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Note 1—Summary of Significant Accounting Policies
Basis of Presentation: The accompanying financial data have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and are presented in conformity with U.S. generally accepted accounting principles (U.S. GAAP). Our fiscal year end is January 31. Unless otherwise stated, all years and dates refer to our fiscal year.
Principles of Consolidation: The consolidated financial statements include the accounts of AstroNova, Inc. and its subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.
Reclassification: Certain amounts in prior year financial statements have been reclassified to conform to the current year’s presentation.
Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect these financial statements and accompanying notes. Some of the more significant estimates relate to the allowances for doubtful accounts, inventory valuation, valuation and estimated lives of intangible assets, impairment of long-lived assets, goodwill, income taxes, share-based compensation and warranty reserves. Management’s estimates are based on the facts and circumstances available at the time estimates are made, past 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.
Cash and Cash Equivalents: Highly liquid investments with an original maturity of 90 days or less are considered to be cash equivalents. Similar investments with original maturities beyond three months are classified as securities available for sale. Cash of $5.1 million and $3.0 million was held in foreign bank accounts at January 31, 2017 and 2016, respectively.
Securities Available for Sale: Securities available for sale are carried at fair value based on quoted market prices, where available. The difference between cost and fair value, net of related tax effects, is recorded as a component of accumulated other comprehensive loss in shareholders’ equity.
Inventories: Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and manufacturing overhead.
Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets (land improvements—10 to 20 years; buildings and improvements—10 to 45 years; machinery and equipment—3 to 10 years). Depreciation expense was $1.7 million for fiscal 2017; $1.6 million for fiscal 2016 and $1.4 million for 2015.
Revenue Recognition: Product revenue is recognized when all of the following criteria have been met: persuasive evidence of an arrangement exists; price to the buyer is fixed or determinable; delivery has occurred and legal title and risk of loss have passed to the customer; and collectability is reasonably assured. Returns and customer credits are infrequent and are recorded as a reduction to revenue. Rights of return are not included in revenue arrangements. Revenue associated with products that contain specific customer acceptance criteria is not recognized before the customer acceptance criteria are satisfied. Revenue is recorded net of any discounts from list price. Amounts billed to customers for shipping and handling fees are included in revenue, while related shipping and handling costs are included in cost of revenue.
The majority of our hardware products contain embedded operating systems and data management software which is included in the purchase price of the equipment. The software is deemed incidental to the systems as a whole as it is not sold or marketed separately and its production costs are minor compared to those of the hardware system. Therefore, the Company’s hardware appliances are considered non-software elements and are not subject to industry-specific software revenue recognition guidance.
Our multiple-element arrangements are generally comprised of a combination of equipment, software, installation and/or training services. Hardware and software elements are typically delivered at the same time and revenue is recognized when all the revenue recognition criteria for each unit are met. Delivery of installation and training services vary based on certain factors such as the complexity of the equipment, staffing availability in a geographic location and customer preferences, and can range from a few days to a few months. Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer.
We have evaluated the deliverables in our multiple-element arrangements and concluded that they are separate units of accounting if the delivered item or items have value to the customer on a standalone basis and delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We allocate revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on vendor specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element have been met.
Infrequently, we recognize revenue for non-recurring engineering (NRE) fees for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue. NRE fees have not been significant in the periods presented herein.
We also receive infrequent requests from customers to hold product purchased from us for the customer’s convenience. Revenue is recognized for such bill and hold arrangements in accordance with the requirements of SEC Staff Accounting Bulletin No. 104 which requires, among other things, the existence of a valid business purpose for the arrangement; the transfer of ownership of the purchased product; a fixed delivery date that is reasonable and consistent with the buyer’s business purpose; the readiness of the product for shipment; the use of customary payment terms; no continuing performance obligation by us; and segregation of the product from our inventories.
Research and Development Costs: We charge costs to expense in the period incurred, and these expenses are presented in the consolidated statement of income. The following costs are included in research and development expense: salaries and benefits, external engineering service costs, engineering related information costs and supplies.
Foreign Currency Translation: The financial statements of foreign subsidiaries and branches are measured using the local currency as the functional currency. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at year-end exchange rates with the translation adjustment recorded as a component of accumulated comprehensive income (loss) in shareholders’ equity. Revenues and expenses are translated at the monthly average exchange rates. We do not provide for U.S. income taxes on foreign currency translation adjustments associated with our German subsidiary since its undistributed earnings are considered to be permanently invested. Our net foreign exchange losses were $0.2 million; $0.3 million and $0.2 million for fiscal 2017, 2016 and 2015, respectively.
Advertising: The Company expenses advertising costs as incurred. Advertising costs including advertising production, trade shows and other activities are designed to enhance demand for our products and amounted to approximately $1.3 million; $1.1 million and $1.7 million in fiscal 2017, 2016 and 2015, respectively.
Long-Lived Assets: Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, as determined by the discounting of future cash flows. For 2017, 2016 and 2015, there were no impairment charges for long-lived assets.
Intangible Assets: Intangible assets include the value of customer relationships and non-competition agreements acquired in connection with business acquisitions and are stated at cost (fair value at acquisition) less accumulated amortization. These intangible assets have a definite life and are amortized over the assets’ useful lives using a systematic and rational basis which is representative of the assets’ use. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. If necessary, an impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. For 2017, 2016 and 2015, there were no impairment charges for intangible assets.
Goodwill: Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether further impairment testing is necessary. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a two-step process is then performed. Step one compares the fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount exceeds the fair value of the reporting unit, step two is required to determine if there is an impairment of the goodwill. Step two compares the implied fair value of the reporting unit goodwill to the carrying amount of the goodwill. We estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. In addition, the Company uses the market approach, which compares the reporting unit to publicly-traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates.
We performed a qualitative assessment for our 2017 analysis of goodwill. Based on this assessment, management does not believe that it is more likely than not that the carrying value of the reporting units exceed their fair values. Accordingly, no further testing was performed, as management believes that there are no impairment issues in regards to goodwill at this time.
Income Taxes: We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and tax basis of the assets and liabilities and are measured using statutory tax rates that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recognized when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. At January 31, 2017 and 2016, a valuation allowance was provided for deferred tax assets attributable to certain state R&D credit carryforwards.
AstroNova accounts for uncertain tax positions in accordance with the guidance provided in ASC 740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and requires recognition of tax benefits that satisfy a more-likely-than-not threshold. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure.
In fiscal 2015, the Company adopted the guidance in ASU 2015-17, “Income Taxes (Topic 740)” and accordingly has presented the Company’s deferred taxes as non-current in the accompanying consolidated balance sheet.
Net Income Per Common Share: Basic net income per share is based on the weighted average number of shares outstanding during the period. Diluted net income per share is based on the basic weighted average number of shares and potential common equivalent shares for stock options, restricted stock awards and restricted stock units outstanding during the period using the treasury stock method. In fiscal years 2017, 2016 and 2015, there were 459,700, 425,200 and 156,600, respectively, of common equivalent shares that were not included in the computation of diluted net income per common share because their inclusion would be anti-dilutive.
Allowance for Doubtful Accounts: In circumstances where we are aware of a customer’s inability to meet its financial obligations, an allowance is established. Accounts are individually evaluated on a regular basis and allowances are established to state such receivables at their net realizable value. The remainder of the allowance is based upon historical write-off experience and current market assessments.
