UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 2, 2019

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-13200

 

 

AstroNova, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Rhode Island		05-0318215
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
600 East Greenwich Avenue, West Warwick, Rhode Island		02893
(Address of principal executive offices)		(Zip Code)

(401) 828-4000

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock, $.05 Par Value		ALOT		NASDAQ Global Market

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 S-T (§ 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 non-accelerated 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 12b-2 of the Exchange Act.

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐		Smaller reporting company		☒
				Emerging growth company		☐

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 12b-2 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 December 5, 2019 was 7,069,568.

 

 

 

ASTRONOVA, INC.

INDEX

 

				Page No.
Part I.		Financial Information
Item 1.		Financial Statements
		Unaudited Condensed Consolidated Balance Sheets – November 2, 2019 and January 31, 2019			3
		Unaudited Condensed Consolidated Statements of Income — Three and Nine Months Ended November 2, 2019 and October 27, 2018			4
		Unaudited Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended November 2, 2019 and October 27, 2018			5
		Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity — Three and Nine Months Ended November 2, 2019 and October 27, 2018			6-7
		Unaudited Condensed Consolidated Statements of Cash Flows — Nine Months Ended November 2, 2019 and October 27, 2018			8
		Notes to the Condensed Consolidated Financial Statements (unaudited)			9-23
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			24-31
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			31
Item 4.		Controls and Procedures			31
Part II.		Other Information
Item 1.		Legal Proceedings			32
Item 1A.		Risk Factors			32
Item 5.		Other Information			32
Item 6.		Exhibits			33
Signatures					34

 

2

Part I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

ASTRONOVA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, Except Share Data)

 

		November 2, 2019				January 31, 2019
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents		$	4,468			$	7,534
Accounts Receivable, net			22,094				23,486
Inventories, net			35,594				30,161
Prepaid Expenses and Other Current Assets			3,059				1,427
Total Current Assets			65,215				62,608
Property, Plant and Equipment, net			11,323				10,380
Intangible Assets, net			26,454				29,674
Goodwill			12,110				12,329
Deferred Tax Assets, net			3,482				2,928
Right of Use Assets			1,767				—
Other Assets			1,014				1,064
TOTAL ASSETS		$	121,365			$	118,983
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts Payable		$	6,674			$	5,956
Accrued Compensation			2,968				5,023
Other Liabilities and Accrued Expenses			3,789				2,911
Current Portion of Long-Term Debt			5,116				5,208
Revolving Credit Facility			6,500				1,500
Current Liability – Royalty Obligation			2,000				1,875
Current Liability – Excess Royalty Payment Due			419				1,265
Deferred Revenue			387				373
Income Taxes Payable			—				554
Total Current Liabilities			27,853				24,665
Long-Term Debt, net of current portion			9,004				12,870
Royalty Obligation, net of current portion			8,488				9,916
Lease Liabilities, net of current portion			1,350				—
Deferred Tax Liabilities			539				40
Other Long-Term Liabilities			1,178				1,717
TOTAL LIABILITIES			48,412				49,208
SHAREHOLDERS’ EQUITY
Common Stock, $0.05 Par Value, Authorized 13,000,000 shares; Issued 10,333,915 shares and 10,218,559 shares at November 2, 2019 and January 31, 2019, respectively			518				511
Additional Paid-in Capital			55,870				53,568
Retained Earnings			51,142				49,511
Treasury Stock, at Cost, 3,279,831 and 3,261,672 shares at November 2, 2019 and January 31, 2019, respectively			(33,454	)			(32,997	)
Accumulated Other Comprehensive Loss, net of tax			(1,123	)			(818	)
TOTAL SHAREHOLDERS’ EQUITY			72,953				69,775
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	121,365			$	118,983

See Notes to condensed consolidated financial statements (unaudited).

 

3

ASTRONOVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, Except Per Share Data)

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		November 2, 2019				October 27, 2018				November 2, 2019				October 27, 2018
Revenue		$	33,318			$	34,196			$	102,967			$	99,490
Cost of Revenue			21,021				20,288				64,454				60,073
Gross Profit			12,297				13,908				38,513				39,417
Operating Expenses:
Selling and Marketing			6,944				6,587				20,122				19,484
Research and Development			2,076				2,123				5,868				5,844
General and Administrative			2,830				2,836				8,445				8,298
Operating Expenses			11,850				11,546				34,435				33,626
Operating Income			447				2,362				4,078				5,791
Other Expense, net			(238	)			(538	)			(788	)			(1,320	)
Income before Income Taxes			209				1,824				3,290				4,471
Income Tax (Benefit) Provision			(247	)			407				182				1,046
Net Income		$	456			$	1,417			$	3,108			$	3,425
Net Income per Common Share—Basic:		$	0.06			$	0.21			$	0.44			$	0.50
Net Income per Common Share—Diluted:		$	0.06			$	0.20			$	0.43			$	0.49
Weighted Average Number of Common Shares Outstanding:
Basic			7,047				6,925				7,013				6,858
Diluted			7,199				7,167				7,272				7,056

See Notes to condensed consolidated financial statements (unaudited).

 

4

ASTRONOVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		November 2, 2019				October 27, 2018				November 2, 2019				October 27, 2018
Net Income		$	456			$	1,417			$	3,108			$	3,425
Other Comprehensive Income (Loss), Net of Taxes and Reclassification Adjustments:
Foreign Currency Translation Adjustments			87				(157	)			(166	)			(775	)
Change in Value of Derivatives Designated as Cash Flow Hedge			62				221				62				766
Losses (Gains) from Cash Flow Hedges Reclassified to Income Statement			3				(150	)			(201	)			(605	)
Realized Loss on Securities Available for Sale Reclassified to Income Statement			—				—				—				3
Other Comprehensive Income (Loss)			152				(86	)			(305	)			(611	)
Comprehensive Income		$	608			$	1,331			$	2,803			$	2,814

See Notes to condensed consolidated financial statements (unaudited).

 

5

ASTRONOVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

($ In Thousands, Except per Share Data)

(Unaudited)

 

		Common Stock								Additional Paid-in Capital				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
		Shares				Amount
Balance February 1, 2019			10,218,559			$	511			$	53,568			$	49,511			$	(32,997	)		$	(818	)		$	69,775
Share-Based Compensation			—				—				601				—				—				—				601
Employee Option Exercises			27,990				1				306				—				(11	)			—				296
Restricted Stock Awards Vested, net			9,522				1				(1	)			—				(69	)			—				(69	)
Cash Dividend—$0.07 per share			—				—				—				(489	)			—				—				(489	)
Net Income			—				—				—				1,700				—				—				1,700
Other Comprehensive Loss			—				—				—				—				—				(200	)			(200	)
Balance May 4, 2019			10,256,071			$	513			$	54,474			$	50,722			$	(33,077	)		$	(1,018	)		$	71,614
Share-Based Compensation			—				—				451				—				—				—				451
Employee Option Exercises			13,821				1				198				—				—				—				199
Restricted Stock Awards Vested, net			45,658				2				(2	)			—				(377	)			—				(377	)
Cash Dividend—$0.07 per share			—				—				—				(493	)			—				—				(493	)
Net Income			—				—				—				951				—				—				951
Other Comprehensive Loss			—				—				—				—				—				(257	)			(257	)
Balance August 3, 2019			10,315,550			$	516			$	55,121			$	51,180			$	(33,454	)		$	(1,275	)		$	72,088
Share-Based Compensation			—				—				525				—				—				—				525
Employee Option Exercises			18,365				2				224				—				—				—				226
Cash Dividend—$0.07 per share			—				—				—				(494	)			—				—				(494	)
Net Income			—				—				—				456				—				—				456
Other Comprehensive Income			—				—				—				—				—				152				152
Balance November 2, 2019			10,333,915			$	518			$	55,870			$	51,142			$	(33,454	)		$	(1,123	)		$	72,953

 

6

		Common Stock								Additional Paid-in Capital				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
		Shares				Amount
Balance February 1, 2018			9,996,120			$	500			$	50,016			$	45,700			$	(32,397	)		$	(172	)		$	63,647
Share-Based Compensation			—				—				363				—				—				—				363
Employee Option Exercises			53,010				3				574				—				(88	)			—				489
Restricted Stock Awards Vested, net			16,981				1				(1	)			—				(40	)			—				(40	)
Cash Dividend—$0.07 per share			—				—				—				(480	)			—				—				(480	)
Net Income			—				—				—				814				—				—				814
Other Comprehensive Loss			—				—				—				—				—				(163	)			(163	)
Balance April 28, 2018			10,066,111			$	504			$	50,952			$	46,034			$	(32,525	)		$	(335	)		$	64,630
Share-Based Compensation			—				—				466				—				—				—				466
Employee Option Exercises			40,302				—				461				—				(278	)			—				183
Restricted Stock Awards Vested, net			30,084				3				(2	)			—				(157	)			—				(156	)
Cash Dividend—$0.07 per share			—				—				—				(481	)			—				—				(481	)
Net Income			—				—				—				1,194				—				—				1,194
Reclassification of Certain Income Tax Effects from Accumulated Other Comprehensive Loss			—				—				—				14				—				—				14
Other Comprehensive Loss			—				—				—				—				—				(362	)			(362	)
Balance July 28, 2018			10,136,497			$	507			$	51,877			$	46,761			$	(32,960	)		$	(697	)		$	65,488
Share-Based Compensation			—				—				510				—				—				—				510
Employee Option Exercises			54,952				3				561				—				—				—				564
Restricted Stock Awards Vested, net			5,306				—				—				—				—				—				—
Cash Dividend—$0.07 per share			—				—				—				(485	)			—				—				(485	)
Net Income			—				—				—				1,417				—				—				1,417
Other Comprehensive Loss			—				—				—				—				—				(86	)			(86	)
Balance October 27, 2018			10,196,755			$	510			$	52,948			$	47,693			$	(32,960	)		$	(783	)		$	67,408

 

7

ASTRONOVA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

		Nine Months Ended
		November 2, 2019				October 27, 2018
Cash Flows from Operating Activities:
Net Income		$	3,108			$	3,425
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation and Amortization			4,692				4,633
Amortization of Debt Issuance Costs			37				38
Share-Based Compensation			1,576				1,339
Deferred Income Tax Provision			—				(67	)
Changes in Assets and Liabilities:
Accounts Receivable			1,296				248
Inventories			(5,412	)			(1,140	)
Income Taxes			(2,639	)			(244	)
Accounts Payable and Accrued Expenses			(1,586	)			(4,793	)
Other			(84	)			(916	)
Net Cash Provided by Operating Activities			988				2,523
Cash Flows from Investing Activities:
Proceeds from Sales/Maturities of Securities Available for Sale			—				1,511
Honeywell Asset Purchase and License Agreement—TSA Agreement Payment			—				(400	)
Additions to Property, Plant and Equipment			(2,422	)			(1,902	)
Net Cash Used by Investing Activities			(2,422	)			(791	)
Cash Flows from Financing Activities:
Net Cash Proceeds from Common Shares Issued Under Employee Benefit Plans and Employee Stock Option Plans, Net of Payment of Minimum Tax Withholdings			276				1,041
Borrowings under Revolving Credit Facility			5,000				3,000
Repayment under Revolving Credit Facility			—				(1,500	)
Payment of Minimum Guarantee Royalty Obligation			(1,375	)			(1,250	)
Principal Payments of Long-Term Debt			(3,998	)			(4,012	)
Dividends Paid			(1,477	)			(1,446	)
Net Cash Used by Financing Activities			(1,574	)			(4,167	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents			(58	)			74
Net Decrease in Cash and Cash Equivalents			(3,066	)			(2,361	)
Cash and Cash Equivalents, Beginning of Period			7,534				10,177
Cash and Cash Equivalents, End of Period		$	4,468			$	7,816
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for Interest		$	350			$	449
Cash Paid During the Period for Income Taxes, Net of Refunds		$	2,746			$	3,154
Schedule of Non-Cash Financing Activities:
Value of Shares Received in Satisfaction of Option Exercise Price		$	11			$	366

See Notes to condensed consolidated financial statements (unaudited).

 

8

ASTRONOVA, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Business and Basis of Presentation

Overview

Headquartered in West Warwick, Rhode Island, AstroNova, Inc. leverages its expertise in data visualization technologies to design, develop, manufacture and distribute a broad range of specialty printers and data acquisition and analysis systems. Our products are 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. In the United States, the Company has factory-trained direct field salespeople located in major cities from coast to coast. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, India, Malaysia, Mexico, Singapore, Spain and the United Kingdom staffed by our own employees and dedicated third-party contractors. Additionally, we utilize over 150 independent dealers and representatives selling and marketing our products in over 50 countries.

The business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The Product Identification segment offers a variety of hardware and software products and associated supplies that allow customers to mark, track and enhance the appearance of their products. PI includes specialty printing systems and supplies sold under the QuickLabel^®, TrojanLabel^® and GetLabels^™ brand names. PI products are used in industrial and commercial product packaging, branding and labeling applications to print custom labels, packaging materials and corresponding visual content to enable our customers to digitally print on-demand in their own facilities. The Test & Measurement segment includes systems sold under the AstroNova^® brand name as well as the Company’s line of aerospace flight deck printers. Products sold under the AstroNova brand enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed and analyzed and then stored and presented in various visual output formats. In the aerospace market, the Company has a long history of using its data visualization technologies to provide networking systems and high-resolution light-weight flight deck and cabin printers.

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

Basis of Presentation

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 the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2019.

The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. Some of the more significant estimates relate to revenue recognition, the allowances for doubtful accounts, inventory valuation, income taxes, impairment of long-lived assets and goodwill, share-based compensation, accrued expenses, lease accounting and warranty reserves. Management’s estimates are based on the facts and circumstances available at the time estimates are made, historical experience, risk of loss, general economic conditions and trends, and management’s assessments of the probable future outcome of these matters. Consequently, actual results could differ from those estimates.

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 financial statements have been reclassified to conform to the current year’s presentation.

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.

 

9

Note 2 – Summary of Significant Accounting Policies Update

The accounting polices used in preparing the condensed consolidated financial statements in this Form 10-Q are the same as those used in preparing the Consolidated Financial Statements for the year ended January 31, 2019, except for the change resulting from the adoption of Accounting Standard Codification Topic 842 (“ASC 842”), Leases. See Note 11 for further details related to the new lease accounting policy as a result of this adoption.

Recently Adopted Accounting Pronouncements

Leases

In February 2019, the Company adopted the guidance issued by the Financial Accounting Standards Board (“FASB”) related to leases. See Note 11 for further details related to this adoption, including policy and expanded disclosure requirements.

Recent Accounting Standards Not Yet Adopted

Internal-Use Software

In August 2018, the FASB issued Accounting Standards Update (“ASU’) 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (Q1 fiscal 2021 for AstroNova), with early adoption permitted. Implementation should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact this new guidance will have on its consolidated financial statements.

Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. This ASU is effective for annual periods beginning after December 15, 2019 including interim periods within those fiscal years (Q1 fiscal 2021 for AstroNova), with early adoption permitted. The provisions of ASU 2018-13 relating to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. The remaining provisions should be applied retrospectively to all periods presented upon their effective date. The Company is currently evaluating the impact this new guidance will have on its consolidated financial statements and related disclosures.

No other new accounting pronouncements, issued or effective during the nine months of the current year, have had or are expected to have a material impact on our consolidated financial statements.

Note 3 – Revenue Recognition

We derive revenue from the sale of (i) hardware, including digital color label printers and specialty OEM printing systems, portable data acquisition systems and airborne printers used in the flight deck and cabin of military, commercial and business aircraft, (ii) related supplies required in the operation of the hardware, (iii) repairs and maintenance of hardware and (iv) service agreements.

 

10

Revenues disaggregated by primary geographic markets and major product types are as follows:

Primary geographical markets:

 

		Three Months Ended								Nine Months Ended
(In thousands)		November 2, 2019				October 27, 2018				November 2, 2019				October 27, 2018
United States		$	21,831			$	21,542			$	64,471			$	60,752
Europe			7,059				7,573				22,408				23,292
Asia			1,396				1,560				7,063				4,653
Canada			1,441				1,860				4,346				5,836
Central and South America			1,019				921				3,232				3,078
Other			572				740				1,447				1,879
Total Revenue		$	33,318			$	34,196			$	102,967			$	99,490

Major product types:

 

		Three Months Ended								Nine Months Ended
(In thousands)		November 2, 2019				October 27, 2018				November 2, 2019				October 27, 2018
Hardware		$	12,160			$	13,096			$	37,514			$	37,989
Supplies			17,655				18,107				55,463				52,690
Service and Other			3,503				2,993				9,990				8,811
Total Revenue		$	33,318			$	34,196			$	1 02,967			$	99,490

Contract Assets and Liabilities

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 and were $387,000 and $373,000 at November 2, 2019 and January 31, 2019, respectively, and are recorded as deferred revenue in the condensed consolidated balance sheet. The Company recognized $279,000 of revenue during the nine month period ended November 2, 2019, related to the deferred revenue balance at January 31, 2019.

Contract Costs

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 based on the forecasted number of units sold over the estimated benefit term, which was estimated to be approximately 10 years. The balance of these contract assets at January 31, 2019 was $903,000. During the third quarter of the current year the Company recognized additional direct costs of $121,000. The Company amortized $82,000 of direct costs for the nine months ended November 2, 2019 and the balance of deferred incremental direct costs net of accumulated amortization at November 2, 2019 was $942,000, of which $117,000 is reported in other current assets and $825,000 is reported in other assets in the accompanying condensed consolidated balance sheet. The remaining contract costs are expected to be amortized over the estimated remaining period of benefit, which we currently estimate to be approximately seven years.

 

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Note 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, 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:

 

		Three Months Ended								Nine Months Ended
		November 2, 2019				October 27, 2018				November 2, 2019				October 27, 2018
Weighted Average Common Shares Outstanding – Basic			7,046,803				6,924,554				7,012,595				6,858,365
Effect of Dilutive Options, Restricted Stock Awards and Restricted Stock Units			151,795				242,074				259,840				197,760
Weighted Average Common Shares Outstanding – Diluted			7,198,598				7,166,628				7,272,435				7,056,125

For the three and nine months ended November 2, 2019, the diluted per share amounts do not reflect common equivalent shares outstanding of 238,477 and 206,592, respectively. For the three and nine months ended October 27, 2018, the diluted per share amounts do not reflect common equivalent shares outstanding of 228,600 and 333,175, respectively. These outstanding common equivalent shares were not included due to their anti-dilutive effect.

Note 5 – Intangible Assets

Intangible assets are as follows:

 

		November 2, 2019																January 31, 2019
(In thousands)		Gross Carrying Amount				Accumulated Amortization				Currency Translation Adjustment				Net Carrying Amount				Gross Carrying Amount				Accumulated Amortization				Currency Translation Adjustment				Net Carrying Amount
Miltope:
Customer Contract Relationships		$	3,100			$	(1,947	)		$	—			$	1,153			$	3,100			$	(1,723	)		$	—			$	1,377
RITEC:
Customer Contract Relationships			2,830				(988	)			—				1,842				2,830				(725	)			—				2,105
Non-Competition Agreement			950				(823	)			—				127				950				(681	)			—				269
TrojanLabel:
Existing Technology			2,327				(968	)			92				1,451				2,327				(711	)			140				1,756
Distributor Relations			937				(273	)			34				698				937				(200	)			56				793
Honeywell:
Customer Contract Relationships			27,243				(6,060	)			—				21,183				27,243				(3,869	)			—				23,374
Intangible Assets, net		$	37,387			$	(11,059	)		$	126			$	26,454			$	37,387			$	(7,909	)		$	196			$	29,674

There were no impairments to intangible assets during the periods ended November 2, 2019 and October 27, 2018. With respect to the acquired intangibles included in the table above, amortization expense of $1.1 million and $1.0 million has been included in the condensed consolidated statements of income for the three months ended November 2, 2019 and October 27, 2018, respectively. Amortization expense of $3.2 million and $3.1 million related to the above acquired intangibles has been included in the condensed consolidated statement of income for the nine months ended November 2, 2019 and October 27, 2018, respectively.

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

 

(In thousands)		Remaining 2020				2021				2022				2023				2024
Estimated amortization expense		$	1,050			$	4,071			$	3,983			$	3,978			$	3,975

 

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Note 6 – Inventories

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

 

(In thousands)		November 2, 2019				January 31, 2019
Materials and Supplies		$	21,116			$	17,517
Work-In-Process			1,586				1,633
Finished Goods			18,170				15,688
			40,872				34,838
Inventory Reserve			(5,278	)			(4,677	)
		$	35,594			$	30,161

Note 7 – Revolving Line of Credit

The Company has a revolving line of credit under its existing Credit Agreement with Bank of America. 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 Kroner. Amounts borrowed under the revolving credit facility bear interest at a rate per annum equal to, at the Company’s option, either (a) the LIBOR rate (or, in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.0% to 1.5% based on the Company’s consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal funds’ rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate or (iii) the LIBOR rate plus 1.00%, plus a margin that varies within a range of 0.0% to 0.5% based on the Company’s consolidated leverage ratio.

At November 2, 2019, $6.5 million has been drawn on the revolving line of credit. The outstanding balance bears interest at a weighted average annual rate of 5.26% and $93,000 and $39,000 of interest has been incurred on this obligation and included in other expense in the accompanying condensed consolidated income statement for the nine month periods ended November 2, 2019 and October 27, 2018, respectively. At November 2, 2019, there was $3.5 million available for borrowing under the revolving credit facility.

Following the completion of the third quarter of fiscal 2020, the Company entered into a Fourth Amendment to the Credit Agreement to, among other things, temporarily increase the revolving line of credit from $10.0 million to $17.5 million and modify certain of the financial covenants with which the Company must comply thereunder. For additional information on the amendment and the resulting changes to the terms of the agreement, see Note 17 – Subsequent Events.

The Company is required to pay a commitment fee on the undrawn portion of the revolving credit facility at the rate of 0.25% per annum.

Note 8 – Debt

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

 

(In thousands)		November 2, 2019				January 31, 2019
USD Term Loan (3.30% as of November 2, 2019 and 4.02% as of January 31, 2019); maturity date of November 20, 2022		$	9,000			$	11,250
USD Term Loan (3.30% as of November 2, 2019 and 4.02% as of January 31, 2019); maturity date of January 31, 2022			5,244				6,992
		$	14,244			$	18,242
Debt Issuance Costs, net of accumulated amortization			(124	)			(164	)
Current Portion of Term Loans			(5,116	)			(5,208	)
Long-Term Debt		$	9,004			$	12,870

 

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The schedule of required principal payments remaining during the next five years on long-term debt outstanding as of November 2, 2019 is as follows:

 

(In thousands)
Fiscal 2020, remainder		$	1,210
Fiscal 2021			5,208
Fiscal 2022			5,576
Fiscal 2023			2,250
Fiscal 2024			—
		$	14,244

Following the completion of the third quarter of fiscal 2020, the Company entered into a Fourth Amendment to its Credit Agreement with Bank of America governing the Company’s long-term debt. Refer to Note 17 – Subsequent Events for additional information on the Fourth Amendment and the resulting changes to the terms of the Credit Agreement.

 

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Note 9 – Derivative Financial Instruments and Risk Management

The Company has 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 the variable rate term loan borrowing by the Company. Both swaps have been designated as cash flow hedges of floating-rate borrowings.

The cross-currency interest rate swap agreement utilized by the Company effectively modifies the Company’s exposure to interest rate risk and foreign currency exchange rate risk by converting the Company’s floating-rate debt denominated in U.S. Dollars on our Danish subsidiary’s books to a fixed-rate debt denominated in Danish 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 involves 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 utilized by the Company on its term loan effectively modifies the Company’s exposure to interest rate risk by converting the Company’s floating-rate debt to fixed-rate debt for the next five years, thus reducing the impact of interest-rate changes on future interest expense. This swap involves 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.

The following table summarizes the notional amount and fair value of the Company’s derivative instrument:

 

Cash Flow Hedges		November 2, 2019												January 31, 2019
(In thousands)						Fair Value Derivatives												Fair Value Derivatives
		Notional Amount				Asset				Liability				Notional Amount				Asset				Liability
Cross-currency Interest Rate Swap		$	4,949			$	—			$	329			$	6,329			$	—			$	600
Interest Rate Swap		$	9,000			$	—			$	88			$	11,250			$	85			$	—

The following table presents the impact of the Company’s derivative instruments in our condensed consolidated financial statements for the three and nine months ended November 2, 2019 and October 27, 2018:

 

		Three Months Ended
		Amount of Gain (Loss) Recognized in OCI on Derivative								Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Expense)		Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Expense)
Cash Flow Hedge (In thousands)		November 2, 2019				October 27, 2018						November 2, 2019				October 27, 2018
Swap Contracts		$	80			$	283			Other Income (Expense)		$	(3	)		$	192
		Nine Months Ended
		Amount of Gain (Loss) Recognized in OCI on Derivative								Location of Gain (Loss) Reclassified from Accumulated OCI into Income  (Expense)		Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Expense)
Cash Flow Hedge (In thousands)		November 2, 2019				October 27, 2018						November 2, 2019				October 27, 2018
Swap Contracts		$	82			$	981			Other Income (Expense)		$	259			$	775

At November 2, 2019, the Company expects to reclassify approximately $0.2 million of net gains on the swap contracts from accumulated other comprehensive loss to earnings during the next 12 months due to changes in foreign exchange rates and the payment of variable interest associated with the floating-rate debt.

 

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Note 10 – Royalty Obligation

In fiscal 2018, AstroNova, Inc. entered into an Asset Purchase and License Agreement (the “Honeywell Agreement”) with Honeywell International, Inc. (“Honeywell”) to acquire an exclusive, perpetual, world-wide 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. Royalty payments are 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 mid double-digit 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 after-tax cost of debt for similar companies. As of November 2, 2019, the Company had paid an aggregate of $3.0 million of the guaranteed minimum royalty obligation. At November 2, 2019, the current portion of the outstanding guaranteed minimum royalty obligation of $2.0 million is to be paid over the next twelve months and is reported as a current liability and the remainder of $8.5 million is reported as a long-term liability on the Company’s condensed consolidated balance sheet. In addition to the guaranteed minimum royalty payments, the Company also incurred excess royalty expense of $0.1 million and $0.8 million, respectively, for the three and nine month periods ended November 2, 2019 and $0.7 million and $2.0 million, respectively, for the three and nine month periods ended October 27, 2018 which is included in cost of revenue in the Company’s condensed consolidated statements of income. A total of $0.4 million of excess royalty is payable and reported as a current liability on the Company’s condensed consolidated balance sheet at November 2, 2019.

Note 11 – Leases

Policy

On February 1, 2019 the Company adopted ASC 842, Leases. This new guidance requires a lessee to recognize assets and liabilities on the balance sheet for all leases, with the result being the recognition of a right of use (ROU) asset and a lease liability. The lease liability is equal to the present value of the minimum lease payments for the term of the lease, including any optional renewal periods determined to be reasonably certain to be exercised, using a discount rate determined at lease commencement. This discount rate is the rate implicit in the lease, if known; otherwise, the incremental borrowing rate for the expected lease term is used. The Company’s incremental borrowing rate approximates the rate the Company would have to pay to borrow on a collateralized basis over a similar term at lease inception. The value of the ROU asset is equal to the initial measurement of the lease liability plus any lease payments made to the lessor at or before the commencement date and any unamortized initial direct costs incurred by the lessee, less any unamortized lease incentives received.

There are two types of leases, operating leases and finance leases. Lease classification is determined at lease commencement. All of the Company’s leases are classified as operating leases. Operating lease expense is recognized on a straight-line basis over the lease term and included in general and administrative expense on the condensed consolidated statement of income. For operating leases, ROU assets are classified in other long-term assets, short-term lease liabilities are classified in other current liabilities, and long-term lease liabilities are classified in other long-term liabilities on the condensed consolidated balance sheet. On the cash flow statement, payments for operating leases are classified as operating activities.

The Company enters into lease contracts for certain of its facilities at various locations worldwide. At inception of a contract, the Company determines whether the contract is or contains a lease. If the Company has a right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the asset, then the contract contains a lease. Several of the Company’s lease contracts include options to extend the lease term and the Company includes the renewal options for these leases in the determination of the ROU asset and lease liability when the likelihood of renewal is determined to be reasonably certain.

 

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In addition, several of our lease agreements include non-lease components for items such as common area maintenance and utilities which are accounted for separately from the lease component.

Adoption Method and Impact

The Company applied ASC 842 to all leases in effect at February 1, 2019 and adopted the accounting standard using the non-comparative transition option, which does not require the restatement of prior years. Comparative information has not been adjusted and continues to be reported under the previous accounting guidance. The Company has elected the package of practical expedients, which allows entities to not reassess (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company has made an accounting policy election to apply the short-term exception, which does not require the capitalization of leases with terms of 12 months or less. On February 1, 2019, the Company recognized $2.0 million of ROU assets and lease liabilities on its consolidated balance sheet. The adoption did not have a material impact on the Company’s results of operations or cash flows.

Disclosure

Our leases have remaining lease terms of 1 to 12 years, some of which include options to extend the lease term for periods up to five years when it is reasonably certain the Company will exercise such options.

The company leases office space from an affiliate. This lease is classified as an operating lease with annual rental payments of approximately $64,000 and $66,000 in fiscal 2020 and 2021, respectively.

Balance sheet and other information related to our leases is as follows:

 

Operating Leases (In thousands)		Balance Sheet Classification		November 2, 2019
Lease Assets		Right of Use Assets		$	1,767
Lease Liabilities – Current		Other Liabilities and Accrued Expenses			429
Lease Liabilities – Long Term		Lease Liabilities			1,350

Lease cost information is as follows:

 

				Three Months Ended				Nine Months Ended
Operating Leases (In thousands)		Statement of Income Classification		November 2, 2019				November 2, 2019
Operating Lease Costs		General and Administrative Expense		$	119			$	329

 

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Maturities of operating lease liabilities are as follows:

 

(In thousands)		November 2, 2019
2020		$	94
2021			420
2022			354
2023			302
2024			275
Thereafter			564
Total Lease Payments			2,009
Less: Imputed Interest			(230	)
Total Lease Liabilities		$	1,779

As of November 2, 2019, the weighted-average remaining lease term and weighted-average discount rate for our operating leases are 5.7 years and 3.98%, 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.

Supplemental cash flow information related to leases is as follows:

 

		Three Months Ended				Nine Months Ended
(In thousands)		November 2, 2019				November 2, 2019
Cash paid for amounts included in the measurement of lease liabilities:		$	108			$	306

As previously disclosed in our fiscal year 2019 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum operating lease commitments that had initial or remaining non-cancelable lease terms in excess of one year at January 31, 2019 were as follows:

 

(In thousands)
2020		$	574
2021			520
2022			387
2023			294
2024			273
Thereafter			568
		$ 2,616

Note 12 – Accumulated Other Comprehensive Loss

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

 

(In thousands)		Foreign Currency Translation Adjustments				Cash Flow Hedges				Total
Balance at January 31, 2019		$	(852	)		$	34			$	(818	)
Other Comprehensive Loss before reclassification			(166	)			62				(104	)
Amounts reclassified from AOCL to Earnings			0				(201	)			(201	)
Other Comprehensive Loss			(166	)			(139	)			(305	)
Balance at November 2, 2019		$	(1,018	)		$	(105	)		$	(1,123	)

 

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

Note 13 – Share-Based Compensation

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, non-qualified stock options, stock appreciation rights, time or performance-based restricted stock units (PSUs), restricted stock units (RSUs) and restricted stock awards (RSAs). At our annual meeting of shareholders held on June 4, 2019, the 2018 Plan was amended to increase the number of shares of the Company’s common stock available for issuance by 300,000, bringing the total number of shares available for issuance under the 2018 Plan from 650,000 to 950,000, plus an additional number of shares equal to the number of shares subject to awards granted under previous equity incentive plans that are forfeited, cancelled, satisfied without the issuance of stock, otherwise terminated (other than by exercise), or, for shares of stock issued pursuant to any unvested award, reacquired by the Company 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 the Company’s common stock on the date of grant and expire after ten years. As of November 2, 2019, 161,375 unvested shares of restricted stock and options to purchase an aggregate of 146,000 shares were outstanding under the 2018 Plan.

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”). Both the 2007 Plan and the 2015 Plan have expired and no new awards may be issued under either, but outstanding awards will continue to be governed by those plans. As of November 2, 2019, 1,007 unvested shares of restricted stock and options to purchase an aggregate of 376,645 shares were outstanding under the 2007 Plan and 27,527 unvested shares of restricted stock and options to purchase an aggregate of 184,650 shares were outstanding under the 2015 Plan.

On January 31, 2019, the compensation committee of the Company’s board of directors adopted an Amended and Restated Non-Employee Director Annual Compensation Program (the “New Program”), which became effective as of February 1, 2019 and supersedes the prior program. Pursuant to the New Program, beginning with fiscal 2020, each non-employee director will automatically receive a grant of restricted stock on the date of their re-election to the Company’s board of directors. The number of whole shares to be granted will be 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 2020 is $60,000. To account for the partial year beginning on February 1, 2019 and continuing through the 2019 annual meeting, and thereby provide for the alignment of the timing of annual grants of restricted stock under the New Program with the election of directors at the annual meeting, a total of 4,340 shares of restricted stock were granted to the non-employee directors on February 1, 2019. A total of 11,560 shares were awarded to the non-employee directors as compensation under the New Program in the second quarter of fiscal 2020. Other than the shares granted on February 1, 2019, which vested on June 1, 2019, shares of restricted stock granted under the New Program will become vested on the first anniversary of the date of grant, conditioned upon the recipient’s continued service on the Board through that date.

In March 2019, the Company granted 47,474 RSUs and 50,148 PSUs to certain key employees.

Share-based compensation expense was recognized as follows:

 

		Three Months Ended								Nine Months Ended
(In thousands)		November 2, 2019				October 27, 2018				November 2, 2019				October 27, 2018
Stock Options		$	148			$	215			$	487			$	571
Restricted Stock Awards and Restricted Stock Units			371				290				1,074				757
Employee Stock Purchase Plan			6				5				15				11
Total		$	525			$	510			$	1,576			$	1,339

 

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