AstroNova, Inc. - Quarter Report: 2022 July (Form 10-Q)

 

 

 

 

 

 

 

 

 

 

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 ☒    No  ☐.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule of the Exchange Act)    Yes  ☐    No  ☒.

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

The number of shares of the registrant’s common stock, $.05 par value per share, outstanding as of September , 2022 was 7,346,758.

 

 

 

 

See Notes to condensed consolidated financial statements (unaudited).

 

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See Notes to condensed consolidated financial statements (unaudited).

 

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See Notes to condensed consolidated financial statements (unaudited).

 

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See Notes to condensed consolidated financial statements (unaudited).

 

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Headquartered in West Warwick, Rhode Island, AstroNova, Inc. leverages its expertise in data visualization technologies to design, develop, manufacture and distribute a broad range of specialty printers and data acquisition and analysis systems. Our products are employed around the world in a wide range of applications in the aerospace, apparel, automotive, avionics, chemical, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging, and transportation industries.

Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems and related supplies sold under the QuickLabel, TrojanLabel, and GetLabelsbrand names. The T&M segment our line of aerospace products, including flight deck printers, networking hardware, and related accessories as well as test and measurement data acquisition systems sold under the AstroNova brand name.

Unless otherwise indicated, references to “AstroNova”, “we,” “our,” and “us” in this Quarterly Report on refer to AstroNova, Inc. and its consolidated subsidiaries.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles 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 our Annual Report on Form for the fiscal year ended January 31, 2022.

The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes, including those that require consideration of forecasted financial information, in the context of the unknown future impacts of the continuing pandemic, using information that is reasonably available to us at this time. Some of the more significant estimates relate to revenue recognition, the allowances for doubtful accounts, inventory valuation, income taxes, impairment of long-lived assets and goodwill, share-based compensation, and warranty reserves. Management’s estimates are based on the facts and circumstances available at the time estimates are made, historical experience, risk of loss, general economic conditions and trends, and management’s assessments of the probable future outcome of these matters, including our expectations at the time regarding the duration, scope, and severity of the pandemic. Consequently, actual results could differ from those estimates.

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

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

 

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

The accounting policies used in preparing the condensed consolidated financial statements in this Form are the same as those used in preparing our consolidated financial statements included in our Annual Report on Form for the fiscal year ended January 31, 2022.

 

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We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time.

Our contract liabilities, which represent billings in excess of revenue recognized, are related to advanced billings for purchased service agreements and extended warranties. Contract liabilities were $281,000 and $262,000 at July 30, 2022, and January 31, 2022, respectively, and are recorded as deferred revenue in the accompanying condensed consolidated balance sheet. The in the deferred revenue balance during the six months ended July 30, 2022, is due to cash payments received in advance of satisfying performance obligations in the current period, offset by $177,000 of revenue recognized during the period that was included in the deferred revenue balance at January 31, 2022.

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain costs related to obtaining sales contracts for our aerospace printer products meet the requirement to be capitalized. These costs are deferred and amortized over the remaining useful life of these contracts, which we currently estimate to be approximately 19 years as of July 30, 2022. The balance of these contract assets at January 31, 2022, was $1.3 million, and in the first quarter of the current year, we incurred an additional $0.1 million in contract costs that will be amortized over 19 years. $19,000 and $37,000, The balance of deferred incremental direct costs net of accumulated amortization at
July 30, 2022, was $1.4 million, of which $0.1 million is reported in other current assets and $1.3 million is reported in other assets in the accompanying condensed consolidated balance sheet.

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, determined using the treasury stock method 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:

 

For the three and six months ended July 30, 2022, the diluted per share amounts do not reflect weighted average common equivalent shares outstanding of 612,116 and 586,084 the three and six months ended July 31, 2021, the diluted per share amounts do not reflect weighted average common equivalent shares outstanding of 189,827 and 484,748 respectively. These outstanding common equivalent shares were not included due to their anti-dilutive effect.

 

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Intangible assets are as follows:

 

There were no impairments With respect to the acquired intangibles included in the table above, amortization expense of $0.4 million has been included in the condensed consolidated statements of income for each of the three months ended July 30, 2022, and July 31, 2021. Amortization expense of $0.8 million and $1.4 million related to the above-acquired intangibles has been included in the accompanying condensed consolidated statement of income for the six months ended July 30, 2022, and July 31, 2021, respectively.