Fair Value of Financial Instruments: Our financial instruments consist of cash and cash equivalents, investment securities, accounts receivable and accounts payable. The carrying amount reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximates fair value due to the short-term nature of these items. Investment securities, all of which are available for sale, are carried in the consolidated balance sheets at fair value based on quoted market prices, when available.
Share-Based Compensation: Share-based compensation expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and the Company’s dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of the option grants, the Company has observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grant and has assessed the expected risk tolerance of different option groups. The risk-free interest rate is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (RSA) and restricted stock units (RSU) is also based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of the Company’s common stock on the grant date. Reductions in compensation expense associated with forfeited awards are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture experience.
In the first quarter of fiscal 2017, the Company prospectively adopted the provisions of ASU 2016-09, and, as such, the cash flow from tax benefits that are a result of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) is classified with other income tax cash flows as an operating activity for the year ended January 31, 2017. Tax deductions from certain stock option exercises are treated as being realized when they reduce tax expense and taxes payable in accordance with relevant tax law.
Recent Accounting Pronouncements:
Statement of Cash Flows
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 interim and annual reporting periods beginning after December 15, 2017 (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 does not expect the adoption of this guidance to have a material 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) and early adoption is allowed. As permitted by ASU 2016-09, the Company adopted this guidance prospectively in fiscal 2017 and 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. The Company does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.
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Note 2—Acquisition
On June 19, 2015, we 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. Our 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 $7.4 million which was funded using available cash and investment securities. The Company withheld $0.8 million of the purchase price in escrow for twelve months following the acquisition date to support the sellers’ indemnifications in the event of any breach in the representations, warranties or covenants of RITEC. The Company retained $0.1 million from the escrow, which was recorded as other income in the consolidated statement of income for the period ended January 31, 2017.
The assets acquired consist principally of accounts receivable and certain intangible assets. Acquisition related costs of approximately $0.1 million are included in the general and administrative expenses in the Company’s consolidated statements of income for fiscal year ended 2016. The acquisition was accounted for under the acquisition method in accordance with the guidance provided by FASB ASC 805, “Business Combinations.”
The Company also entered into a Transition Services Agreement, under which RITEC provided transition services and continued to manufacture products in the acquired product line until the Company transitioned the manufacturing to its West Warwick, Rhode Island facility. The TSA concluded in the third quarter of fiscal 2017 and AstroNova purchased the remaining inventory held by RITEC for $0.2 million.
Also as part of the Asset Purchase Agreement, the Company entered into a 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 revenue price on all products sold into the military end-user aircraft market during the first five years of the License Agreement. No royalty revenue was accrued in fiscal 2017.
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.” Key assumptions include (1) a weighted average cost of capital of 15.5%; (2) a range of earnings projections from $0.1-$0.7 million and (3) a range of contract renewal probability from 30%-100%.
Goodwill of $3.5 million, 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, 2014, the impact on net revenue, net income and earnings per share would not have been material to the Company for the years ended January 31, 2017, 2016 and 2015.
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Note 3—Intangible Assets
Intangible assets are as follows:
January 31, 2017 | 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 | $ | (1,108 | ) | $ | 1,992 | $ | 3,100 | $ | (758 | ) | $ | 2,342 | ||||||||||
RITEC: |
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Customer Contract Relationships |
2,830 | (207 | ) | 2,623 | 2,830 | (31 | ) | 2,799 | ||||||||||||||||
Non-Competition Agreement |
950 | (301 | ) | 649 | 950 | (111 | ) | 839 | ||||||||||||||||
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Intangible assets, net |
$ | 6,880 | $ | (1,616 | ) | $ | 5,264 | $ | 6,880 | $ | (900 | ) | $ | 5,980 | ||||||||||
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There were no impairments to intangible assets during the periods ended January 31, 2017, 2016 and 2015. Amortization expense of $0.7 million; $0.5 million and $0.7 million with regard to acquired intangibles has been included in the consolidated statements of income for years ended January 31, 2017, 2016 and 2015, respectively.
Estimated amortization expense for the next five years is as follows:
(In thousands) | 2018 | 2019 | 2020 | 2021 | 2022 | |||||||||||||||
Estimated amortization expense |
$ | 774 | $ | 769 | $ | 803 | $ | 706 | $ | 633 |
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Note 4—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 one month to two years. These securities are carried at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss), net of taxes 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 the securities are as follows:
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
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(In thousands) | ||||||||||||||||
January 31, 2017 |
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State and Municipal Obligations |
$ | 6,732 | $ | — | $ | (9 | ) | $ | 6,723 | |||||||
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January 31, 2016 |
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State and Municipal Obligations |
$ | 10,363 | $ | 15 | $ | (2 | ) | $ | 10,376 | |||||||
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The contractual maturity dates of these securities are as follows:
January 31 | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Less than one year |
$ | 3,563 | $ | 3,833 | ||||
One to two years |
3,160 | 6,543 | ||||||
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$ | 6,723 | $ | 10,376 | |||||
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Actual maturities may differ from contractual dates as a result of revenue or earlier issuer redemptions.
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Note 5—Inventories
The components of inventories are as follows:
January 31 | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Materials and Supplies |
$ | 11,865 | $ | 10,197 | ||||
Work-in-Progress |
1,216 | 1,025 | ||||||
Finished Goods |
10,270 | 7,491 | ||||||
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23,351 | 18,713 | |||||||
Inventory Reserve |
(3,845 | ) | (3,823 | ) | ||||
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Balance at January 31 |
$ | 19,506 | $ | 14,890 | ||||
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Finished goods inventory includes $1.6 million and $1.4 million of demonstration equipment at January 31, 2017 and 2016, respectively.
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Note 6—Accrued Expenses
Accrued expenses consisted of the following:
January 31 | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Professional Fees |
$ | 584 | $ | 328 | ||||
Warranty |
515 | 400 | ||||||
Product Replacement Cost Reserve |
174 | 278 | ||||||
Dealer Commissions |
180 | 221 | ||||||
Other |
718 | 982 | ||||||
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$ | 2,171 | $ | 2,209 | |||||
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Note 7—Line of Credit
At January 31, 2017 the Company had a $10.0 million revolving line of credit available to be used as needed for ongoing working capital requirements, business acquisitions or general corporate purposes. Any borrowings made under the line of credit would bear interest at a fluctuating variable rate of either (i) the Prime Rate plus an agreed upon margin of between 0% and 0.50%, based upon the consolidated leverage ratio (funded debt: EBITDA, as defined); or (ii) the Eurocurrency Rate (LIBOR) plus an agreed-upon margin of between 1.00% and 1.50%, based upon the consolidated leverage ratio. In addition, the agreement provides for two financial covenant requirements: 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 January 31, 2017, there had been no borrowings against this line of credit and the Company was in compliance with its financial covenants. Under the terms, the line of credit would have expired on August 30, 2017. Subsequent to year-end, this $10.0 million revolving line of credit was terminated. As part of a new credit facility, the Company entered into a $10.0 million revolving credit facility with a different Lender. Refer to Note 20 for additional details.
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Note 8—Sale of Property
In December of 2016, we sold our Slough UK real estate and related machinery, computers and equipment at that location. Proceeds from the sale amounted to $0.5 million (0.4 million in British Pounds) and a gain of $0.4 million was recognized in other income in the Company’s consolidated statement of income for the period ended January 31, 2017. Our UK branch is currently leasing property for its operations in Maidenhead, UK.
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Note 9—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 |
Total | |||||||||
Balance at January 31, 2014 |
$ | 152 | $ | 24 | $ | 176 | ||||||
Other Comprehensive Loss |
(866 | ) | (9 | ) | (875 | ) | ||||||
Amounts Reclassified to Net Income |
— | — | — | |||||||||
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Net Other Comprehensive Loss |
(866 | ) | (9 | ) | (875) | |||||||
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Balance at January 31, 2015 |
(714 | ) | 15 | (699 | ) | |||||||
Other Comprehensive Loss |
(269 | ) | (7 | ) | (276 | ) | ||||||
Amounts Reclassified to Net Income |
— | — | — | |||||||||
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Net Other Comprehensive Loss |
(269 | ) | (7 | ) | (276 | ) | ||||||
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Balance at January 31, 2016 |
$ | (983 | ) | $ | 8 | $ | (975 | ) | ||||
Other Comprehensive Loss |
(65 | ) | (16 | ) | (81 | ) | ||||||
Amounts Reclassified to Net Income |
— | — | — | |||||||||
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Net Other Comprehensive Loss |
(65 | ) | (16 | ) | (81 | ) | ||||||
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Balance at January 31, 2017 |
$ | (1,048 | ) | $ | (8 | ) | $ | (1,056 | ) | |||
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The amounts presented above in other comprehensive loss are net of taxes except for translation adjustments associated with our German subsidiary.
|
Note 12—Income Taxes
The components of income before income taxes are as follows:
January 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
(In thousands) | ||||||||||||
Domestic |
$ | 4,026 | $ | 5,982 | $ | 5,401 | ||||||
Foreign |
2,579 | 927 | 1,531 | |||||||||
|
|
|
|
|
|
|||||||
$ | 6,605 | $ | 6,909 | $ | 6,932 | |||||||
|
|
|
|
|
|
The components of the provision for income taxes are as follows:
January 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
(In thousands) | ||||||||||||
Current: |
||||||||||||
Federal |
$ | 1,269 | $ | 1,930 | $ | 1,666 | ||||||
State |
209 | 470 | 466 | |||||||||
Foreign |
725 | 276 | 535 | |||||||||
|
|
|
|
|
|
|||||||
2,203 | 2,676 | 2,667 | ||||||||||
|
|
|
|
|
|
|||||||
Deferred: |
||||||||||||
Federal |
$ | 150 | $ | (402 | ) | $ | (290 | ) | ||||
State |
37 | 126 | (107 | ) | ||||||||
Foreign |
(13 | ) | (16 | ) | — | |||||||
|
|
|
|
|
|
|||||||
174 | (292 | ) | (397 | ) | ||||||||
|
|
|
|
|
|
|||||||
$ | 2,377 | $ | 2,384 | $ | 2,270 | |||||||
|
|
|
|
|
|
The Company’s effective tax rate for 2017 was 36.0% compared to 34.5% in 2016 and 32.7% in 2015. The increase from 2016 is primarily related to non-deductible transaction costs and increased unrecognized tax benefits. The increase in 2016 from 2015 is primarily related to the change in valuation allowance. The provision for income taxes differs from the amount computed by applying the United States federal statutory income tax rate of 34% to income before income taxes. The reasons for this difference were due to the following:
January 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
(In thousands) | ||||||||||||
Income Tax Provision at Statutory Rate |
$ | 2,246 | $ | 2,349 | $ | 2,357 | ||||||
Capitalized Transaction Costs |
179 | — | — | |||||||||
Unrecognized Tax Benefits |
165 | (67 | ) | 23 | ||||||||
State Taxes, Net of Federal Tax Effect |
162 | 277 | 233 | |||||||||
Domestic Production Deduction |
(103 | ) | (134 | ) | (164 | ) | ||||||
R&D Credits |
(168 | ) | (176 | ) | (135 | ) | ||||||
Other |
(104 | ) | 135 | (44 | ) | |||||||
|
|
|
|
|
|
|||||||
$ | 2,377 | $ | 2,384 | $ | 2,270 | |||||||
|
|
|
|
|
|
The components of deferred income tax expense arise from various temporary differences and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows:
January 31 |
||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Deferred Tax Assets: |
||||||||
Inventory |
$ | 2,151 | $ | 1,948 | ||||
State R&D Credits |
679 | 583 | ||||||
Share-Based Compensation |
546 | 830 | ||||||
Foreign Tax Credit |
508 | 426 | ||||||
Compensation Accrual |
281 | 346 | ||||||
Unrecognized State Tax Benefits |
241 | 237 | ||||||
Warranty Reserve |
192 | 149 | ||||||
Deferred Service Contract Revenue |
176 | 200 | ||||||
Other |
348 | 383 | ||||||
|
|
|
|
|||||
5,122 | 5,102 | |||||||
Deferred Tax Liabilities: |
||||||||
Accumulated Tax Depreciation in Excess of Book Depreciation |
1,380 | 1,355 | ||||||
Other |
263 | 193 | ||||||
|
|
|
|
|||||
1,643 | 1,548 | |||||||
|
|
|
|
|||||
Subtotal |
3,479 | 3,554 | ||||||
Valuation Allowance |
(679 | ) | (583 | ) | ||||
|
|
|
|
|||||
Net Deferred Tax Assets |
$ | 2,800 | $ | 2,971 | ||||
|
|
|
|
As of January 31, 2017 there are $0.5 million of foreign tax credit carryforwards which are expected to be utilized prior to their expiration. Carryforwards will expire during fiscal years 2024 to 2027.
The valuation allowance of $0.7 million at January 31, 2017 and $0.6 million at January 31, 2016 related to state research and development tax credit carryforwards which are expected to expire unused. The valuation allowance increased $0.1 million in 2017 and $0.3 million in 2016 due to the generation of research and development credits in excess of the Company’s ability to currently utilize credits, and the decision to fully reserve for the state tax benefits of all R&D tax credit carryforwards, net of federal benefit. The Company has reached this conclusion after considering the availability of taxable income in prior carryback years, tax planning strategies, and the likelihood of future taxable income exclusive of reversing temporary differences and carryforwards in the relevant state jurisdiction.
The Company believes that it is reasonably possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balances of unrecognized tax benefits, excluding interest and penalties are as follows:
2017 | 2016 | 2015 | ||||||||||
(In thousands) | ||||||||||||
Balance at February 1 |
$ | 591 | $ | 707 | $ | 715 | ||||||
Increases in prior period tax positions |
75 | — | — | |||||||||
Increases in current period tax positions |
133 | 49 | 87 | |||||||||
Reductions related to lapse of statute of limitations |
(91 | ) | (165 | ) | (95 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance at January 31 |
$ | 708 | $ | 591 | $ | 707 | ||||||
|
|
|
|
|
|
If the $0.7 million balance as of January 31, 2017 is recognized, $0.5 million would decrease the effective tax rate in the period in which each of the benefits is recognized and the remainder would be offset by a reversal of deferred tax assets.
During fiscal 2017, 2016 and 2015, the Company recognized an expense of $52,000, a benefit of $87,000 and an expense of $43,000, respectively, related to change in interest and penalties, which are included as a component of income tax expense in the accompanying statements of income. The Company has accrued potential interest and penalties of $0.4 million at the end of both January 31, 2017 and 2016.
The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for fiscal years ended prior to January 2014.
U.S. income taxes have not been provided on $4.7 million of undistributed earnings of the Company’s German subsidiary since it is the Company’s intention to permanently reinvest such earnings offshore or to repatriate them only when it is tax efficient to do so. It is impracticable to estimate a total tax liability or benefit, if any, created by the future distribution of all or portions of these earnings due to complexities related to taxation and foreign tax credit benefits. If circumstances change and it becomes apparent that some, or all of these undistributed earnings as of January 31, 2017 will not be indefinitely reinvested, the provision for the tax consequence, if any, will be recorded in the period when circumstances change.
|
Note 13—Nature of Operations, Segment Reporting and Geographical Information
The Company’s operations consist of the design, development, manufacture and sale of specialty printers and data acquisition and analysis systems, including both hardware and software and related consumable supplies. The Company organizes and manages its business as a portfolio of products and services designed around a common theme of data acquisition and information output. The Company has two reporting segments consistent with its revenue product groups: Product Identification and Test & Measurement (T&M).
The Product Identification segment produces an array of tabletop, high-technology digital color and monochrome label printers, labeling software and consumables for a variety of commercial industries worldwide. T&M produces data recording equipment used worldwide for a variety of recording, monitoring and troubleshooting applications for many industries including aerospace, automotive, defense, rail, energy, industrial and general manufacturing.
Business is conducted in the United States and through foreign affiliates in Canada, Europe, China Southeast Asia and Mexico. Manufacturing activities are primarily conducted in the United States. Revenue and service activities outside the United States are conducted through wholly-owned entities and, to a lesser extent, through authorized distributors and agents. Transfer prices are intended to produce gross profit margins as would be associated with an arms-length transaction.
On June 19, 2015, AstroNova completed the asset purchase of the aerospace printer product line from RITEC. AstroNova’s aerospace printer product line is part of the 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. Refer to Note 2, “Acquisition,” for further details.
The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies herein. The Company evaluates segment performance based on the segment profit before corporate and financial administration expenses.
Summarized below are the Revenue and Segment Operating Profit (both in dollars and as a percentage of Revenue) for each reporting segment:
($ in thousands) | Revenue | Segment Operating Profit | Segment Operating Profit % of Revenue |
|||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||
Product Identification |
$ | 69,862 | $ | 67,127 | $ | 59,779 | $ | 9,821 | $ | 9,300 | $ | 7,259 | 14.1% | 13.9% | 12.1% | |||||||||||||||||||||
T&M |
28,586 | 27,531 | 28,568 | 4,399 | 3,664 | 5,627 | 15.4% | 13.3% | 19.7% | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 98,448 | $ | 94,658 | $ | 88,347 | 14,220 | 12,964 | 12,886 | 14.4% | 13.7% | 14.6% | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Corporate Expenses |
7,939 | 7,030 | 5,655 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Operating Income |
6,281 | 5,934 | 7,231 | |||||||||||||||||||||||||||||||||
Other Income (Expense) |
324 | 975 | (299) | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Income before Income Taxes |
6,605 | 6,909 | 6,932 | |||||||||||||||||||||||||||||||||
Income Tax Provision |
2,377 | 2,384 | 2,270 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Net Income |
$ | 4,228 | $ | 4,525 | $ | 4,662 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
No customer accounted for greater than 10% of net revenue in fiscal 2017, 2016 and 2015.
Other information by segment is presented below:
(In thousands) | Assets | |||||||
2017 | 2016 | |||||||
Product Identification |
$ | 30,624 | $ | 27,143 | ||||
T&M |
28,129 | 28,570 | ||||||
Corporate* |
24,912 | 22,250 | ||||||
|
|
|
|
|||||
Total |
$ | 83,665 | $ | 77,963 | ||||
|
|
|
|
* | Corporate assets consist principally of cash, cash equivalents and securities available for sale. |
(In thousands) | Depreciation and Amortization |
Capital Expenditures | ||||||||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||
Product Identification |
$ | 885 | $ | 690 | $ | 678 | $ | 767 | $ | 2,284 | $ | 1,408 | ||||||||||||
T&M |
1,546 | 1,375 | 1,385 | 471 | 777 | 839 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 2,431 | $ | 2,065 | $ | 2,063 | $ | 1,238 | $ | 3,061 | $ | 2,247 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Geographical Data
Presented below is selected financial information by geographic area:
(In thousands) | Revenue | Long-Lived Assets* | ||||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | ||||||||||||||||
United States |
$ | 69,850 | $ | 68,316 | $ | 61,494 | $ | 8,940 | $ | 9,310 | ||||||||||
Europe |
18,848 | 16,830 | 18,181 | 168 | 290 | |||||||||||||||
Canada |
5,008 | 4,487 | 3,934 | 172 | 207 | |||||||||||||||
Central and South America |
3,053 | 2,436 | 1,919 | 0 | — | |||||||||||||||
Asia |
1,664 | 1,741 | 1,408 | 0 | — | |||||||||||||||
Other |
25 | 848 | 1,411 | 0 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 98,448 | $ | 94,658 | $ | 88,347 | $ | 9,280 | $ | 9,807 | ||||||||||
|
|
|
|
|
|
|
|
|
|
* | Long-lived assets excludes goodwill assigned to the T&M segment of $4.5 million at both January 31, 2017 and 2016. |
|
Note 14—Employee Benefit Plans
Employee Stock Ownership Plan (ESOP):
AstroNova has an ESOP providing retirement benefits to all eligible employees. Annual contributions in amounts determined by the Company’s Board of Directors are invested by the ESOP’s Trustees in shares of common stock of AstroNova. Contributions may be in cash or stock. The Company did not make a contribution to the ESOP in fiscal 2017 or 2016. The Company’s contribution of $0.1 million in fiscal 2015 was recorded as compensation expense. All shares owned by the ESOP have been allocated to participants. On January 23, 2017, the Compensation Committee of the Board of Directors has voted to terminate the ESOP.
Profit-Sharing Plan:
AstroNova sponsors a Profit-Sharing Plan (the “Plan”) which provides retirement benefits to all eligible domestic employees. The Plan allows participants to defer a portion of their cash compensation and contribute such deferral to the Plan through payroll deductions. The Company makes matching contributions up to specified levels. The deferrals are made within the limits prescribed by Section 401(k) of the Internal Revenue Code.
All contributions are deposited into trust funds. It is the policy of the Company to fund any contributions accrued. The Company’s annual contribution amounts are determined by the Board of Directors. Contributions paid or accrued amounted to $0.5 million in fiscal 2017 and $0.3 million in both 2016 and 2015.
|
Note 15—Product Warranty Liability
AstroNova offers a manufacturer’s warranty for the majority of its hardware products. The specific terms and conditions of warranty vary depending upon the products sold and country in which the Company does business. For products sold in the United States, the Company provides a basic limited warranty, including parts and labor. The Company estimates the warranty costs based on historical claims experience and records a liability in the amount of such estimates at the time product revenue is recognized. The Company regularly assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Activity in the product warranty liability, which is included in other accrued expenses in the accompanying consolidated balance sheet, is as follows:
January 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
(In thousands) | ||||||||||||
Balance, beginning of the year |
$ | 400 | $ | 375 | $ | 355 | ||||||
Provision for Warranty Expense |
971 | 887 | 546 | |||||||||
Cost of Warranty Repairs |
(856 | ) | (862 | ) | (526 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance, end of the year |
$ | 515 | $ | 400 | $ | 375 | ||||||
|
|
|
|
|
|
|
Note 16—Product Replacement Costs
In April 2013, tests conducted by the Company revealed that one of its suppliers had been using a non-conforming material in 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, we immediately suspended production of the printers, notified all customers and contacted the supplier who confirmed the problem. We are continuing to work with our customers to replace the non-conforming material on existing printers with conforming material. The estimated costs associated with the replacement program were $0.7 million, which was based upon the number of printers shipped during the period the non-conforming material was used. Those costs were recognized and recorded in the first quarter of fiscal 2014. As of January 31, 2017, the Company had expended $0.4 million in replacement costs which have been charged against this reserve and has adjusted the reserve amount to reflect the estimate of remaining cost associated with the replacement program. The remaining reserve amount of $0.2 million is included in other accrued expenses in the accompanying consolidated balance sheet as of January 31, 2017.
Since the supplier deviated from the agreed upon specifications for the power supply while providing certificates of conformance to the original specifications, AstroNova received a $0.5 million settlement from the supplier in January 2014 for recovery of the costs and expense associated with this issue. In addition to this cash settlement, the Company received lower product prices from the supplier through the first quarter of fiscal 2017.
|
Note 17—Concentration of Risk
Credit is generally extended on an uncollateralized basis to almost all customers after review of credit worthiness. Concentration of credit and geographic risk with respect to accounts receivable is limited due to the large number and general dispersion of accounts which constitute the Company’s customer base. The Company periodically performs on-going credit evaluations of its customers. The Company has not historically experienced significant credit losses on collection of its accounts receivable.
Excess cash is invested principally in investment grade government and state municipal securities. The Company has established guidelines relative to diversification and maturities that maintain safety of principal, liquidity and yield. These guidelines are periodically reviewed and modified to reflect changes in market conditions. The Company has not historically experienced any significant losses on its cash equivalents or investments.
During the years ended January 31, 2017, 2016 and 2015, one vendor accounted for 33.2%, 23.7% and 21.9% of purchases, and 42.7%, 16.7% and 55.1% of accounts payable, respectively.
|
Note 18—Commitments and Contingencies
Contractual Obligations
The following table summarizes our contractual obligations:
(In thousands) | Total | 2018 | 2019 | 2020 | 2021 | 2022 and Thereafter |
||||||||||||||||||
Purchase Commitments* |
$ | 19,271 | $ | 17,848 | $ | — | $ | 1,352 | $ | — | $ | 71 | ||||||||||||
Operating Lease Obligations |
706 | 371 | 214 | 101 | 20 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 19,977 | $ | 18,219 | $ | 214 | $ | 1,453 | $ | 20 | $ | 71 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
*Purchase | commitments consist primarily of inventory and equipment purchase orders made in the ordinary course of business. |
The Company is also subject to contingencies, including legal proceedings and claims arising in the normal course of business that cover a wide range of matters including, among others, contract and employment claims; workers compensation claims; product liability; warranty and modification; and adjustment or replacement of component parts of units sold.
Direct costs associated with the estimated resolution of contingencies are accrued at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, the Company believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations. It is possible, however, that future results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of the Company’s control.
|
Note 19—Fair Value Measurements
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. 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, accrued compensation and other expenses and income tax payable are reflected in the 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:
January 31, 2017 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In thousands) | ||||||||||||||||
Money market funds (included in cash and cash equivalents) |
$ | 2 | $ | – | $ | – | $ | 2 | ||||||||
State and municipal obligations (included in securities available for sale) |
– | 6,723 | – | 6,723 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 2 | $ | 6,723 | $ | – | $ | 6,725 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
January 31, 2016 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In thousands) | ||||||||||||||||
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 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 4,340 | $ | 10,376 | $ | – | $ | 14,716 | ||||||||
|
|
|
|
|
|
|
|
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 market prices for similar assets.
Non-financial assets such as goodwill, intangible assets, and property, plant and equipment are required to be measured at fair value only when an impairment loss is recognized. The Company did not record an impairment loss related to these assets during the periods ended January 31, 2017, 2016 or 2015.
|
Note 20—Subsequent Event
On February 1, 2017, our wholly-owned Danish subsidiary, ANI ApS, completed the acquisition of the issued and outstanding equity interests of TrojanLabel ApS, a Danish private limited liability company, pursuant to the terms of a Share Purchase Agreement, dated January 7, 2017, by and among the ANI ApS, Holdingselskabet af 20. marts 2014 ApS (“Holding”), a Danish private limited liability company and Li Wei Chong, an individual (Holding, together with Li Wei Chong, the “Sellers”). Based in Copenhagen, Denmark, TrojanLabel ApS 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 ApS became an indirect wholly-owned subsidiary of AstroNova.
The purchase price of this acquisition was DKK 62.9 million (approximately $9.1 million), of which DKK 6.4 million (approximately $0.9 million) was placed in escrow to secure certain post-closing working capital adjustments and indemnification obligations of the Sellers. The Sellers may be entitled to additional contingent consideration if 80% of specified earnings targets are achieved by Trojanlabel ApS 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 DKK 32.5 million (approximately $5 million) if 80% of the specified earnings targets are achieved, DKK 40.6 million (approximately $5.8 million) if 100% of the specified earnings targets are achieved, and a maximum of DKK 48.7 million (approximately $7 million) if 120% of the specified earnings targets are achieved. Transaction costs related to this acquisition of $0.6 million are included in the general and administrative expenses in the consolidated statement of income for the period ended January 31, 2017. The Company is currently in the process of completing the purchase accounting allocations and does not expect this transaction to have a material impact on the consolidated financial statements.
On February 28, 2017, ANI ApS, entered into a Credit Agreement with Bank of America, N.A. (the “Lender”), ANI ApS, and Trojanlabel ApS. The Company also entered into a related Security and Pledge Agreement with the Lender. The Credit Agreement provides for a term loan to AstroNova 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 Company’s option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Krone. No amount was drawn under the revolving credit facility as of the filing of this Annual Report on 10-K.
In connection with the Credit Agreement, AstroNova 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. Under these arrangements, payments of principal and interest in respect of approximately $8.9 million of the principal of the term loan will be made in Danish Krone, and interest on such principal amount will be payable at a fixed rate of 0.67% per annum for the entire term, subject only to potential increases of 0.25% or 0.50% per annum based on the Company’s consolidated leverage ratio. The obligations of ANI ApS under these arrangements are guaranteed by the Company.
In connection with the entry into the Credit Agreement on February 28, 2017, the Company’s existing 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 the existing Credit Agreement with Wells Fargo Bank at the time of termination.
|
ASTRONOVA, INC.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Description |
Balance at Beginning of Year |
Provision/ (Benefit) Charged to Operations |
Deductions(2) | Balance at End of Year |
||||||||||||
Allowance for Doubtful Accounts(1): |
||||||||||||||||
(In thousands) | ||||||||||||||||
Year Ended January 31, |
||||||||||||||||
2017 |
$ | 404 | $ | (80 | ) | $ | (58 | ) | $ | 266 | ||||||
2016 |
$ | 343 | $ | 112 | $ | (51 | ) | $ | 404 | |||||||
2015 |
$ | 370 | $ | 60 | $ | (87 | ) | $ | 343 |
(1) | The allowance for doubtful accounts has been netted against accounts receivable in the balance sheets as of the respective balance sheet dates. |
(2) | Uncollectible accounts written off, net of recoveries. Also includes foreign exchange adjustment. |
|
Basis of Presentation: The accompanying financial data have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and are presented in conformity with U.S. generally accepted accounting principles (U.S. GAAP). Our fiscal year end is January 31. Unless otherwise stated, all years and dates refer to our fiscal year.
Principles of Consolidation: The consolidated financial statements include the accounts of AstroNova, Inc. and its subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.
Reclassification: Certain amounts in prior year financial statements have been reclassified to conform to the current year’s presentation.
Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect these financial statements and accompanying notes. Some of the more significant estimates relate to the allowances for doubtful accounts, inventory valuation, valuation and estimated lives of intangible assets, impairment of long-lived assets, goodwill, income taxes, share-based compensation and warranty reserves. Management’s estimates are based on the facts and circumstances available at the time estimates are made, past 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.
Cash and Cash Equivalents: Highly liquid investments with an original maturity of 90 days or less are considered to be cash equivalents. Similar investments with original maturities beyond three months are classified as securities available for sale. Cash of $5.1 million and $3.0 million was held in foreign bank accounts at January 31, 2017 and 2016, respectively.
Securities Available for Sale: Securities available for sale are carried at fair value based on quoted market prices, where available. The difference between cost and fair value, net of related tax effects, is recorded as a component of accumulated other comprehensive loss in shareholders’ equity.
Inventories: Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and manufacturing overhead.
Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets (land improvements—10 to 20 years; buildings and improvements—10 to 45 years; machinery and equipment—3 to 10 years). Depreciation expense was $1.7 million for fiscal 2017; $1.6 million for fiscal 2016 and $1.4 million for 2015.
Revenue Recognition: Product revenue is recognized when all of the following criteria have been met: persuasive evidence of an arrangement exists; price to the buyer is fixed or determinable; delivery has occurred and legal title and risk of loss have passed to the customer; and collectability is reasonably assured. Returns and customer credits are infrequent and are recorded as a reduction to revenue. Rights of return are not included in revenue arrangements. Revenue associated with products that contain specific customer acceptance criteria is not recognized before the customer acceptance criteria are satisfied. Revenue is recorded net of any discounts from list price. Amounts billed to customers for shipping and handling fees are included in revenue, while related shipping and handling costs are included in cost of revenue.
The majority of our hardware products contain embedded operating systems and data management software which is included in the purchase price of the equipment. The software is deemed incidental to the systems as a whole as it is not sold or marketed separately and its production costs are minor compared to those of the hardware system. Therefore, the Company’s hardware appliances are considered non-software elements and are not subject to industry-specific software revenue recognition guidance.
Our multiple-element arrangements are generally comprised of a combination of equipment, software, installation and/or training services. Hardware and software elements are typically delivered at the same time and revenue is recognized when all the revenue recognition criteria for each unit are met. Delivery of installation and training services vary based on certain factors such as the complexity of the equipment, staffing availability in a geographic location and customer preferences, and can range from a few days to a few months. Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer.
We have evaluated the deliverables in our multiple-element arrangements and concluded that they are separate units of accounting if the delivered item or items have value to the customer on a standalone basis and delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We allocate revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on vendor specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element have been met.
Infrequently, we recognize revenue for non-recurring engineering (NRE) fees for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue. NRE fees have not been significant in the periods presented herein.
We also receive infrequent requests from customers to hold product purchased from us for the customer’s convenience. Revenue is recognized for such bill and hold arrangements in accordance with the requirements of SEC Staff Accounting Bulletin No. 104 which requires, among other things, the existence of a valid business purpose for the arrangement; the transfer of ownership of the purchased product; a fixed delivery date that is reasonable and consistent with the buyer’s business purpose; the readiness of the product for shipment; the use of customary payment terms; no continuing performance obligation by us; and segregation of the product from our inventories.
Research and Development Costs: We charge costs to expense in the period incurred, and these expenses are presented in the consolidated statement of income. The following costs are included in research and development expense: salaries and benefits, external engineering service costs, engineering related information costs and supplies.
Foreign Currency Translation: The financial statements of foreign subsidiaries and branches are measured using the local currency as the functional currency. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at year-end exchange rates with the translation adjustment recorded as a component of accumulated comprehensive income (loss) in shareholders’ equity. Revenues and expenses are translated at the monthly average exchange rates. We do not provide for U.S. income taxes on foreign currency translation adjustments associated with our German subsidiary since its undistributed earnings are considered to be permanently invested. Our net foreign exchange losses were $0.2 million; $0.3 million and $0.2 million for fiscal 2017, 2016 and 2015, respectively.
Advertising: The Company expenses advertising costs as incurred. Advertising costs including advertising production, trade shows and other activities are designed to enhance demand for our products and amounted to approximately $1.3 million; $1.1 million and $1.7 million in fiscal 2017, 2016 and 2015, respectively.
Long-Lived Assets: Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, as determined by the discounting of future cash flows. For 2017, 2016 and 2015, there were no impairment charges for long-lived assets.
Intangible Assets: Intangible assets include the value of customer relationships and non-competition agreements acquired in connection with business acquisitions and are stated at cost (fair value at acquisition) less accumulated amortization. These intangible assets have a definite life and are amortized over the assets’ useful lives using a systematic and rational basis which is representative of the assets’ use. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. If necessary, an impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. For 2017, 2016 and 2015, there were no impairment charges for intangible assets.
Goodwill: Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether further impairment testing is necessary. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a two-step process is then performed. Step one compares the fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount exceeds the fair value of the reporting unit, step two is required to determine if there is an impairment of the goodwill. Step two compares the implied fair value of the reporting unit goodwill to the carrying amount of the goodwill. We estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. In addition, the Company uses the market approach, which compares the reporting unit to publicly-traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates.
We performed a qualitative assessment for our 2017 analysis of goodwill. Based on this assessment, management does not believe that it is more likely than not that the carrying value of the reporting units exceed their fair values. Accordingly, no further testing was performed, as management believes that there are no impairment issues in regards to goodwill at this time.
Income Taxes: We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and tax basis of the assets and liabilities and are measured using statutory tax rates that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recognized when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. At January 31, 2017 and 2016, a valuation allowance was provided for deferred tax assets attributable to certain state R&D credit carryforwards.
AstroNova accounts for uncertain tax positions in accordance with the guidance provided in ASC 740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and requires recognition of tax benefits that satisfy a more-likely-than-not threshold. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure.
In fiscal 2015, the Company adopted the guidance in ASU 2015-17, “Income Taxes (Topic 740)” and accordingly has presented the Company’s deferred taxes as non-current in the accompanying consolidated balance sheet.
Net Income Per Common Share: Basic net income per share is based on the weighted average number of shares outstanding during the period. Diluted net income per share is based on the basic weighted average number of shares and potential common equivalent shares for stock options, restricted stock awards and restricted stock units outstanding during the period using the treasury stock method. In fiscal years 2017, 2016 and 2015, there were 459,700, 425,200 and 156,600, respectively, of common equivalent shares that were not included in the computation of diluted net income per common share because their inclusion would be anti-dilutive.
Allowance for Doubtful Accounts: In circumstances where we are aware of a customer’s inability to meet its financial obligations, an allowance is established. Accounts are individually evaluated on a regular basis and allowances are established to state such receivables at their net realizable value. The remainder of the allowance is based upon historical write-off experience and current market assessments.
Fair Value of Financial Instruments: Our financial instruments consist of cash and cash equivalents, investment securities, accounts receivable and accounts payable. The carrying amount reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximates fair value due to the short-term nature of these items. Investment securities, all of which are available for sale, are carried in the consolidated balance sheets at fair value based on quoted market prices, when available.
Share-Based Compensation: Share-based compensation expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and the Company’s dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of the option grants, the Company has observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grant and has assessed the expected risk tolerance of different option groups. The risk-free interest rate is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (RSA) and restricted stock units (RSU) is also based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of the Company’s common stock on the grant date. Reductions in compensation expense associated with forfeited awards are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture experience.
In the first quarter of fiscal 2017, the Company prospectively adopted the provisions of ASU 2016-09, and, as such, the cash flow from tax benefits that are a result of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) is classified with other income tax cash flows as an operating activity for the year ended January 31, 2017. Tax deductions from certain stock option exercises are treated as being realized when they reduce tax expense and taxes payable in accordance with relevant tax law.
Recent Accounting Pronouncements:
Statement of Cash Flows
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 interim and annual reporting periods beginning after December 15, 2017 (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 does not expect the adoption of this guidance to have a material 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) and early adoption is allowed. As permitted by ASU 2016-09, the Company adopted this guidance prospectively in fiscal 2017 and 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. The Company does not believe the adoption of this guidance will have a material impact on the Company’s 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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|
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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) |
||||||
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:
January 31, 2017 | January 31, 2016 | |||||||||||||||||||||||
(In thousands) | Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||||||||||
Miltope: |
||||||||||||||||||||||||
Customer Contract Relationships |
$ | 3,100 | $ | (1,108 | ) | $ | 1,992 | $ | 3,100 | $ | (758 | ) | $ | 2,342 | ||||||||||
RITEC: |
||||||||||||||||||||||||
Customer Contract Relationships |
2,830 | (207 | ) | 2,623 | 2,830 | (31 | ) | 2,799 | ||||||||||||||||
Non-Competition Agreement |
950 | (301 | ) | 649 | 950 | (111 | ) | 839 | ||||||||||||||||
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Intangible assets, net |
$ | 6,880 | $ | (1,616 | ) | $ | 5,264 | $ | 6,880 | $ | (900 | ) | $ | 5,980 | ||||||||||
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Estimated amortization expense for the next five years is as follows:
(In thousands) | 2018 | 2019 | 2020 | 2021 | 2022 | |||||||||||||||
Estimated amortization expense |
$ | 774 | $ | 769 | $ | 803 | $ | 706 | $ | 633 |
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The fair value, amortized cost and gross unrealized gains and losses of the securities are as follows:
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
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(In thousands) | ||||||||||||||||
January 31, 2017 |
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State and Municipal Obligations |
$ | 6,732 | $ | — | $ | (9 | ) | $ | 6,723 | |||||||
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January 31, 2016 |
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State and Municipal Obligations |
$ | 10,363 | $ | 15 | $ | (2 | ) | $ | 10,376 | |||||||
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The contractual maturity dates of these securities are as follows:
January 31 | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Less than one year |
$ | 3,563 | $ | 3,833 | ||||
One to two years |
3,160 | 6,543 | ||||||
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$ | 6,723 | $ | 10,376 | |||||
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The components of inventories are as follows:
January 31 | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Materials and Supplies |
$ | 11,865 | $ | 10,197 | ||||
Work-in-Progress |
1,216 | 1,025 | ||||||
Finished Goods |
10,270 | 7,491 | ||||||
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23,351 | 18,713 | |||||||
Inventory Reserve |
(3,845 | ) | (3,823 | ) | ||||
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Balance at January 31 |
$ | 19,506 | $ | 14,890 | ||||
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Accrued expenses consisted of the following:
January 31 | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Professional Fees |
$ | 584 | $ | 328 | ||||
Warranty |
515 | 400 | ||||||
Product Replacement Cost Reserve |
174 | 278 | ||||||
Dealer Commissions |
180 | 221 | ||||||
Other |
718 | 982 | ||||||
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$ | 2,171 | $ | 2,209 | |||||
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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 |
Total | |||||||||
Balance at January 31, 2014 |
$ | 152 | $ | 24 | $ | 176 | ||||||
Other Comprehensive Loss |
(866 | ) | (9 | ) | (875 | ) | ||||||
Amounts Reclassified to Net Income |
— | — | — | |||||||||
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Net Other Comprehensive Loss |
(866 | ) | (9 | ) | (875) | |||||||
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Balance at January 31, 2015 |
(714 | ) | 15 | (699 | ) | |||||||
Other Comprehensive Loss |
(269 | ) | (7 | ) | (276 | ) | ||||||
Amounts Reclassified to Net Income |
— | — | — | |||||||||
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Net Other Comprehensive Loss |
(269 | ) | (7 | ) | (276 | ) | ||||||
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Balance at January 31, 2016 |
$ | (983 | ) | $ | 8 | $ | (975 | ) | ||||
Other Comprehensive Loss |
(65 | ) | (16 | ) | (81 | ) | ||||||
Amounts Reclassified to Net Income |
— | — | — | |||||||||
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Net Other Comprehensive Loss |
(65 | ) | (16 | ) | (81 | ) | ||||||
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Balance at January 31, 2017 |
$ | (1,048 | ) | $ | (8 | ) | $ | (1,056 | ) | |||
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The components of income before income taxes are as follows:
January 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
(In thousands) | ||||||||||||
Domestic |
$ | 4,026 | $ | 5,982 | $ | 5,401 | ||||||
Foreign |
2,579 | 927 | 1,531 | |||||||||
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$ | 6,605 | $ | 6,909 | $ | 6,932 | |||||||
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The components of the provision for income taxes are as follows:
January 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
(In thousands) | ||||||||||||
Current: |
||||||||||||
Federal |
$ | 1,269 | $ | 1,930 | $ | 1,666 | ||||||
State |
209 | 470 | 466 | |||||||||
Foreign |
725 | 276 | 535 | |||||||||
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2,203 | 2,676 | 2,667 | ||||||||||
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Deferred: |
||||||||||||
Federal |
$ | 150 | $ | (402 | ) | $ | (290 | ) | ||||
State |
37 | 126 | (107 | ) | ||||||||
Foreign |
(13 | ) | (16 | ) | — | |||||||
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|||||||
174 | (292 | ) | (397 | ) | ||||||||
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|||||||
$ | 2,377 | $ | 2,384 | $ | 2,270 | |||||||
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The provision for income taxes differs from the amount computed by applying the United States federal statutory income tax rate of 34% to income before income taxes. The reasons for this difference were due to the following:
January 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
(In thousands) | ||||||||||||
Income Tax Provision at Statutory Rate |
$ | 2,246 | $ | 2,349 | $ | 2,357 | ||||||
Capitalized Transaction Costs |
179 | — | — | |||||||||
Unrecognized Tax Benefits |
165 | (67 | ) | 23 | ||||||||
State Taxes, Net of Federal Tax Effect |
162 | 277 | 233 | |||||||||
Domestic Production Deduction |
(103 | ) | (134 | ) | (164 | ) | ||||||
R&D Credits |
(168 | ) | (176 | ) | (135 | ) | ||||||
Other |
(104 | ) | 135 | (44 | ) | |||||||
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$ | 2,377 | $ | 2,384 | $ | 2,270 | |||||||
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The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows:
January 31 |
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2017 | 2016 | |||||||
(In thousands) | ||||||||
Deferred Tax Assets: |
||||||||
Inventory |
$ | 2,151 | $ | 1,948 | ||||
State R&D Credits |
679 | 583 | ||||||
Share-Based Compensation |
546 | 830 | ||||||
Foreign Tax Credit |
508 | 426 | ||||||
Compensation Accrual |
281 | 346 | ||||||
Unrecognized State Tax Benefits |
241 | 237 | ||||||
Warranty Reserve |
192 | 149 | ||||||
Deferred Service Contract Revenue |
176 | 200 | ||||||
Other |
348 | 383 | ||||||
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|
|||||
5,122 | 5,102 | |||||||
Deferred Tax Liabilities: |
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Accumulated Tax Depreciation in Excess of Book Depreciation |
1,380 | 1,355 | ||||||
Other |
263 | 193 | ||||||
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1,643 | 1,548 | |||||||
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Subtotal |
3,479 | 3,554 | ||||||
Valuation Allowance |
(679 | ) | (583 | ) | ||||
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Net Deferred Tax Assets |
$ | 2,800 | $ | 2,971 | ||||
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expiration of certain statutes of limitation. The changes in the balances of unrecognized tax benefits, excluding interest and penalties are as follows:
2017 | 2016 | 2015 | ||||||||||
(In thousands) | ||||||||||||
Balance at February 1 |
$ | 591 | $ | 707 | $ | 715 |
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Summarized below are the Revenue and Segment Operating Profit (both in dollars and as a percentage of Revenue) for each reporting segment:
($ in thousands) | Revenue | Segment Operating Profit | Segment Operating Profit % of Revenue |
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2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||
Product Identification |
$ | 69,862 | $ | 67,127 | $ | 59,779 | $ | 9,821 | $ | 9,300 | $ | 7,259 | 14.1% | 13.9% | 12.1% | |||||||||||||||||||||
T&M |
28,586 | 27,531 | 28,568 | 4,399 | 3,664 | 5,627 | 15.4% | 13.3% | 19.7% | |||||||||||||||||||||||||||
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Total |
$ | 98,448 | $ | 94,658 | $ | 88,347 | 14,220 | 12,964 | 12,886 | 14.4% | 13.7% | 14.6% | ||||||||||||||||||||||||
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Corporate Expenses |
7,939 | 7,030 | 5,655 | |||||||||||||||||||||||||||||||||
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Operating Income |
6,281 | 5,934 | 7,231 | |||||||||||||||||||||||||||||||||
Other Income (Expense) |
324 | 975 | (299) | |||||||||||||||||||||||||||||||||
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Income before Income Taxes |
6,605 | 6,909 | 6,932 | |||||||||||||||||||||||||||||||||
Income Tax Provision |
2,377 | 2,384 | 2,270 | |||||||||||||||||||||||||||||||||
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Net Income |
$ | 4,228 | $ | 4,525 | $ | 4,662 | ||||||||||||||||||||||||||||||
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Other information by segment is presented below:
(In thousands) | Assets | |||||||
2017 | 2016 | |||||||
Product Identification |
$ | 30,624 | $ | 27,143 | ||||
T&M |
28,129 | 28,570 | ||||||
Corporate* |
24,912 | 22,250 | ||||||
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Total |
$ | 83,665 | $ | 77,963 | ||||
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* | Corporate assets consist principally of cash, cash equivalents and securities available for sale. |
(In thousands) | Depreciation and Amortization |
Capital Expenditures | ||||||||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||
Product Identification |
$ | 885 | $ | 690 | $ | 678 | $ | 767 | $ | 2,284 | $ | 1,408 | ||||||||||||
T&M |
1,546 | 1,375 | 1,385 | 471 | 777 | 839 | ||||||||||||||||||
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Total |
$ | 2,431 | $ | 2,065 | $ | 2,063 | $ | 1,238 | $ | 3,061 | $ | 2,247 | ||||||||||||
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Presented below is selected financial information by geographic area:
(In thousands) | Revenue | Long-Lived Assets* | ||||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | ||||||||||||||||
United States |
$ | 69,850 | $ | 68,316 | $ | 61,494 | $ | 8,940 | $ | 9,310 | ||||||||||
Europe |
18,848 | 16,830 | 18,181 | 168 | 290 | |||||||||||||||
Canada |
5,008 | 4,487 | 3,934 | 172 | 207 | |||||||||||||||
Central and South America |
3,053 | 2,436 | 1,919 | 0 | — | |||||||||||||||
Asia |
1,664 | 1,741 | 1,408 | 0 | — | |||||||||||||||
Other |
25 | 848 | 1,411 | 0 | — | |||||||||||||||
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Total |
$ | 98,448 | $ | 94,658 | $ | 88,347 | $ | 9,280 | $ | 9,807 | ||||||||||
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* | Long-lived assets excludes goodwill assigned to the T&M segment of $4.5 million at both January 31, 2017 and 2016. |
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Activity in the product warranty liability, which is included in other accrued expenses in the accompanying consolidated balance sheet, is as follows:
January 31 | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
(In thousands) | ||||||||||||
Balance, beginning of the year |
$ | 400 | $ | 375 | $ | 355 | ||||||
Provision for Warranty Expense |
971 | 887 | 546 | |||||||||
Cost of Warranty Repairs |
(856 | ) | (862 | ) | (526 | ) | ||||||
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Balance, end of the year |
$ | 515 | $ | 400 | $ | 375 | ||||||
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The following table summarizes our contractual obligations:
(In thousands) | Total | 2018 | 2019 | 2020 | 2021 | 2022 and Thereafter |
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Purchase Commitments* |
$ | 19,271 | $ | 17,848 | $ | — | $ | 1,352 | $ | — | $ | 71 | ||||||||||||
Operating Lease Obligations |
706 | 371 | 214 | 101 | 20 | — | ||||||||||||||||||
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$ | 19,977 | $ | 18,219 | $ | 214 | $ | 1,453 | $ | 20 | $ | 71 | |||||||||||||
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*Purchase | commitments consist primarily of inventory and equipment purchase orders made in the ordinary course of business. |
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Assets measured at fair value on a recurring basis are summarized below:
January 31, 2017 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In thousands) | ||||||||||||||||
Money market funds (included in cash and cash equivalents) |
$ | 2 | $ | – | $ | – | $ | 2 | ||||||||
State and municipal obligations (included in securities available for sale) |
– | 6,723 | – | 6,723 | ||||||||||||
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Total |
$ | 2 | $ | 6,723 | $ | – | $ | 6,725 | ||||||||
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January 31, 2016 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In thousands) | ||||||||||||||||
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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