AstroNova, Inc. - Quarter Report: 2012 July (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended July 28, 2012

OR

For the transition period from          to         

Commission file number 0-13200

Astro-Med, Inc.

(Exact name of registrant as specified in its charter)

(401) 828-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.05 Par Value – 7,441,490 shares

(excluding treasury shares) as of August 24, 2012

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ASTRO-MED, INC.

INDEX

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Part I. FINANCIAL INFORMATION

ASTRO-MED, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See Notes to condensed consolidated financial statements (unaudited).

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ASTRO-MED, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See Notes to condensed consolidated financial statements (unaudited).

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ASTRO-MED, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

See Notes to condensed consolidated financial statements (unaudited).

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ASTRO-MED, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See Notes to condensed consolidated financial statements (unaudited).

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ASTRO-MED, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(1) Overview

Headquartered in West Warwick, Rhode Island, Astro-Med Inc. designs, develops, manufactures and distributes a broad range of specialty printers and data acquisition and analysis systems. Our products are distributed through our own sales force and authorized dealers in the United States. We also sell to customers outside of the United States primarily by using authorized dealers and international sales representatives, who are managed from our foreign branch offices. Astro-Med, Inc. products are sold under the brand names Astro-Med ^® Test & Measurement, Grass ^® Technologies and QuickLabel ^® Systems and are employed around the world in a wide range of aerospace, automotive, communications, chemical, food and beverage, medical, military, industrial, and packaging applications.

Unless otherwise indicated, references to “Astro-Med,” the “Company,” “we,” “our,” and “us” in this Quarterly Report on Form 10-Q refer to Astro-Med, Inc. and its consolidated subsidiaries.

(2) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by Astro-Med pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods included herein. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with footnotes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2012.

Results of operations for the interim periods presented herein are not necessarily indicative of the results that may be expected for the full year.

The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Some of the more significant estimates relate to the allowances for doubtful accounts and credits, inventory valuation, impairment of long-lived assets and goodwill, income taxes, share-based compensation 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.

Certain amounts in prior year’s financial statements have been reclassified to conform to the current year’s presentation.

(3) Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.

(4) Net Income Per Common Share

Basic net income per share is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted average number of shares and, if dilutive, common equivalent shares for stock options, restricted stock awards and restricted stock units outstanding during the period. A reconciliation of the shares used in calculating basic and diluted net income per share is as follows:

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For the three and six months ended July 28, 2012, the diluted per share amounts do not reflect common equivalent shares outstanding of 605,844 because their effect would have been anti-dilutive. For the three and six months ended July 30, 2011, the diluted per share amounts do not reflect options outstanding of 615,769 and 736,590, respectively. These outstanding options were not included due to their anti-dilutive effect, as the exercise price was greater than the average market price of the underlying stock during the period presented.

(5) Share-Based Compensation

Astro-Med has one equity incentive plan (the “Plan”) under which incentive stock options, non-qualified stock options, restricted stock units (“RSUs”), restricted stock awards (“RSAs”) and other equity based awards may be granted to officers and certain employees. An aggregate of 1,000,000 shares were authorized for awards under the Plan. Options granted to employees vest over four years. The exercise price of each stock option will be established at the discretion of the Compensation Committee; however, any incentive stock options granted must be at an exercise price of not less than fair market value at the date of grant. Beginning in fiscal year 2013, a portion of the Company’s long-term incentive compensation will be awarded in the form of RSUs. The RSUs vest fifty-percent on the first anniversary of the grant date and fifty-percent on the second anniversary of the grant date provided that the grantee is employed on each vesting date by Astro-Med or an affiliate company and provided the Company achieves specific thresholds of net sales and annual operating income as established under the Management Bonus Domestic Plan. At July 28, 2012, 559,594 shares were available for grant under the Plan.