Estimated amortization expense for the next five fiscal years is as follows:

 

Inventories are stated at the lower of cost (standard and average methods) and net realizable value and include material, labor, and manufacturing overhead. The components of inventories are as follows:

 

 

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Credit Agreement provides for (i) a term loan in the principal amount of $10.0 million, and (ii) a $22.5 million revolving credit facility available for general corporate purposes. 

Credit Agreement requires that the term loan be paid in quarterly installments on the last day of each of our fiscal quarters with the final payment due on September 30, 2025. We may voluntarily prepay the term loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later than September 30, 2025, at which time any outstanding revolving loans will be due and payable in full, and the revolving credit facility will terminate. We may reduce or terminate the revolving line of credit at any time, subject to certain thresholds and conditions, without premium or penalty.

Credit Agreement includes an uncommitted accordion provision under which the term loan and/or revolving credit facility commitments may be increased in an aggregate principal amount not exceeding $10.0 million, subject to obtaining the agreement of the Lender and the satisfaction of certain other conditions.

are as follows: the term loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the BSBY Rate as defined in the LIBOR
Amendment (or in the case of revolving credit loans denominated in Pounds Sterling, Euros or another currency other than U.S. Dollars, the SONIA
Rate as defined in the LIBOR Rate as defined in the LIBOR Amendment, or the applicable quoted rate, respectively), plus a
margin that varies within a range of 1.60% to 2.30% based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate, (iii) the BSBY Rate, SONIA Rate, EURIBOR Rate or other applicable quoted rate plus 1.00% or (iv) 0.50%, plus a margin that varies within a range of 0.60% to 1.30% based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15% and 0.30% based on our consolidated leverage ratio.

the first six months of the current year, we borrowed $4.5 million on our revolving line of credit. The balance outstanding under the revolving line of credit bore interest at a weighted average rate of 5.17% and 4.79% for the three and six months ended July 3, 2022, and we incurred $45,000 and $69,000 for interest on this obligation during the three and six months ended July 30, 2022. July 31, 2021, there was no balance outstanding on the revolving line of credit, and no interest was incurred for the three and six months ended July 31, 2021. incurred $30,000 of commitment fees on the undrawn portion of our revolving credit Both the interest expense and commitment fees are included as interest expense in the accompanying condensed consolidated income statement for all periods presented. At July 30, 2022, there is $18.0 million remaining available for borrowing under the revolving line of credit.

Long-term debt in the accompanying condensed consolidated balance sheets is as follows:

 

During the three and six months ended July 30, 2022, we recognized $65,000 and $118,000 of interest expense on debt, respectively, which included in interest expense in the accompanying condensed consolidated income statement. During the three and six months ended July 31, 2021, we recognized $65,000 and $179,000 of interest expense on debt, respectively, which included in interest expense in the accompanying condensed consolidated income statement.

The schedule of required principal payments remaining during the next five years on long-term debt outstanding as of July 30, 2022, is as follows:

 

On May 6, 2020, we entered into a loan agreement with, and executed a promissory note in favor of Greenwood Credit Union (“Greenwood”) pursuant to which we borrowed $4.4 million (the “PPP Loan”) from Greenwood pursuant to the Paycheck Protection Program (“PPP”) administered by the United States Small Business Administration (the “SBA”) and authorized by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES A

The PPP Loan, which would have been set to mature on May 6, 2022, was unsecured and bore interest at a rate of 1.0% per annum accruing from the loan date and payable monthly. No payments were due on the PPP Loan until the date on which the lender determined the amount of the PPP Loan that was eligible for forgiveness.

notified us that the SBA approved our application for forgiveness of the entire $4.4 million principal balance of our PPP Loan and all accrued interest thereon. As a result, we recorded a $4.5 million gain on extinguishment of debt in the accompanying condensed consolidated income statement for the three and six months ended July 31, 2021.

In 2017, we entered into a cross-currency interest rate swap to manage the interest rate risk and foreign currency exchange risk associated with the floating-rate foreign currency-denominated term loan borrowing by our Danish Subsidiary and an interest rate swap to manage the interest rate risk associated with our variable rate term loan borrowing. Both swaps were designated as cash flow hedges of floating-rate borrowings.

Our cross-currency interest rate swap agreement effectively modified our exposure to interest rate risk and foreign currency exchange rate risk by converting our floating-rate debt denominated in U.S. Dollars on our Danish subsidiary’s books to a fixed-rate debt denominated in Danish Kroner for the term of the loan, thus reducing the impact of interest-rate and foreign currency exchange rate changes on future interest expense and principal repayments. This swap involved the receipt of floating rate amounts in U.S. Dollars in exchange for fixed-rate interest payments in Danish Kroner, as well as exchanges of principal at the inception spot rate, over the life of the term loan.

The interest rate swap agreement effectively modified our exposure to interest rate risk by effectively converting our floating-rate term-loan debt to fixed-rate debt, thus reducing the impact of interest-rate changes on future interest expense. This swap involved the receipt of floating rate amounts in U.S. Dollars in exchange for fixed rate payments in U.S. dollars over the life of the term loan.

terminated these two swaps. The terms of the A&R Credit Agreement caused those swaps to cease to be effective hedges of the underlying exposures. The termination of the swaps was contracted immediately prior to the end of the second quarter of fiscal 2021 at a cash cost of approximately $0.7 million which was settled in the third quarter of fiscal 2021. Upon termination, the remaining balance of $58,000 in accumulated other comprehensive loss related to the cross-currency interest rate swap was reclassified into earnings as the forecasted foreign currency interest payments will not occur. The remaining balance in accumulated other comprehensive loss related to the interest rate swap of $0.2 million is being amortized into earnings through the original term of the hedge relationship as the underlying floating interest rate debt still exists.

 

 

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At July 30, 2022, we expect to reclassify approximately $20,000 of net losses on the frozen OCI balance associated with the terminated interest rate swap from accumulated other comprehensive loss to earnings during the next 12 months due to the payment of variable interest associated with the floating interest rate debt.

of Social Security taxes equal to seventy percent (70%) of the qualified wages that we paid to our employees between December 31, 2020 and June 30, 2021. Qualified to $10,000 per employee per calendar quarter in 2021 for a maximum ERC per employee of $7,000 per calendar quarter in 2021.

We evaluated our eligibility for the ERC in the second quarter of calendar year 2021. In order to qualify for the ERC, we needed to experience a 20% reduction in gross receipts from either (1) the same quarter in calendar year 2019 or (2) the immediately preceding quarter to the corresponding calendar quarter in 2019. We determined that we qualified for the employee retention credit under the first scenario for wages paid in calendar year 2020 and the first calendar quarter of 2021. In the second quarter of fiscal 2022, we amended certain payroll tax filings and applied for a refund of $3.1 million. Since there is no US GAAP guidance for business entities that receive government assistance that is not in the form of a loan, an income tax credit or revenue from a contract with a customer, we determined the appropriate accounting treatment by analogy to other guidance. We accounted for the employee retention credit by analogy to International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, of International Financial Reporting Standards (IFRS). Under an IAS 20 analogy, a business entity would recognize the credit on a systematic basis over the periods in which the entity recognizes the payroll expenses for which the grant (i.e., tax credit) is intended to compensate when there is reasonable assurance (i.e., it is probable) that the entity will comply with any conditions attached to the grant and the grant (i.e., tax credit) will be received.

We recorded a $3.1 million receivable in the second quarter of fiscal 2022 for the ERC receivable and recognized a reduction in employer payroll taxes which was allocated to the financial statement captions from which the employee’s taxes were originally incurred. As a result, we recorded a reduction in expenses of $1.7 million in cost of revenue, $0.8 million in selling and marketing, $0.3 million in research and development and $0.3 million in general and administrative in the accompanying condensed consolidated income statement for the three and six month periods ended July 31, 2021. On March 22, 2022, we received payment of the $3.1 million ERC.

 

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In fiscal 2018, we entered into an Asset Purchase and License Agreement with Honeywell to acquire an exclusive, perpetual, worldwide license to manufacture Honeywell’s narrow-format flight deck printers for two aircraft families along with certain inventory used in the manufacturing of the licensed printers. The purchase price included a guaranteed minimum royalty payment of $15.0 million, to be paid over ten years, based on gross revenues from the sales of the printers, paper, and repair services of the licensed products. The royalty rates vary based on the year in which they are paid or earned, and product sold or service provided, and range from single-digit to percentages of gross revenue.

The guaranteed minimum royalty payment obligation was recorded at the present value of the minimum annual royalty payments using a present value factor of 2.8%, which is based on the estimated cost of debt for similar companies. As of July 30, 2022, we had paid an aggregate of $8.5 million of the guaranteed minimum royalty obligation. At July 30, 2022, the current portion of the outstanding guaranteed minimum royalty obligation of $1.9 million is to be paid over the next twelve months and is reported as a current liability, and the remainder of $3.6 million is reported as a long-term liability on our condensed consolidated balance sheet. For the three and six month periods ended July 30, 2022, we incurred $0.3 million and $0.6 million, respectively, in excess royalty expenses which are included in the cost of revenue in our condensed consolidated statements of income. A total of $0.5 million in excess royalties was paid during the current fiscal year, and there are $0.3 million in excess royalty payables due as a result of this agreement for the period ended July 30, 2022.

 

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Lease cost information is as follows:

 

Maturities of operating lease liabilities are as follows:

 

As of July 30, 2022, the weighted-average remaining lease term and weighted-average discount rate for our operating leases are 4.6 years and 3.85%, respectively. We calculated the weighted-average discount rate using incremental borrowing rates, which equal the rates of interest that we would pay to borrow funds on a fully collateralized basis over a similar term.

 

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Supplemental cash flow information related to leases is as follows:

 

The changes in the balance of accumulated other comprehensive loss (“AOCL”) by component are as follows:

 

The amounts presented above in other comprehensive loss are net of taxes except for translation adjustments associated with our German, Danish and Shanghai subsidiaries.

We have one equity incentive plan from which we are authorized to grant equity awards, the AstroNova, Inc. 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for, among other things, the issuance of awards, including incentive stock options, stock options, stock appreciation rights, time-based restricted stock units (“RSUs”), or performance-based restricted stock units (“PSUs”) and restricted stock awards (RSAs). The 2018 Plan authorizes the issuance of up to 950,000 shares of common stock, plus an additional number of shares equal to the number of shares subject to awards granted under previous equity incentive plans that are forfeited, , satisfied without the issuance of stock, otherwise terminated (other than by exercise), or, for shares of stock issued pursuant to any unvested award, that are reacquired by us at not more than the grantee’s purchase price (other than by exercise). Under the 2018 Plan, all awards to employees generally have a minimum vesting period of one year. Options granted under the 2018 Plan must be issued at an exercise price of not less than the fair market value of our common stock on the date of grant and expire after ten years. Under the 2018 Plan, there were 129,363 unvested RSUs; 128,793 unvested PSUs; 21,172 unvested RSAs and options to purchase an aggregate of 135,500 shares outstanding as of July 30, 2022.

In addition to the 2018 Plan, we previously granted equity awards under our 2015 Equity Incentive Plan (the “2015 Plan”) and our 2007 Equity Incentive Plan (the “2007 Plan”). No new awards may be issued under either the 2007 or 2015 plans, but outstanding awards will continue to be governed by those plans. As of July 30, 2022, options to purchase an aggregate of 308,274 shares were outstanding under the 2007 Plan and options to purchase an aggregate of 135,325 shares were outstanding under the 2015 Plan.

We also have a Director Annual Compensation Program (the “Program”), under which each of our directors automatically receives a grant of restricted stock on the date of their to our board of directors. The number of whole shares granted is equal to the number calculated by dividing the stock component of the director compensation amount determined by the compensation committee for that year by the fair market value of our stock on that day. The value of the restricted stock award for fiscal 2023 is $65,000. Shares of restricted stock granted under the Program become vested on the first anniversary of the date of grant, conditioned upon the recipient’s continued service on our board of directors through that date.

 

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Share-based compensation expense was recognized as follows:

 

 

Set forth below is a summary of options outstanding at July 30, 2022: