroNova), with early adoption permitted. At adoption, this update will be applied using a modified retrospective approach. The Company is currently evaluating the effect of this new guidance on the Company’s consolidated financial statements.
Inventory
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330).” ASU 2015-11 requires inventory to be measured at the lower of cost and net realizable value instead of at lower of cost or market. This guidance does not apply to inventory that is measured using last-in, first out (LIFO) or the retail inventory method but applies to all other inventory including inventory measured using first-in, first-out (FIFO) or the average cost method. ASU 2015-11 will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years (Q1 fiscal 2018 for AstroNova) and should be applied prospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. AstroNova is currently evaluating the effect of this new guidance on the Company’s consolidated financial statements.
No other new accounting pronouncements, issued or effective during the second quarter of the current year, have had or are expected to have a material impact on our consolidated financial statements.
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(13) Securities Available for Sale
Pursuant to our investment policy, securities available for sale include state and municipal securities with various contractual or anticipated maturity dates ranging from 1 to 31 months. Securities available for sale are carried at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity until realized. Realized gains and losses from the sale of available for sale securities, if any, are determined on a specific identification basis. A decline in the fair value of any available for sale security below cost that is determined to be other than temporary will result in a write-down of its carrying amount to fair value. No such impairment charges were recorded for any period presented. All short-term investment securities have original maturities greater than 90 days.
The fair value, amortized cost and gross unrealized gains and losses of securities available for sale are as follows:
(In thousands) July 30, 2016 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
State and Municipal Obligations |
$ | 8,842 | $ | 22 | $ | — | $ | 8,864 | ||||||||
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January 31, 2016 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
State and Municipal Obligations |
$ | 10,363 | $ | 15 | $ | (2 | ) | $ | 10,376 | |||||||
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(14) Fair Value
We measure our financial assets at fair value on a recurring basis in accordance with the guidance provided in ASC 820, “Fair Value Measurement and Disclosures” which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In addition, ASC 820 establishes a three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect management’s belief about the assumptions market participants would use in pricing a financial instrument based on the best information available in the circumstances.
The fair value hierarchy is summarized as follows:
• | Level 1—Quoted prices in active markets for identical assets or liabilities; |
• | Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
• | Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Cash and cash equivalents, accounts receivable, accounts payable, line of credit receivable, accrued compensation, other liabilities and accrued expenses and income tax payable are reflected in the condensed consolidated balance sheet at carrying value, which approximates fair value due to the short term nature of the these instruments.
Assets measured at fair value on a recurring basis are summarized below:
(In thousands) July 30, 2016 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Money Market Funds (included in Cash and Cash Equivalents) |
$ | 5,910 | $ | — | $ | — | $ | 5,910 | ||||||||
State and Municipal Obligations (included in Securities Available for Sale) |
— | 8,864 | — | 8,864 | ||||||||||||
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Total |
$ | 5,910 | $ | 8,864 | $ | — | $ | 14,774 | ||||||||
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January 31, 2016 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Money Market Funds (included in Cash and Cash Equivalents) |
$ | 4,340 | $ | — | $ | — | $ | 4,340 | ||||||||
State and Municipal Obligations (included in Securities Available for Sale) |
— | 10,376 | — | 10,376 | ||||||||||||
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Total |
$ | 4,340 | $ | 10,376 | $ | — | $ | 14,716 | ||||||||
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For our money market funds and state and municipal obligations, we utilize the market approach to measure fair value. The market approach is based on using quoted prices for identical or similar assets.
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(15) Accumulated Other Comprehensive Loss
The changes in the balance of accumulated other comprehensive loss by component are as follows:
(In thousands) |
Foreign Currency Translation Adjustments |
Unrealized Holding Gain on Available for Sale Securities |
Total | |||||||||
Balance at January 31, 2016 |
$ | (983 | ) | $ | 8 | $ | (975 | ) | ||||
Other Comprehensive Income |
134 | 7 | 141 | |||||||||
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Balance at July 30, 2016 |
$ | (849 | ) | $ | 15 | $ | (834 | ) | ||||
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The amounts presented above in other comprehensive income are net of any applicable taxes.
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(16) Commitments and Contingencies
Product Replacement Program
In April 2013, tests conducted by the Company revealed that one of its suppliers had been using a non-conforming part in power supplies for certain models of AstroNova’s Test & Measurement printers. No malfunctions have been reported by customers as a result of the non-conforming material.
Upon identifying this issue, AstroNova immediately suspended production of the printers, notified all customers and contacted the supplier who confirmed the problem. AstroNova is continuing to work with its customers to replace the non-conforming material on existing printers with conforming material. The estimated costs associated with the replacement program were $672,000, which was based upon the number of printers shipped during the period the non-conforming material was used. Those estimated costs were recognized and recorded as a reserve in the first quarter of fiscal 2014. Since fiscal 2014, the Company has expended a total of $411,000 in replacement costs which have been charged against this reserve. The remaining reserve amount of $261,000 is included in other accrued expenses in the accompanying condensed consolidated balance sheet at July 30, 2016.
Since the supplier deviated from the agreed upon specifications for the power supply while providing certificates of conformance to the original specifications, in January 2014, AstroNova received a non-refundable $450,000 settlement from the supplier for recovery of the costs and expense associated with this issue. In addition to this cash settlement, the Company had received lower product prices from the supplier through the first quarter of fiscal 2017.
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(17) Line of Credit
The Company has a $10 million revolving line of credit available for ongoing working capital requirements, business acquisitions or general corporate purposes as needed. This line of credit is scheduled to expire on August 30, 2017. Any borrowings made under this line of credit bear interest at either a fluctuating base rate equal to the highest of (i) the Prime Rate, (ii) 1.50% above the daily one month LIBOR, and (iii) the Federal Funds Rate in effect plus 1.50% or at a fixed rate of LIBOR plus an agreed upon margin of between 0% and 2.25%, based on the Company’s funded debt to EBITDA ratio as defined in the agreement. In addition, the agreement provides for two financial covenant requirements, namely, Total Funded Debt to Adjusted EBITDA (as defined) of not greater than 3 to 1 and a Fixed Charge Coverage Ratio (as defined) of not less than 1.25 to 1, both measured at the end of each quarter on a rolling four quarter basis. As of July 30, 2016, there have been no borrowings against this line of credit and the Company was in compliance with its financial covenants.
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Recent Accounting Pronouncements
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. In August 2015, the FASB modified ASU 2014-09 to be effective for annual reporting periods beginning after December 15, 2017 (Q1 fiscal 2019 for AstroNova), including interim periods within that reporting period. As modified, the FASB permits the adoption of the new revenue standard early, but not before annual periods beginning after December 15, 2016. Entities have the choice to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information.
In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606) –Principal versus Agent Consideration.” In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606) -Identifying Performance Obligations and Licensing.” In May 2016, the FASB issued ASU 2016-11, “Revenue from Contracts with Customers (Topic 606) and Derivatives and Hedging (Topic 815) – Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16” and ASU 2016-12, “Revenue from Contracts with Customers (Topic 606) –Narrow Scope Improvements and Practical Expedients.” All of these ASUs do not change the core principle of the guidance in Topic 606 (as amended by ASU 2014-09), but rather provide further guidance to improve the operability and understandability of the implementation guidance included in ASU 2014-09. The effective date for all of these ASUs is the same as the effective date of ASU 2014-09 as amended by ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within those years. The Company is currently evaluating the requirements of these ASUs along with ASU 2014-09 and has not yet determined its impact on the Company’s consolidated financial statements.
Share-Based Compensation
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods (Q1 fiscal 2018 for AstroNova). As permitted by ASU 2016-09, we adopted this guidance prospectively in fiscal 2017. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 supersedes current guidance related to accounting for leases and is intended to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities in the balance sheet for operating leases with lease terms greater than twelve months. The update also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (Q1 fiscal 2020 for AstroNova), with early adoption permitted. At adoption, this update will be applied using a modified retrospective approach. The Company is currently evaluating the effect of this new guidance on the Company’s consolidated financial statements.
Inventory
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330).” ASU 2015-11 requires inventory to be measured at the lower of cost and net realizable value instead of at lower of cost or market. This guidance does not apply to inventory that is measured using last-in, first out (LIFO) or the retail inventory method but applies to all other inventory including inventory measured using first-in, first-out (FIFO) or the average cost method. ASU 2015-11 will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years (Q1 fiscal 2018 for AstroNova) and should be applied prospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. AstroNova is currently evaluating the effect of this new guidance on the Company’s consolidated financial statements.
No other new accounting pronouncements, issued or effective during the second quarter of the current year, have had or are expected to have a material impact on our consolidated financial statements.
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The purchase price of the acquisition has been allocated on the basis of the fair value as follows:
(In thousands) | ||||
Accounts Receivable |
$ | 50 | ||
Identifiable Intangible Assets |
3,780 | |||
Goodwill |
3,530 | |||
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Total Purchase Price |
$ | 7,360 | ||
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The following table reflects the fair value of the acquired identifiable intangible assets and related estimated useful lives:
(In thousands) |
Fair Value |
Useful Life (Years) |
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Customer Contract Relationships |
$ | 2,830 | 10 | |||||
Non-Competition Agreement |
950 | 5 | ||||||
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Total |
$ | 3,780 | ||||||
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Intangible assets are as follows:
July 30, 2016 | January 31, 2016 | |||||||||||||||||||||||
(In thousands) | Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
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Miltope: |
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Customer Contract Relationships |
$ | 3,100 | $ | (933 | ) | $ | 2,167 | $ | 3,100 | $ | (758 | ) | $ | 2,342 | ||||||||||
RITEC: |
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Customer Contract Relationships |
2,830 | (119 | ) | 2,711 | 2,830 | (31 | ) | 2,799 | ||||||||||||||||
Non-Competition Agreement |
950 | (206 | ) | 744 | 950 | (111 | ) | 839 | ||||||||||||||||
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Intangible Assets, net |
$ | 6,880 | $ | (1,258 | ) | $ | 5,622 | $ | 6,880 | $ | (900 | ) | $ | 5,980 | ||||||||||
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Estimated amortization expense for the next five years is as follows:
(In thousands) | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||||
Estimated amortization expense |
$715 | $774 | $769 | $803 | $ | 706 |
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Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and manufacturing overhead. The components of inventories are as follows:
(In thousands) | July 30, 2016 | January 31, 2016 | ||||||
Materials and Supplies |
$ | 11,993 | $ | 10,197 | ||||
Work-In-Process |
1,063 | 1,025 | ||||||
Finished Goods |
9,000 | 7,491 | ||||||
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22,056 | 18,713 | |||||||
Inventory Reserve |
(4,490 | ) | (3,823 | ) | ||||
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$ | 17,566 | $ | 14,890 | |||||
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The Company’s effective tax rates for the period, which are based on the projected effective tax rate for the full year, are as follows:
Three Months Ended | Six Months Ended | |||||||
Fiscal 2017 |
27.7 | % | 29.6 | % | ||||
Fiscal 2016 |
37.0 | % | 32.7 | % |
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Summarized below are the Net Sales and Segment Operating Profit for each reporting segment:
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
Net Sales | Segment Operating Profit | Net Sales | Segment Operating Profit | |||||||||||||||||||||||||||||
(In thousands) |
July 30, 2016 |
August 1, 2015 |
July 30, 2016 |
August 1, 2015 |
July 30, 2016 |
August 1, 2015 |
July 30, 2016 |
August 1, 2015 |
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Product Identification |
$ | 17,628 | $ | 17,100 | $ | 2,632 | $ | 2,720 | $ | 34,234 | $ | 32,744 | $ | 4,628 | $ | 4,698 | ||||||||||||||||
T&M |
7,711 | 6,838 | 1,141 | 897 | 15,215 | 13,400 | 2,343 | 1,825 | ||||||||||||||||||||||||
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Total |
$ | 25,339 | $ | 23,938 | 3,773 | 3,617 | $ | 49,449 | $ | 46,144 | 6,971 | 6,523 | ||||||||||||||||||||
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Corporate Expenses |
2,025 | 1,783 | 3,676 | 3,241 | ||||||||||||||||||||||||||||
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Operating Income |
1,748 | 1,834 | 3,295 | 3,282 | ||||||||||||||||||||||||||||
Other Income (Expense)—Net |
40 | 21 | (12 | ) | 254 | |||||||||||||||||||||||||||
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Income Before Income Taxes |
1,788 | 1,855 | 3,283 | 3,536 | ||||||||||||||||||||||||||||
Income Tax Provision |
496 | 687 | 972 | 1,158 | ||||||||||||||||||||||||||||
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Net Income |
$ | 1,292 | $ | 1,168 | $ | 2,311 | $ | 2,378 | ||||||||||||||||||||||||
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The fair value, amortized cost and gross unrealized gains and losses of securities available for sale are as follows:
(In thousands) July 30, 2016 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
State and Municipal Obligations |
$ | 8,842 | $ | 22 | $ | — | $ | 8,864 | ||||||||
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January 31, 2016 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
State and Municipal Obligations |
$ | 10,363 | $ | 15 | $ | (2 | ) | $ | 10,376 | |||||||
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Assets measured at fair value on a recurring basis are summarized below:
(In thousands) July 30, 2016 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Money Market Funds (included in Cash and Cash Equivalents) |
$ | 5,910 | $ | — | $ | — | $ | 5,910 | ||||||||
State and Municipal Obligations (included in Securities Available for Sale) |
— | 8,864 | — | 8,864 | ||||||||||||
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Total |
$ | 5,910 | $ | 8,864 | $ | — | $ | 14,774 | ||||||||
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January 31, 2016 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Money Market Funds (included in Cash and Cash Equivalents) |
$ | 4,340 | $ | — | $ | — | $ | 4,340 | ||||||||
State and Municipal Obligations (included in Securities Available for Sale) |
— | 10,376 | — | 10,376 | ||||||||||||
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Total |
$ | 4,340 | $ | 10,376 | $ | — | $ | 14,716 | ||||||||
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The changes in the balance of accumulated other comprehensive loss by component are as follows:
(In thousands) |
Foreign Currency Translation Adjustments |
Unrealized Holding Gain on Available for Sale Securities |
Total | |||||||||
Balance at January 31, 2016 |
$ | (983 | ) | $ | 8 | $ | (975 | ) | ||||
Other Comprehensive Income |
134 | 7 | 141 | |||||||||
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Balance at July 30, 2016 |
$ | (849 | ) | $ | 15 | $ | (834 | ) | ||||
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