The Plan provides for an automatic annual grant of ten-year options to purchase 5,000 shares of stock to each non-employee director upon the adjournment of each annual shareholders’ meeting. Each such option is exercisable at the fair market value as of the grant date and vests immediately prior to the next succeeding annual shareholders’ meeting. During the second quarter of fiscal 2013, 20,000 options were awarded to non-employee directors pursuant to the Plan. In addition to the automatic option grant under Plan, the Company adopted a Non-Employee Director Annual Compensation Program (the “Program”) effective as of February 1, 2012. The Program provides that each non-employee director is entitled to an annual cash retainer of $7,000 (the “Cash Retainer”), plus $500 for each Board and committee meeting attended, provided that if more than one meeting occurs on the same day, no more than $500 shall be paid for such day. The non-employee director may elect for any fiscal year to receive all or a portion of the Cash Retainer in the form of common stock of the Company, which will be issued under the Plan. If a non-employee director elects to receive all or a portion of the Cash Retainer in the form of common stock, such shares shall be issued in four quarterly installments on the first day of each fiscal quarter, and the number of shares of common stock to be issued shall be based on the fair market value of such common stock on the date such installment is payable. The common stock received in lieu of such Cash Retainer will be fully vested. However, a non-employee director who receives common stock in lieu of all or a portion of the Cash Retainer may not sell, transfer, assign, pledge or otherwise encumber the common stock prior to the first anniversary of the date on which such shares were issuable. In the event of the death or disability of a nonemployee director, or a change in control of the Company, any shares of common stock issued in lieu of such Cash Retainer, shall no longer be subject to such restrictions on transfer.

In addition, under the Program, commencing with the 2012 annual meeting, each non-employee director will receive “RSAs” with a value equal to $20,000 (the “Equity Retainer”). If a non-employee director is first appointed or elected to the Board of Directors effective on a date other than at the annual shareholders meeting, on the date of such appointment or election, the director shall receive a pro rata award of restricted common stock having a value based on the number of days remaining until the next annual meeting. The Equity Retainer will vest on the earlier of 12 months after the grant date or the date immediately prior to the next annual meeting of the shareholders following the meeting at which such RSAs were granted. However, a non-employee director may not sell, transfer, assign, pledge or otherwise encumber the vested common stock prior to the second anniversary of the vesting date. In the event of the death or disability of a non-employee director, or a change in control of the Company, the RSAs shall immediately vest and shall no longer be subject to such restrictions on transfer. During the second quarter of fiscal 2013, 9,900 RSAs were awarded to non-employee directors pursuant to the Program.

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We account for compensation cost related to share-based payments based on fair value of the stock options, RSUs and RSAs when awarded to an employee or director. We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate 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. Our accounting for share-based compensation for RSUs and RSAs 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 date of the RSU or RSA award.

Share-based compensation expense was recognized as follows:

Stock Options

The fair value of stock options granted during the six months ended July 28, 2012 and July 30, 2011 was estimated using the following assumptions:

The weighted average fair value per share for options granted was $2.09 during the first quarter of fiscal 2013 and $2.01 during the second quarter of fiscal 2013 compared to $2.03 and $2.05 during the first and second quarters of fiscal 2012.

Aggregated information regarding stock options granted under the Plan for the six months ended July 28, 2012 is summarized below:

As of July 28, 2012 there was $285,920 of unrecognized compensation expense related to unvested options.

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Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs)

Aggregated information regarding RSUs and RSAs granted under the Plan for the six months ended July 28, 2012 is summarized below:

As of July 28, 2012 there was $252,952 of unrecognized compensation expense related to unvested RSUs and RSAs.

Employee Stock Purchase Plan

Astro-Med has an Employee Stock Purchase Plan allowing eligible employees to purchase shares of common stock at a 15% discount from fair value on the date of purchase. A total of 247,500 shares were reserved for issuance under this plan. During the quarters ended July 28, 2012 and July 30, 2011, 1,550 and 1,559 shares respectively, were purchased under this plan. During the six months ended July 28, 2012 and July 30, 2011, 2,547 and 3,277 shares respectively, were purchased under this plan. As of July 28, 2012, 67,660 shares remain available.

(6) Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and manufacturing overhead. The components of inventories are as follows:

(7) Income Taxes

The Company’s effective tax rates for the periods, which are based on the projected effective tax rate for the full year, are as follows:

During fiscal 2013, the Company recognized an income tax expense of approximately $638,000 which included an expense of $907,000 on the six month’s pretax income and a benefit $269,000 primarily related to the favorable resolution of a previously uncertain tax positions.

As of July 28, 2012, the Company’s cumulative unrecognized tax benefits totaled $570,354 compared to $779,543 as of January 31, 2012. There were no developments affecting unrecognized tax benefits during the quarter ended July 28, 2012.

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(8) Line of Credit and Note Receivable

On January 30, 2012, we completed the sale of our label manufacturing operations in Asheboro, North Carolina to Label Line Ltd. The net sales price of $1,000,000 was received in the form of a promissory note issued by Label Line Ltd. and is fully secured by a first lien on various collateral, including the Asheboro plant and plant assets. The note bears interest at a rate equal to the lesser of (i) the United States prime rate as of January 30, 2013 plus 50 basis points or (ii) six percent per annum and is payable in sixteen quarterly installments of principal and interest commencing on January 30, 2013. The Note Receivable is disclosed at its present value on the accompanying condensed consolidated balance sheet for the periods ended July 28, 2012 and January 31, 2012. The current portion of the Note Receivable of $62,500 is included in prepaid and other current assets on the accompanying condensed consolidated balance sheet for the period ended July 28, 2012.

The terms of the Asheboro sale also included an agreement for Astro-Med to provide Label Line Ltd. with additional financing in the form of a revolving line of credit in the amount of $600,000. This line of credit is fully secured by first lien on various collateral of Label Line Ltd., including the Asheboro plant and plant assets and bears interest at a rate equal to the United States prime rate plus an additional margin of two percent of the outstanding credit balance. The line of credit has an initial term of one-year from the date of the sale which may be extended for consecutive one-year terms on mutual agreement of both parties. There were no outstanding borrowings due as of January 31, 2012. As of July 28, 2012, Astro-Med has extended $300,000 on this revolving line of credit.

(9) Segment Information

The Company reports three segments consistent with its sales product groups: Test & Measurement (T&M); QuickLabel Systems (QuickLabel) and Grass Technologies (Grass). The Company evaluates segment performance based on the segment profit before corporate expenses.

Summarized below are the Net Sales and Segment Operating Profit for each reporting segment:

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(10) Recent Accounting Pronouncements

Comprehensive Income

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which requires entities to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. While ASU 2011-05 changes the presentation of comprehensive income, it does not change the components that are recognized in net income or comprehensive income under current accounting guidance. ASU 2011-05 also requires entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standard Update No. 2011-05,” which indefinitely defers the guidance related to the presentation of reclassification adjustments. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011, and must be applied retrospectively. We adopted this guidance in the first quarter of fiscal 2013 and have provided the disclosures required for the three and six months ended July 28, 2012 and July 30, 2011, in the accompanying Condensed Consolidated Statements of Comprehensive Income.

Fair Value Measurements

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. ASU 2011-04 does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or IFRSs. ASU 2011-04 changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU 2011-04 clarifies the FASB’s intent about the application of existing fair value measurement. We adopted ASU 2011-04 effective February 1, 2012. The provisions of this guidance did not have a material effect on our consolidated financial position or results of operations.

Except for the ASU’s discussed above, all other ASUs issued by the FASB as of the filing date of this Quarterly Report on Form 10-Q are not expected to have a material effect on our consolidated financial statements.

(11) 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 to 17 months. Securities available for sale are carried at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity until realized. Realized gains and losses from the sale of available for sale securities, if any, are determined on a specific identification basis. A decline in the fair value of any available for sale security below cost that is determined to be other than temporary will result in a write-down of its carrying amount to fair value. No such impairment charges were recorded for any period presented. All short-term investment securities have original maturities greater than 90 days. The fair value, amortized cost and gross unrealized gains and losses of the securities are as follows:

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(12) Fair Value

We measure our financial assets at fair value on a recurring basis in accordance with the guidance provided in ASC 820, “Fair Value Measurement and Disclosures” which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In addition, ASC 820 establishes a three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect management’s belief about the assumptions market participants would use in pricing a financial instrument based on the best information available in the circumstances.

The fair value hierarchy is summarized as follows:

Cash and cash equivalents; accounts receivables; line of credit receivable; accounts payable, accrued compensation and other expenses; and income tax payable are reflected in the condensed consolidated balance sheet at carrying value, which approximates fair value due to the short term nature of the these instruments.

Assets measured at fair value on a recurring basis are summarized below:

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 identical assets.

(13) Life Insurance Proceeds

During the second quarter of fiscal 2012, we recognized income on key-man life insurance proceeds of $300,000. This income is included in other income in the accompanying consolidated statement of operations for the six month period ended July 30, 2011.

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ASTRO-MED, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Business Overview

This section should be read in conjunction with Astro-Med’s Condensed Consolidated Financial Statements included elsewhere herein and our Annual Report on Form 10-K for the fiscal year ended January 31, 2012.

Astro-Med is a multi-national enterprise, which designs, develops, manufactures, distributes and services a broad range of products that acquire, store, analyze and present data in multiple formats. The Company organizes its structure around a core set of competencies, including research and development, manufacturing, service, marketing and distribution. We market and sell our products and services through the following three sales product groups:

Astro-Med markets and sells its products and services globally through a diverse distribution structure of sales personnel, manufacturing representatives and authorized dealers that deliver a full complement of branded products and services to customers in our respective markets.

Results of Operations

Three Months Ended July 28, 2012 vs. Three Months Ended July 30, 2011

Net sales by product group and current quarter percentage change over prior year for the three months ended July 28, 2012 and July 30, 2011 were:

Net sales for the second quarter of the current year were $19,572,000, representing a 3.8% decrease as compared to the previous year’s second quarter sales of $20,336,000 but a 6.2% improvement over current year first quarter sales of $18,425,000. Sales through the domestic channels for the current quarter were $14,012,000, a decrease of 1.8% over the prior year. International shipments for the second quarter of the current year were $5,560,000, representing an 8.3% decrease from the previous year. Current year’s second quarter international sales includes an unfavorable foreign exchange rate impact of $459,000.

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Hardware sales in the current quarter were $8,875,000, a decrease of 5.3% as compared to prior year’s second quarter sales of $9,370,000, but a 12.1% improvement over the current year first quarter sales of $7,920,000. The current quarter decrease is primarily due to the decline in T&M and QuickLabel product group hardware sales and as compared to the prior year. The overall hardware sales decline is tempered by increases in Grass’s clinical and research line of products, which have increased 8.3% and 20.6%, respectively.

Consumables sales in the current quarter were $9,589,000, representing a 1.3% decrease over prior year’s second quarter consumable sales of $9,713,000, but a 3.0% increase as compared to current year first quarter consumable sales of $9,312,000. The current quarter decrease in consumable sales as compared to the prior year is an outgrowth of the January 2012 divestiture of the Asheboro, North Carolina label business, which contributed sales of $985,000 in the second quarter of the prior year. This overall decrease was slightly tempered by QuickLabel’s 20.4% increase in sales of digital color printer supplies and a 2.6% increase in sales of the Thermal Transfer Ribbon product line as compared to prior year’s second quarter.

Service and other revenues of $1,108,000 in the current quarter were down from prior year’s second quarter service and other revenues of $1,253,000, primarily due to the decrease in service and freight revenue during the quarter.

Current year second quarter gross profit was $8,299,000, reflecting a 12.6% improvement over current year first quarter gross profit of $7,371,000 and a 5.0% improvement over prior year’s second quarter gross profit of $7,901,000. The Company’s gross profit margin of 42.4% in the current quarter reflects an increase from the prior year’s second quarter gross profit margin of 38.9%. The higher gross profit and related margin for the current quarter as compared to prior year is primarily attributable to lower material and manufacturing costs and favorable product mix.

Operating expenses for the current quarter were $6,621,000, a slight decrease as compared to prior year’s second quarter operating expenses of $6,678,000. Specifically, selling and marketing expenses for the current quarter decreased 5.0% to $4,298,000 as compared to the previous year’s second quarter selling and marketing expenses of $4,526,000. The decrease in selling and marketing for the current quarter was primarily due to decreases in commissions and trade show spending. The overall decrease in second quarter operating expenses was tempered by the increase in General and administrative (G&A) and research & development (R&D) expenses. G&A expenses increased 15.7% to $1,115,000 in the second quarter of the current year as compared to prior year’s second quarter G&A expenses of $964,000. The increase in G&A was primarily due to a increase in benefits and outside service spending. Investment in R&D in the second quarter of the current year of $1,208,000 represents a 1.8% increase compared to prior year’s second quarter investment of $1,187,000. The current quarter spending in R&D represents 6.2% of sales, an increase as compared to prior year’s second quarter level of 5.8%.

Second quarter operating income of $1,678,000 increased 37.2% as compared to the prior year’s second quarter operating income of $1,223,000. Operating margin for the second quarter of the current year of 8.6% is also up as compared to the prior year’s second quarter margin of 6.0%. The increase in operating income and related margin is primarily attributable to lower manufacturing cost and reduced selling and marketing spend during the current quarter.

Other expense during the second quarter was $89,000 compared to other income of $297,000 in the second quarter of the previous year. The decrease was primarily due to $300,000 of income recognized in the second quarter of the prior year related to the disposition of a key-man life insurance policy, as well as the increase in foreign exchange loss recognized in the second quarter of the current year.

The provision for federal, state and foreign income taxes for the second quarter of the current year was $602,000 reflecting an effective tax rate of 37.9%. This result compares to the prior year’s second quarter income tax expense of $474,000 reflecting an effective tax rate of 31.2%. The increased effective tax rate for the second quarter of the current year as compared to the prior year is primarily due to a discrete benefit related to tax exempt key-man life insurance proceeds recognized in the second quarter of the prior year.

The Company reported $987,000 in net income for the second quarter of the current year, reflecting a return on sales of 5.0% and generating EPS of $0.13 per diluted share, On a comparative basis, prior year’s second quarter recognized net income of $1,046,000 reflecting a return on sales of 5.1% and an EPS of $0.14 per diluted share which includes $0.04 per diluted share related to income of $300,000 from life insurance proceeds recognized in the second quarter of the prior year.

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Six Months Ended July 28, 2012 vs. Six Months Ended July 30, 2011

Net sales by product group and current quarter percentage change over prior year for the six months ended July 28, 2012 and July 30, 2011 were:

Net sales for the six month period of the current fiscal year were $37,997,000, a 3.1% decrease as compared to sales of $39,196,000 as reported for the first six months of the prior fiscal year. Sales through the domestic channels for the first six months of the current year were $26,751,000, a slight decrease from prior year’s domestic sales of $26,848,000. International sales for the first six months of the current year of $11,246,000 includes an unfavorable impact of $668,000 due to foreign exchange rates and reflects an 8.9% decrease as compared to the prior year.

The Company’s hardware sales were $16,796,000 in the first six months of fiscal 2013, a 2.7% decrease as compared to the same period in the prior year. All three product groups experienced a decline in hardware growth in the current year ,with T&M hardware sales for the first six months of the current year of $6,978,000, a 4.7% decrease compared to prior year’s sales of $7,325,000; QuickLabel hardware sales for the first six months of the current year of $4,256,000, approximately flat as compared to prior year’s sales of $4,266,000 and Grass Technologies hardware sales for the first six months of the current year of $5,562,000, a 2.0% decrease compared to prior year’s sales of $5,673,000.

Consumables sales for the first six months of the current year were $18,901,000, representing a decrease of 2.9% as compared to the prior year’s consumable sales of $19,461,000. The overall decrease in consumable sales for the first six months of the current year was primarily attributable to lower label and tag sales in the QuickLabel product group due to the January 2012 divestiture of the Asheboro, North Carolina facilities, which contributed sales of approximately $2,116,000 in the first six months of the prior year. This overall decrease in consumable sales in the current year was somewhat tempered by the increase in sales of digital color printer supplies within the QuickLabel product group, which were up 23.4% as compared to the prior year.

Service and other revenues of $2,300,000 in the first six months of fiscal 2013 were down 6.9% from prior year’s service and other revenues of $2,471,000, primarily due to the decrease in service revenue, as well as a decrease in parts revenue.

The Company achieved $15,670,000 in gross profit for the first six months of fiscal 2013 and generated a gross profit margin of 41.2% as compared to prior year’s gross profit of $15,402,000 and related gross profit margin of 39.3%. The increase in gross profit and related margin for the first six months of the current year is due to lower manufacturing costs and favorable product mix.

Operating expenses in the first six months of the current year were $13,105,000, representing a 3.8% decrease from the prior year. Selling and marketing expenses for the first six months of the current year decreased 6.0% from the prior year to $8,542,000, with the decrease traceable primarily to lower commissions, trade show, travel and advertising spending. R&D spending for the current six months is $2,411,000, representing a 9.2% decrease as compared with prior year R&D spending of $2,655,000. Spending in R&D represents 6.3% of sales for the first six months of the current year as compared to 6.8% in the prior year. General and administrative (G&A) expenses for the first six months of the current year were $2,152,000, a 14.8% increase from the prior year. The increased spending level for G&A in the current year is mainly attributed to the increase in benefits and higher professional services spending.

The Company earned $2,565,000 in operating income during the first six months of fiscal year 2013, a 44.1% increase as compared to $1,780,000 for the same period in the prior year. On a margin basis, this year’s operating income reflects an operating margin of 6.8% on sales compared to prior year’s operating margin of 4.5%.

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Other expense realized during the first six months of the current fiscal year is $103,000 as compared to the other income of $447,000 reported in the same period of the previous year. This decrease in the current year is a result of income recognized of $300,000 related to the disposition of a key-man life insurance policy in the prior year. Also contributing to the current period decline is the recognition of a foreign exchange loss of $154,000 in the current year as compared to a foreign exchange gain of $77,000 in the prior year.

The Company has provided federal, state and foreign income tax expense of $638,000 for the six month period ended July 28, 2012. This year’s provision reflects an effective tax rate of 25.9%, down from the prior year’s effective tax rate of 33.7%. The lower effective tax rate in fiscal 2013 as compared to the prior year is due to a benefit of $269,000 primarily related to the resolution of a previously uncertain tax position recognized in the first quarter of the current year.

Net income earned during the first six months of the current fiscal year was $1,824,000, a 23.5% increase as compared to prior year’s first six months of net income of $1,477,000, and reflects a return on sales of 4.8%. This year’s net income resulted in an EPS of $0.24 per diluted share. On a comparative basis, prior year’s first six months net income reflected a return on sales of 3.8% and generated an EPS of $0.20 per diluted share which includes $0.04 per diluted share related to $300,000 of income from key-man life insurance proceeds recognized in the prior year.

Segment Analysis

The Company reports three segments consistent with its sales product groups: Test & Measurement (T&M); QuickLabel Systems (QuickLabel) and Grass Technologies (Grass). The Company evaluates segment performance based on the segment profit before corporate and financial administration expenses.

Summarized below are the Net Sales and Segment Operating Profit for each reporting segment: