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(1) Overview
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 with independent dealers and representatives. AstroNova, Inc. products are employed 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 specialty printing systems sold under the QuickLabel® and TrojanLabel™ brand names, and Test & Measurement which includes test and measurement as well as Aerospace systems sold under the AstroNova™ brand name.
Products sold under the QuickLabel and TrojanLabel brands 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 airborne printers and networking systems as well as related hardware and supplies.
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, 2017.
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 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 February 1, 2017, our newly-formed wholly-owned Danish subsidiary, ANI ApS, completed the acquisition of the issued and outstanding equity interests of TrojanLabel ApS (TrojanLabel), a Danish private limited liability company, pursuant to the terms of a Share Purchase Agreement dated January 7, 2017. Based in Copenhagen, Denmark, TrojanLabel is a manufacturer of products including digital color label presses and specialty printing systems for a broad range of end markets. Upon the consummation of the acquisition, TrojanLabel became an indirect wholly-owned subsidiary of AstroNova.
The purchase price of this acquisition was 62.9 million Danish Krone (approximately $9.1 million), net of cash acquired of 976,000 Danish Krone (approximately $0.1 million), of which 6.4 million Danish Krone (approximately $0.9 million) was placed in escrow to secure certain post-closing working capital adjustments and indemnification obligations of the sellers. The acquisition was funded using available cash and investment securities.
The sellers of TrojanLabel may be entitled to additional contingent consideration if 80% of specified earnings targets are achieved by TrojanLabel during the seven years following the closing, subject to certain closing working capital adjustments and potential offsets to satisfy the sellers’ indemnification obligations. The contingent consideration consists of potential earn-out payments to the sellers of between 32.5 million Danish Krone (approximately $5.0 million) if 80% of the specified earnings targets are achieved, 40.6 million Danish Krone (approximately $5.8 million) if 100% of the specified earnings targets are achieved, and a maximum of 48.7 million Danish Krone (approximately $7 million) if 120% of the specified earnings targets are achieved.
Total acquisition-related costs were approximately $0.7 million, of which $0.1 million and $0.6 million, are included in the general and administrative expenses in the Company’s consolidated statements of income for the periods ending April 29, 2017 and January 31, 2017, respectively. The acquisition was accounted for under the acquisition method in accordance with the guidance provided by FASB ASC 805, “Business Combinations.”
The US dollar purchase price of the acquisition has been allocated on the basis of fair value as follows:
(In thousands) | ||||
Accounts Receivable |
$ | 1,322 | ||
Inventory |
796 | |||
Other Current Assets |
166 | |||
Property, Plant and Equipment |
15 | |||
Identifiable Intangible Assets |
3,264 | |||
Goodwill |
7,388 | |||
Accounts Payable and Other Current Liabilities |
(1,821 | ) | ||
Other Liability |
(114 | ) | ||
Contingent Liability (Earnout) |
(1,314 | ) | ||
Deferred Tax Liability |
(695 | ) | ||
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Total Purchase Price |
$ | 9,007 | ||
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The fair value of the intangible assets acquired was estimated by applying the income approach, and the fair value of the contingent consideration liability was estimated by applying the real options method. These fair value measurements are 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.” Key assumptions in estimating the fair value of the intangibles include (1) remaining life of existing technology acquired based on estimate of percentage of revenue from 0% -100% for each product, (2) the Company’s internal rate of return of 19.0% and (3) a range of earnings projections from $121,000-$1,070,000. Key assumptions in estimating the fair value of the contingent consideration liability include (1) the estimated earnout targets over the next seven years of $407,000-$1,280,000, (2) the probability of success (achievement of the various contingent events) from 1.6%-87.2% and (3) a risk-adjusted discount rate of approximately 1.77%-3.35% used to adjust the probability-weighted earnout payments to their present value.
Goodwill of $7.4 million, which is not 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 and liabilities assumed from TrojanLabel. The goodwill recognized is attributable to synergies which are expected to enhance and expand the Company’s overall product portfolio and opportunities in new and existing markets, future technologies that have yet to be determined and TrojanLabel’s assembled work force. The carrying amount of the goodwill was allocated to the Product Identification 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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Existing Technology |
$ | 2,327 | 7 | |||||
Non-Competition Agreement |
937 | 10 | ||||||
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Total |
$ | 3,264 | ||||||
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Existing Technology intangible asset acquired represents the various technologies TrojanLabel has developed related to its series of printing presses, including hardware components of the presses and the software utilized to optimize their performance.
Beginning February 1, 2017, the results of operations for TrojanLabel have been included in the Company’s statement of income for the period ended April 29, 2017 and are reported as part of the Product Identification segment. Assuming the acquisition of TrojanLabel had occurred on February 1, 2016, the impact on net sales, net income and earnings per share would not have been material to the Company for the period ended April 30, 2016.
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(6) Intangible Assets
Intangible assets are as follows:
April 29, 2017 | January 31, 2017 | |||||||||||||||||||||||||||
(In thousands) | Gross Carrying Amount |
Accumulated Amortization |
Currency Translation Adjustment |
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 | $ | (1,190 | ) | — | $ | 1,910 | $ | 3,100 | $ | (1,108 | ) | $ | 1,992 | |||||||||||||
RITEC: |
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Customer Contract Relationships |
2,830 | (271 | ) | — | 2,559 | 2,830 | (207 | ) | 2,623 | |||||||||||||||||||
Non-Competition Agreement |
950 | (348 | ) | — | 602 | 950 | (301 | ) | 649 | |||||||||||||||||||
TrojanLabel: |
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Existing Technology |
2,327 | (82 | ) | 14 | 2,259 | — | — | — | ||||||||||||||||||||
Non-Competition Agreement |
937 | (23 | ) | 5 | 919 | — | — | — | ||||||||||||||||||||
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Intangible Assets, net |
$ | 10,144 | $ | (1,914 | ) | 19 | $ | 8,249 | $ | 6,880 | $ | (1,616 | ) | $ | 5,264 | |||||||||||||
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There were no impairments to intangible assets during the periods ended April 29, 2017 and April 30, 2016. With respect to the acquired intangibles included in the table above, amortization expense of $298,000 and $179,000, has been included in the condensed consolidated statements of income for the periods ended April 29, 2017 and April 30, 2016, respectively.
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(8) Inventories
Inventories are stated at the lower of cost (first-in, first-out) and net realizable value and include material, labor and manufacturing overhead. The components of inventories are as follows:
(In thousands) | April 29, 2017 | January 31, 2017 | ||||||
Materials and Supplies |
$ | 12,082 | $ | 11,865 | ||||
Work-In-Process |
1,168 | 1,216 | ||||||
Finished Goods |
11,184 | 10,270 | ||||||
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24,434 | 23,351 | |||||||
Inventory Reserve |
(4,098 | ) | (3,845 | ) | ||||
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$ | 20,336 | $ | 19,506 | |||||
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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 | ||
Fiscal 2018 |
22.3% | |
Fiscal 2017 |
31.8% |
During the three months ended April 29, 2017, the Company recognized an income tax expense of approximately $147,000. The effective tax rate in this period was directly impacted by a $71,000 tax benefit related to the expiration of the statute of limitations on a previously uncertain tax position and a $14,000 tax benefit arising from windfall tax benefits related to the Company’s stock. During the three months ended April 30, 2016, the Company recognized an income tax expense of approximately $476,000. The effective tax rate in that quarter was directly impacted by a $52,000 tax benefit related to the statute of limitations expiring on a previously uncertain tax position.
As of April 29, 2017, the Company’s cumulative unrecognized tax benefits totaled $673,000 compared to $708,000 as of January 31, 2017. There were no other developments affecting unrecognized tax benefits during the quarter ended April 29, 2017.
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(10) Debt
Long-term debt in the accompanying condensed consolidated balance sheets is as follows:
(In thousands) | April 29, 2017 | January 31, 2017 | ||||||
USD Term Loan with a rate equal to LIBOR plus a margin of 1.0% to 1.5%, (2.031% as of April 29, 2017), and maturity date of January 31, 2022 |
$ | 9,200 | $ | — | ||||
Less: |
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Debt Issuance Costs, net of accumulated amortization |
$ | ( 155 | ) | $ | — | |||
Current Portion |
$ | (1,104 | ) | $ | — | |||
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Long-Term Debt |
$ | 7,941 | $ | — | ||||
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The schedule of required principal payments remaining during the next five years on long-term debt outstanding as of April 29, 2017 is as follows:
(In thousands) | ||||
Fiscal 2018 |
$ | 1,104 | ||
Fiscal 2019 |
1,472 | |||
Fiscal 2020 |
1,840 | |||
Fiscal 2021 |
2,208 | |||
Fiscal 2022 |
2,576 | |||
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$ | 9,200 | |||
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On February 28, 2017, the Company and the Company’s wholly-owned subsidiary, ANI ApS (together, the “Parties”), entered into a Credit Agreement with Bank of America, N.A. (the “Lender”). The Parties also entered into a related Security and Pledge Agreement with the Lender. The Credit Agreement provides for a term loan to the Parties in the amount of $9.2 million. The Credit Agreement also provides for a $10.0 million revolving credit facility available to the Company for general corporate purposes. Revolving credit loans may be borrowed, at the borrower’s option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Krone.
The term loan bears interest under the Credit Agreement at a rate per annum equal to the LIBOR Rate plus a margin that varies within a range of 1.0% to 1.5% based on the Company’s consolidated leverage ratio. Amounts borrowed under the revolving credit facility bear interest at a rate per annum equal to, at the Company’s option, either (a) the LIBOR Rate (or in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.0% to 1.5% based on the Company’s consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal funds’ rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate or (iii) the LIBOR Rate plus 1.00%, plus a margin that varies within a range of 0.0% to 0.5% based on the Company’s consolidated leverage ratio. In addition to certain other fees and expenses, the Company is required to pay a commitment fee on the undrawn portion of the revolving credit facility at the rate of 0.25% per annum.
In connection with the Credit Agreement, AstroNova and ANI ApS entered into certain hedging arrangements with the Lender to manage the variable interest rate risk and currency risk associated with its payments in respect of the term loan. Refer to Note 11, “Derivative Financial Instruments and Risk Management” for further information about these arrangements.
The Parties must comply with various customary financial and non-financial covenants under the Credit Agreement. The financial covenants consist of a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. The Credit Agreement contains limitations, in each case subject to various exceptions and thresholds, on the Company’s and its 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. The Credit Agreement permits the Company to pay cash dividends on and repurchase shares of its common stock, subject to certain limitations.
The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following: failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of the Company’s covenants or representations under the loan documents, default under any other of the Company’s or its subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to the Company or any of its subsidiaries, a significant unsatisfied judgment against the Company or any of its subsidiaries, or a change of control of the Company.
The obligations of ANI ApS in respect of the term loan are guaranteed by the Company and TrojanLabel. The Company’s obligations in respect of the revolving credit facility and its guarantee in respect of the term loan are secured by substantially all of the assets of the Company (including a pledge of a portion of the equity interests held by the Company in ANI ApS and the Company’s wholly-owned German subsidiary Astro-Med GmbH), subject to certain exceptions.
As of April 29, 2017, there are no borrowings under the revolving credit facility, and we believe the Company is in compliance with all of the covenants in the Credit Agreement.
Upon entry into the Credit Agreement on February 28, 2017, the Company’s prior Credit Agreement, dated as of September 5, 2014, among the Company, as borrower, and Wells Fargo Bank was terminated. No loans or other amounts were outstanding or owed under that Credit Agreement with Wells Fargo Bank at the time of termination.
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(11) Derivative Financial Instruments and Risk Management
As a multinational enterprise, AstroNova is exposed to certain risks relating to our ongoing business operations. We employ a number of practices to manage these risks, including operating and financing activities, and where appropriate, the use of derivative instruments. The primary risks managed by using derivative instruments are interest rate risk and foreign currency exchange rate risk.
ASC 815, “Derivatives and Hedging,” requires the Company to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the statement of income during the current period.
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings (e.g., in “interest expense” when the hedged transactions are interest cash flows associated with floating-rate debt, or “other income (expense)” for portions reclassified relating to the remeasurement of the debt). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffectiveness portion), or hedge components excluded from the assessment of effectiveness, are recognized in the statement of financial income during the current period.
In connection with the Credit Agreement, we entered into a cross-currency interest rate swap to manage the interest rate risk and foreign currency exchange risk associated with the floating-rate foreign currency-denominated borrowing on our Danish Subsidiary and, in accordance to the guidance in ASC 815, have designated this swap as a cash flow hedge of floating-rate borrowings. The cross-currency interest rate swap agreement utilized by the Company effectively modifies the Company’s exposure to interest rate risk and foreign currency exchange rate risk by converting approximately $8.9 million of the Company’s floating-rate debt denominated in U.S. Dollars on our Danish subsidiary’s books to a fixed-rate debt denominated in Danish Krone for the next five years, thus reducing the impact of interest-rate and foreign currency exchange rate changes on future interest expense and principal repayments. This swap involves the receipt of floating rate amounts in U.S. Dollars in exchange for fixed-rate interest payments in Danish Krone, as well as exchanges of principal at the inception spot rate, over the life of the Credit Agreement.
As of April 29, 2017, the total notional amount of the Company’s cross-currency interest rate swap was $8.6 million; the fair value was $393,600.
The following table presents the impact of the derivative instrument in our condensed consolidated financial statements:
Cash Flow Hedge |
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) |
Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
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April 29, 2017 | January 31, 2017 | April 29, 2017 |
January 31, 2017 |
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Swap contract |
$ | (392,636 | ) | $ | — | Other Income (Expense) | $ | (320,076 | ) | $ | — | |||||||
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The swap contract resulted in no ineffectiveness for the three months ended April 29, 2017, and no gains or losses were reclassified into earnings as a result of the discontinuance of the swap contract due to the original forecasted transaction no longer being probable of occurring. At April 29, 2017, the Company expects to reclassify $108,200 of net gains on the swap contract from accumulated other comprehensive income to earnings during the next 12 months due to changes in foreign exchange rates and the payment of variable interest associated with the floating-rate debt.
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(12) Segment Information
AstroNova reports two segments: Product Identification and Test & Measurement (T&M). The Company evaluates segment performance based on the segment profit before corporate expenses.
Summarized below are the Revenue and Segment Operating Profit for each reporting segment:
Three Months Ended | ||||||||||||||||
Revenue | Segment Operating Profit | |||||||||||||||
(In thousands) |
April 29, 2017 |
April 30, 2016 |
April 29, 2017 |
April 30, 2016 |
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Product Identification |
$ | 18,646 | $ | 16,606 | $ | 2,492 | $ | 1,996 | ||||||||
T&M |
5,812 | 7,504 | 71 | 1,202 | ||||||||||||
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Total |
$ | 24,458 | $ | 24,110 | 2,563 | 3,198 | ||||||||||
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Corporate Expenses |
1,856 | 1,651 | ||||||||||||||
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Operating Income |
707 | 1,547 | ||||||||||||||
Other Expense |
(48 | ) | (52 | ) | ||||||||||||
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Income Before Income Taxes |
659 | 1,495 | ||||||||||||||
Income Tax Provision |
147 | 476 | ||||||||||||||
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Net Income |
$ | 512 | $ | 1,019 | ||||||||||||
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(13) Recent Accounting Pronouncements
Goodwill
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-04, “Intangibles—Goodwill and Other (Topic 350).” ASU 2017-14 simplifies the subsequent measurement of goodwill impairment. The new guidance eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. Goodwill impairment charges, if any, would be determined by reducing the goodwill balance by the difference between the carrying value and the reporting unit’s fair value (impairment loss is limited to the carrying value). This standard is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019. The Company does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 230).” ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for certain cash receipts and cash payments. The standard is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those years (Q1 fiscal 2019 for AstroNova), with early adoption permitted. The Company does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued 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 (Q1 fiscal 2019 for AstroNova). The Company is currently evaluating the impact of adopting this guidance on its 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. Our adoption of this guidance at the beginning of the first quarter of fiscal 2018 did not have a material effect on our consolidated financial statements.
No other new accounting pronouncements, issued or effective during the first three months of the current year, have had or are expected to have a material impact on our consolidated financial statements.
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(14) 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 6 to 24 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) April 29, 2017 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
State and Municipal Obligations |
$ | 5,188 | $ | — | $ | (3 | ) | $ | 5,185 | |||||||
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January 31, 2017 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
State and Municipal Obligations |
$ | 6,732 | $ | — | $ | (9 | ) | $ | 6,723 | |||||||
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(15) Fair Value
We measure our financial and nonfinancial 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 and Liabilities Recorded at Fair Value on a Recurring Basis
Fair value is applied to our financial assets and liabilities including money market funds, available for sale securities, derivative instruments consisting of a cross-currency interest rate swap and a contingent consideration liability relating to an earnout payment on future TrojanLabel operating results.
The following tables provide a summary of the financial assets and liabilities that are measured at fair value as of April 29, 2017 and January 31, 2017:
Assets measured at fair value: |
Fair value
measurement at April 29, 2017 |
Fair value measurement at January 31, 2017 |
||||||||||||||||||||||||||||||
(in thousands) |
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
Money Market Funds (included in Cash and Cash Equivalents) |
$ | 1,611 | $ | — | $ | — | $ | 1,611 | $ | 2 | $ | — | $ | — | $ | 2 | ||||||||||||||||
State and Municipal Obligations (included in Securities Available for Sale) |
— | 5,185 | — | 5,185 | — | 6,723 | — | 6,723 | ||||||||||||||||||||||||
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Total assets |
$ | 1,611 | $ | 5,185 | $ | — | $ | 6,796 | $ | 2 | $ | 6,723 | $ | — | $ | 6,725 | ||||||||||||||||
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Liabilities measured at fair value: |
Fair value measurement at April 29, 2017 |
Fair value measurement at January 31, 2017 |
||||||||||||||||||||||||||||||
(in thousands) |
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
Swap Contracts (included in Other Liabilities) |
$ | — | $ | 393 | $ | — | $ | 393 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Earnout liability (included in Other Liabilities) |
— | — | 1,322 | 1,322 | — | — | — | — | ||||||||||||||||||||||||
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Total liabilities |
$ | — | $ | 393 | $ | 1,322 | $ | 1,715 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
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For our money market funds 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.
We also use the market approach to measure fair value of our derivative instruments. Our derivative liability is comprised of a cross-currency interest rate swap. This derivative instrument was measured at fair value using readily observable market inputs, such as quotations on interest rates and foreign exchange rates, and is classified as Level 2 because it is an over-the-counter contract with a bank counterparty that is not traded in an active market.
The fair value of the contingent consideration liability was initially determined as of the acquisition date of February 1, 2017, using significant inputs that are not observable in the market and therefore classified as Level 3. Key assumptions in estimating the fair value of the contingent consideration liability included (1) the estimated earnout targets over the next seven years of $407,000-$1,280,000, (2) the probability of success (achievement of the various contingent events) from 1.6%-87.2% and (3) a risk-adjusted discount rate of approximately 1.77%-3.35% used to adjust the probability-weighted earnout payments to their present value. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is recorded at its fair value with changes reflected in other income in the condensed consolidated statements of operations. The change in fair value for the quarter ended April 29, 2017, was not material.
Assets and Liabilities Not Recorded at Fair Value
As of April 29, 2017, the Company’s long-term debt, including the current portion of long-term debt not reflected in the financial statements at fair value, is reflected in the table below:
Fair Value Measurement
at April 29, 2017 |
||||||||||||||||||||
(In thousands) |
Level 1 | Level 2 | Level 3 | Total | Carrying Value |
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Long-Term debt and related current maturities |
$ | — | $ | 9,200 | $ | — | $ | 9,200 | $ | 9,200 |
On February 28, 2017, the Company entered into a term loan in the amount of $9.2 million with the Bank of America. The fair value of the Company’s long-term debt, including the current portion of long-term debt approximates carrying value at April 29, 2017. In subsequent periods, the fair value of the debt will be based on the quoted market prices for the same issues or on the current rates offered for debt of similar remaining maturities.
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(16) 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/(Loss) on Available for Sale Securities |
Net Unrealized Gain(Losses) on Cash Flow Hedges |
Total | ||||||||||||
Balance at January 31, 2017 |
$ | (1,048 | ) | $ | (8 | ) | $ | — | $ | (1,056 | ) | |||||
Other Comprehensive Income (Loss) before reclassification |
(221 | ) | 12 | (259 | ) | (468 | ) | |||||||||
Amounts reclassified from AOCI to Earnings |
— | — | 211 | 211 | ||||||||||||
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Other Comprehensive Income (Loss) |
(221 | ) | 12 | (48 | ) | (257 | ) | |||||||||
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Balance at April 29, 2017 |
$ | (1,269 | ) | $ | 4 | $ | (48 | ) | $ | (1,313 | ) | |||||
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The amounts presented above in other comprehensive income (loss) are net of any applicable taxes.
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(17) Subsequent Events
Stock Repurchase Agreement
On May 1, 2017, the Company entered into a stock repurchase agreement with a trust established by Albert W. Ondis to repurchase 826,305 shares of the Company’s common stock held by the trust at a per share price of $13.60, for an aggregate repurchase price of $11.2 million. This stock repurchase was consummated on May 2, 2017 and was funded using existing cash on hand. Following this stock repurchase, the Ondis trust owns 36,000 shares of the Company’s common stock.
April L. Ondis, a director of the Company, is a beneficiary of the trust. The stock repurchase was authorized and approved by the Company’s Audit Committee as a related party transaction. Prior to entering into the agreement, the Company obtained an opinion from an independent investment banking firm that the consideration to be paid by the Company to the trust pursuant to the stock repurchase agreement would be fair to the public stockholders of the Company, other than the trust, from a financial point of view.
Credit Agreement Amendment
In connection with the stock repurchase, the Company entered into a consent and amendment, dated as of May 1, 2017, relating to the Credit Agreement, dated as of February 28, 2017, among the Company, its subsidiaries, ANI ApS and TrojanLabel ApS, and Bank of America, N.A., as lender. Solely for purposes of effecting the stock repurchase, the Amendment increased the aggregate amount of certain repurchases of Company equity interests permitted to be made by the Company under the Credit Agreement in the Company’s fiscal year ending January 31, 2018, from $5,000,000 to $12,000,000, subject to certain conditions. The Amendment prohibits the Company from making other repurchases of Company equity interests under such permission in the fiscal year ending January 31, 2018. The Amendment also provides that the aggregate amount paid in cash by the Company to effect the stock repurchase shall not be deducted from the Company’s consolidated EBITDA for the purposes of calculating the consolidated fixed charge coverage ratio covenant to which the Company is subject under the Credit Agreement with respect to any trailing four-fiscal-quarter measurement period through and including the measurement period ending January 31, 2018.
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Recent Accounting Pronouncements
Goodwill
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-04, “Intangibles—Goodwill and Other (Topic 350).” ASU 2017-14 simplifies the subsequent measurement of goodwill impairment. The new guidance eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. Goodwill impairment charges, if any, would be determined by reducing the goodwill balance by the difference between the carrying value and the reporting unit’s fair value (impairment loss is limited to the carrying value). This standard is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019. The Company does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 230).” ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for certain cash receipts and cash payments. The standard is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those years (Q1 fiscal 2019 for AstroNova), with early adoption permitted. The Company does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued 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 (Q1 fiscal 2019 for AstroNova). The Company is currently evaluating the impact of adopting this guidance on its 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. Our adoption of this guidance at the beginning of the first quarter of fiscal 2018 did not have a material effect on our consolidated financial statements.
No other new accounting pronouncements, issued or effective during the first three months of the current year, have had or are expected to have a material impact on our consolidated financial statements.
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The US dollar purchase price of the acquisition has been allocated on the basis of fair value as follows:
(In thousands) | ||||
Accounts Receivable |
$ | 1,322 | ||
Inventory |
796 | |||
Other Current Assets |
166 | |||
Property, Plant and Equipment |
15 | |||
Identifiable Intangible Assets |
3,264 | |||
Goodwill |
7,388 | |||
Accounts Payable and Other Current Liabilities |
(1,821 | ) | ||
Other Liability |
(114 | ) | ||
Contingent Liability (Earnout) |
(1,314 | ) | ||
Deferred Tax Liability |
(695 | ) | ||
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|
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Total Purchase Price |
$ | 9,007 | ||
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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) |
||||||
Existing Technology |
$ | 2,327 | 7 | |||||
Non-Competition Agreement |
937 | 10 | ||||||
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|
|||||||
Total |
$ | 3,264 | ||||||
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Intangible assets are as follows:
April 29, 2017 | January 31, 2017 | |||||||||||||||||||||||||||
(In thousands) | Gross Carrying Amount |
Accumulated Amortization |
Currency Translation Adjustment |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
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Miltope: |
||||||||||||||||||||||||||||
Customer Contract Relationships |
$ | 3,100 | $ | (1,190 | ) | — | $ | 1,910 | $ | 3,100 | $ | (1,108 | ) | $ | 1,992 | |||||||||||||
RITEC: |
||||||||||||||||||||||||||||
Customer Contract Relationships |
2,830 | (271 | ) | — | 2,559 | 2,830 | (207 | ) | 2,623 | |||||||||||||||||||
Non-Competition Agreement |
950 | (348 | ) | — | 602 | 950 | (301 | ) | 649 | |||||||||||||||||||
TrojanLabel: |
||||||||||||||||||||||||||||
Existing Technology |
2,327 | (82 | ) | 14 | 2,259 | — | — | — | ||||||||||||||||||||
Non-Competition Agreement |
937 | (23 | ) | 5 | 919 | — | — | — | ||||||||||||||||||||
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|||||||||||||||
Intangible Assets, net |
$ | 10,144 | $ | (1,914 | ) | 19 | $ | 8,249 | $ | 6,880 | $ | (1,616 | ) | $ | 5,264 | |||||||||||||
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Inventories are stated at the lower of cost (first-in, first-out) and net realizable value and include material, labor and manufacturing overhead. The components of inventories are as follows:
(In thousands) | April 29, 2017 | January 31, 2017 | ||||||
Materials and Supplies |
$ | 12,082 | $ | 11,865 | ||||
Work-In-Process |
1,168 | 1,216 | ||||||
Finished Goods |
11,184 | 10,270 | ||||||
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24,434 | 23,351 | |||||||
Inventory Reserve |
(4,098 | ) | (3,845 | ) | ||||
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$ | 20,336 | $ | 19,506 | |||||
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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 | ||
Fiscal 2018 |
22.3% | |
Fiscal 2017 |
31.8% |
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Long-term debt in the accompanying condensed consolidated balance sheets is as follows:
(In thousands) | April 29, 2017 | January 31, 2017 | ||||||
USD Term Loan with a rate equal to LIBOR plus a margin of 1.0% to 1.5%, (2.031% as of April 29, 2017), and maturity date of January 31, 2022 |
$ | 9,200 | $ | — | ||||
Less: |
||||||||
Debt Issuance Costs, net of accumulated amortization |
$ | ( 155 | ) | $ | — | |||
Current Portion |
$ | (1,104 | ) | $ | — | |||
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Long-Term Debt |
$ | 7,941 | $ | — | ||||
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The schedule of required principal payments remaining during the next five years on long-term debt outstanding as of April 29, 2017 is as follows:
(In thousands) | ||||
Fiscal 2018 |
$ | 1,104 | ||
Fiscal 2019 |
1,472 | |||
Fiscal 2020 |
1,840 | |||
Fiscal 2021 |
2,208 | |||
Fiscal 2022 |
2,576 | |||
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$ | 9,200 | |||
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The following table presents the impact of the derivative instrument in our condensed consolidated financial statements:
Cash Flow Hedge |
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) |
Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
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April 29, 2017 | January 31, 2017 | April 29, 2017 |
January 31, 2017 |
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Swap contract |
$ | (392,636 | ) | $ | — | Other Income (Expense) | $ | (320,076 | ) | $ | — | |||||||
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Summarized below are the Revenue and Segment Operating Profit for each reporting segment:
Three Months Ended | ||||||||||||||||
Revenue | Segment Operating Profit | |||||||||||||||
(In thousands) |
April 29, 2017 |
April 30, 2016 |
April 29, 2017 |
April 30, 2016 |
||||||||||||
Product Identification |
$ | 18,646 | $ | 16,606 | $ | 2,492 | $ | 1,996 | ||||||||
T&M |
5,812 | 7,504 | 71 | 1,202 | ||||||||||||
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Total |
$ | 24,458 | $ | 24,110 | 2,563 | 3,198 | ||||||||||
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Corporate Expenses |
1,856 | 1,651 | ||||||||||||||
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Operating Income |
707 | 1,547 | ||||||||||||||
Other Expense |
(48 | ) | (52 | ) | ||||||||||||
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Income Before Income Taxes |
659 | 1,495 | ||||||||||||||
Income Tax Provision |
147 | 476 | ||||||||||||||
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Net Income |
$ | 512 | $ | 1,019 | ||||||||||||
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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) April 29, 2017 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
State and Municipal Obligations |
$ | 5,188 | $ | — | $ | (3 | ) | $ | 5,185 | |||||||
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January 31, 2017 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
State and Municipal Obligations |
$ | 6,732 | $ | — | $ | (9 | ) | $ | 6,723 | |||||||
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The following tables provide a summary of the financial assets and liabilities that are measured at fair value as of April 29, 2017 and January 31, 2017:
Assets measured at fair value: |
Fair value
measurement at April 29, 2017 |
Fair value measurement at January 31, 2017 |
||||||||||||||||||||||||||||||
(in thousands) |
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
Money Market Funds (included in Cash and Cash Equivalents) |
$ | 1,611 | $ | — | $ | — | $ | 1,611 | $ | 2 | $ | — | $ | — | $ | 2 | ||||||||||||||||
State and Municipal Obligations (included in Securities Available for Sale) |
— | 5,185 | — | 5,185 | — | 6,723 | — | 6,723 | ||||||||||||||||||||||||
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Total assets |
$ | 1,611 | $ | 5,185 | $ | — | $ | 6,796 | $ | 2 | $ | 6,723 | $ | — | $ | 6,725 | ||||||||||||||||
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Liabilities measured at fair value: |
Fair value measurement at April 29, 2017 |
Fair value measurement at January 31, 2017 |
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(in thousands) |
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
Swap Contracts (included in Other Liabilities) |
$ | — | $ | 393 | $ | — | $ | 393 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Earnout liability (included in Other Liabilities) |
— | — | 1,322 | 1,322 | — | — | — | — | ||||||||||||||||||||||||
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Total liabilities |
$ | — | $ | 393 | $ | 1,322 | $ | 1,715 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
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As of April 29, 2017, the Company’s long-term debt, including the current portion of long-term debt not reflected in the financial statements at fair value, is reflected in the table below:
Fair Value Measurement
at April 29, 2017 |
||||||||||||||||||||
(In thousands) |
Level 1 | Level 2 | Level 3 | Total | Carrying Value |
|||||||||||||||
Long-Term debt and related current maturities |
$ | — | $ | 9,200 | $ | — | $ | 9,200 | $ | 9,200 |
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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/(Loss) on Available for Sale Securities |
Net Unrealized Gain(Losses) on Cash Flow Hedges |
Total | ||||||||||||
Balance at January 31, 2017 |
$ | (1,048 | ) | $ | (8 | ) | $ | — | $ | (1,056 | ) | |||||
Other Comprehensive Income (Loss) before reclassification |
(221 | ) | 12 | (259 | ) | (468 | ) | |||||||||
Amounts reclassified from AOCI to Earnings |
— | — | 211 | 211 | ||||||||||||
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Other Comprehensive Income (Loss) |
(221 | ) | 12 | (48 | ) | (257 | ) | |||||||||
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Balance at April 29, 2017 |
$ | (1,269 | ) | $ | 4 | $ | (48 | ) | $ | (1,313 | ) | |||||
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