ASTRONOVA, INC. The following discussion and analysis are meant to provide material information relevant to an assessment of the financial condition and results of operations of our company, including an evaluation of the amounts of cash flows from operations and outside resources, liquidity and certain other factors that may affect future results so as to allow investors to better view our company from management's perspective. The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and other financial information included elsewhere in this annual report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on Form 10-K, including information with respect to our plans and strategy for our business and financing, includes forward-looking statements that involve risks and uncertainties. Carefully review the "Forward-Looking Statements" and "Risk Factors" sections of this annual report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a multi-national enterprise that leverages its proprietary data visualization technologies to design, develop, manufacture, distribute and service a broad range of products that acquire, store, analyze and present data in multiple formats. We organize our structure around a core set of competencies, including research and
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development, manufacturing, service, marketing and distribution. We market and sell our products and services through the following two segments:
• Product Identification ("PI") - offers color and monochromatic digital
label printers, over-printers and custom OEM printers. PI also provides
software to design, manage and print labeling and packaging images
locally and across networked printing systems, as well as all related
printing supplies such as pressure-sensitive labels, tags, inks, toners
and thermal transfer ribbons used by digital printers. PI also provides
on-site and remote service, spare parts and various service contracts.
• Test and Measurement ("T&M") - offers a suite of products and servicesthat acquire data from local and networked data streams and sensors as
well as wired and wireless networks. The T&M segment includes a line of
aerospace printers used to print hard copies of data required for the
safe and efficient operation of aircraft, including navigation maps,clearances, arrival and departure procedures, NOTAMS, flight itineraries,
weather maps, performance data, passenger data, and various air traffic
control data. Aerospace products also include aircraft networking systems
for high-speed onboard data transfer. T&M also provides repairs, service
and spare parts.
On August 4, 2022 , we completed the acquisition of Astro Machine, an
Illinois -based manufacturer of printing equipment, including label printers,
tabbers, conveyors, and envelope feeders, for aggregate consideration of
$17.1 million . Astro Machine is reported as part of our PI segment beginning
with the third quarter of fiscal 2023. Refer to Note 2, "Acquisition," in our
consolidated financial statements included elsewhere in this report for further
details.
We market and sell our products and services globally through a diverse
distribution structure of direct sales personnel, manufacturers' representatives
and authorized dealers that deliver a full complement of branded products and
services to customers in our respective markets. Our growth strategy centers on
organic growth through product innovation made possible by research and
development initiatives, as well as strategic acquisitions that fit into or
complement existing core businesses. In fiscal 2023, 2022, and 2021, revenue
from customers in various geographic areas outside the United States , primarily
in Western Europe , Canada and Asia , amounted to $50.6 million , $49.3 million ,
and $45.1 million , respectively.
We maintain an active program of product research and development. We spent
approximately $6.8 million in both fiscal 2023 and 2022, and $6.2 million in
fiscal 2021 on Company-sponsored product development. We are committed to
continuous product development as essential to our organic growth and expect to
continue our focus on research and development efforts in fiscal 2024 and
beyond.
We also continue to invest in sales and marketing initiatives by expanding and improving the existing sales force and using various marketing campaigns to achieve our goals of sales growth and increased profitability.
COVID-19 Update
All of our global operations were materially adversely affected by the worldwide
COVID-19 pandemic and the related supply-chain disruptions. In the aftermath of
the immediate severe impacts of COVID-19 on our operations and financial
performance the changes in our customers' purchasing behavior, the post-pandemic
impact of inflation from macroeconomic factors, and the continued and lingering
structural impacts on our global supply chain, particularly with respect to the
availability and costs of electronic components, have made planning for customer
demand and manufacturing production more difficult. Also, it has led to a rise
in the cost of a number of classes of acquired goods for both the T&M and PI
segments. We will continue to evaluate the impact of COVID-19 and its aftermath
effects on our business, results of operations and cash flows throughout fiscal
2024, including the potential impacts on various estimates and assumptions
inherent in the preparation of the consolidated financial statements.
Since the COVID-19 pandemic began we have experienced difficulties in obtaining
raw materials and components for our products. Some of the structural
dislocations in the global economy that were triggered by the pandemic are
prolonging these difficulties. Particularly with respect to certain electronic
components for legacy
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-------------------------------------------------------------------------------- products in our T&M segment, availability has been curtailed and may not recover, and as a result we have had to accelerate product redesign and as quickly transition customers to products with more viable long-term product configurations. We expect to incur substantial costs in doing so but are unable to accurately estimate the financial impact due to the rapidly changing environment. We also have had to incur additional costs, such as higher shipping fees (i.e., air rather than ocean freight) and though these have abated to a degree, they have not returned to pre-pandemic levels. These factors have negatively impacted our efficiency, have delayed shipments for each of the fiscal quarters of fiscal 2023, and have caused what we believe are product shortages. We are addressing these issues through long-range planning and procuring higher inventory levels for the affected items to help mitigate potential shortages whenever practicable. For our T&M segment, we are also monitoring and reacting to extended lead times on electronic components, and utilizing a variety of strategies, including blanket orders, vendor-bonded inventories, extended commitments to our supply base, and seeking alternative suppliers. Additionally, we have taken actions to increase regular contact with our essential vendors and increased our forecasting horizon for our products to help us better manage our supply chain. In some cases, we are working with our vendors to help them procure components. Similarly, in our PI segment, we are increasing our inventory levels to ensure the adequacy of the supplies we sell to customers who use the printers we have sold to them. Our strategies to counteract these supply chain dislocations have significantly increased the amount of inventory we maintain to support our product sales. We have also experienced several situations where component shortages and scarcity have required us to pay significantly higher costs to obtain those components, particularly electronic components and circuit board assemblies in the T&M segment and inks and printer machine parts in the PI segment. We will continue to monitor our supply chain going forward and update our mitigation strategies as we determine appropriate. We are not able to predict how current supply chain difficulties will develop in the future, and if the steps we are taking are not effective, it could have a material adverse impact on our business and results of operations.
Product Identification Update
The COVID-19 pandemic impacted our PI business by limiting our ability to meet with customers to demonstrate our products at trade shows and on-site in their facilities was curtailed. We partially countered this through a variety of virtual, on-line selling and digital marketing strategies, a number of which we continue to emphasize today. The degree to which post-pandemic selling practices will revert to traditional practices, and the ultimate mix of customer engagement methods of face-to-face selling versus digital selling methods are just starting to recover. For example, throughout fiscal 2023 we attended numerous trade shows, but demand generation through those selling methods has not fully recovered and digital marketing has, we believe, become a more permanent element of our go-to-market strategy. This has required us to shift resources to those technologies. Further, the reliability of timely delivery of acceptable quality printer components from one of our suppliers has deteriorated post-pandemic causing us to incur additional direct procurement costs to carry higher inventories to assure adequate supplies to satisfy customers, as well as causing us to incur additional warranty and technical service costs to offset those impacts and to invest considerable time and resources with that supplier to improve their performance.
Test & Measurement Update
The aerospace industry, which we serve through our aerospace product line, was
significantly disrupted by the COVID-19 pandemic, because of the severe decline
in the demand for air travel, demand for aircraft, and a general curtailment of
aircraft production rates. This had a material adverse impact on our financial
results. Although air travel demand and aircraft production demand have
improved, the direct and secondary impacts of the demand decline have somewhat
abated, they have not recovered completely. As a result, demand for our products
has not fully recovered to pre-pandemic levels. We believe that it will be at
least another two or more years before we reach full revenue recovery due to the
lingering impacts of the pandemic era on the economic structure of the airline
industry. General economic conditions could also still become a negative factor
impacting demand for new aircraft, which could potentially stall or reverse
current favorable trends. If this were to happen individually or in combination,
these factors would be difficult to respond to, which could have a material
adverse impact on our business operations and financial results.
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Results of Operations
Fiscal 2023 compared to Fiscal 2022
The following table presents the revenue of each of our segments, as well as the percentage of total revenue and change from the prior year.
($ in thousands) 2023 2022
As a % of % Change As a % of
Revenue Total Revenue Over Prior Year Revenue Total Revenue
P I $ 103,089 72.3 % 13.4 % $ 90,915 77.4 %
T&M 39,438 27.7 % 48.5 % 26,565 22.6 %
Total $ 142,527 100.0 % 21.3 % $ 117,480 100.0 %
Net revenue in fiscal 2023 was $142.5 million , a 21.3% increase compared to net
revenue of $117.5 million for fiscal 2022. Current year revenue through domestic
channels was $91.8 million , an increase of 34.8% from prior year domestic
revenue of $68.2 million . International revenue of $50.6 million for fiscal 2023
increased 2.7% compared to prior year international revenue of $49.3 million .
Fiscal 2023 international revenue reflects an unfavorable foreign exchange rate
impact of $3.5 million , compared to a favorable foreign exchange rate impact of
$1.1 million in fiscal 2022.
Hardware revenue in fiscal 2023 was $42.4 million , an $11.0 million or 34.8%
increase compared to fiscal 2022 hardware revenue of $31.5 million due to
increased hardware sales in both the T&M and PI segments. T&M hardware sales
increased 44.2% or $7.5 million compared to the prior year primarily due to
increased sales in our aerospace printer product line. Current year hardware
sales in the PI segment increased 23.9% or $3.5 million compared to the prior
year, predominately as a result of the August 2022 acquisition of Astro Machine.
The increase in PI hardware sales for the current year was slightly offset by a
decline in sales of our TrojanLabel product line printers.
Revenue from supplies in fiscal 2023 was $82.1 million , a 12.1% or $8.8 million
increase compared to fiscal 2022 supplies revenue of $73.2 million . Supplies
revenue increased in both the PI and T&M segment in the current year, with the
increase primarily due to the contribution of $6.7 million of supply sales from
the newly acquired Astro Machine in the PI segment. Also contributing to the
increase in current year supply revenue was the increase in paper supply revenue
for the aerospace printers in the T&M segment and the increased sales of
supplies in our TrojanLabel product line in the PI segment.
Service and other revenue in fiscal 2023 was $18.0 million , a 41.3% increase
compared to fiscal 2022 service and other revenue of $12.7 million . The increase
is due primarily to significantly increased repair and parts revenue for
aerospace printer products in the T&M segment due to the impact of increased
flight hour usage and pricing increases. Also contributing to the current year
increase was Astro Machine parts revenues included since the acquisition, offset
by modest declines in aftermarket parts sales for Quick Label related products
in the PI segment.
Gross profit was $48.2 million for fiscal 2023, reflecting a 10.1% increase
compared to fiscal 2022 gross profit of $43.7 million . Our gross profit margin
of 33.8% in fiscal 2023 reflects a 3.4 percentage point decrease compared to
fiscal 2022 gross profit margin of 37.2%. The lower gross profit margin for the
current year compared to the prior year is primarily attributable to the
inclusion of Astro Machine for the six months since its acquisition, because of
the impact of its lower gross margin business model, plus the impact of the
employment retention tax credit ("ERC") in the prior year, which reduced
manufacturing payroll taxes, a component of cost of revenue, in the amount of
$1.7 million in the second quarter of the prior year. Lastly, excess royalties
(above the minimum guaranteed royalty amount), which are payable in connection
with our license from Honeywell to produce aircraft cockpit printers for two
narrow-body aircraft programs increased due to higher volumes of sales.
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Operating expenses for the current year were $42.7 million , representing an 8.2%
increase from the prior year's operating expenses of $39.5 million .
Specifically, selling and marketing expenses of $24.5 million in fiscal 2023
increased 5.5% from the prior year amount of $23.2 million . The increase in
selling and marketing expenses for the current year is primarily due to a
decrease in payroll taxes in the second quarter of the prior year related to the
ERC, which reduced payroll taxes in the amount of $0.8 million , as well as the
current year increase in employee wages and travel and entertainment expenses.
The current year increase in selling and marketing expenses was partially offset
by a decrease in commissions and advertising and trade show expenses. General
and administrative expenses increased 19.7% to $11.4 million in the current year
compared to $9.6 million in the prior year, primarily due to an increase in
outside service fees and employee wages, and the impact of the ERC, which
reduced manufacturing payroll taxes in the amount of $0.3 million in the third
quarter of the prior year, partially offset by a decrease in bonus and
advertising and trade show expenses. Research & development ("R&D") costs in
fiscal 2023 of $6.8 million remained relatively unchanged from fiscal 2022, as
increases in wages and benefits were substantially offset by decreases in bonus
and supplies and repair expenses. The R&D spending level for fiscal 2023
represents 4.8% of net revenue, compared to the prior year level of 5.7%.
Other expense in fiscal 2023 was $2.0 million compared to other income of
$2.8 million in fiscal 2022. Current year expense includes $1.7 million of
interest expense on our debt and revolving line of credit and $0.4 million of
net foreign exchange loss, offset by net other income of $0.1 million . Prior
year other income includes $4.5 million related to the forgiveness of the loan
we received under the Paycheck Protection Program (the "PPP"), partially offset
by $0.7 million related to the write-off of our Oracle EnterpriseOne ERP system
and related prepaid service and maintenance contracts as a result of the full
implementation of a new ERP system in our US-based operations in the fourth
quarter of fiscal 2022, interest expense on debt of $0.7 million , and net
foreign exchange loss of $0.3 million .
We recognized $0.7 million of income tax expense for the current fiscal year,
resulting in an effective tax rate of 22.0% compared to 8.6% in fiscal 2022. The
increase in the effective tax rate in fiscal 2023 from fiscal 2022 is primarily
related to the absence of the impact of the PPP loan forgiveness, which is
tax-exempt income that was a one-time item that reduced the rate in fiscal 2022.
Specific items increasing the effective tax rate in fiscal 2023 include the
change in reserves related to uncertain tax positions under ASC 740 and an
increase in the valuation allowance recorded on our China net operating losses.
This increase was offset by state taxes, return to provision adjustments,
share-based compensation, R&D tax credits, and foreign derived intangible income
("FDII") deduction. During fiscal 2022, we recognized $0.6 million of income tax
expense for the prior fiscal year, resulting in an effective tax rate of 8.6%.
Specific items decreasing the effective tax rate include PPP loan forgiveness
tax-exempt income, R&D tax credits, foreign derived intangible income ("FDII")
deductions, and a change in reserves related to ASC 740 liabilities. This
decrease was offset by state taxes, return to provision adjustments, and taxes
on foreign earnings. The PPP loan forgiveness is excluded from taxable income.
Net income for fiscal 2023 was $2.7 million , or $0.36 per diluted share. Net
income for fiscal 2022 was $6.4 million , or $0.88 per diluted share. The results
for the current year were impacted by expenses of $0.7 million ($0.5 million net
of tax, or $0.07 per diluted share) related to transaction costs of the Astro
Machine acquisition. The results for the prior period were impacted by income of
$4.5 million ($4.4 million net of tax, or $0.60 per diluted share) related to
the forgiveness of our PPP loan, income of $2.1 million ($1.6 million net of
tax, or $0.22 per diluted share) related to the net ERC and expense of
$0.7 million ($0.5 million net of tax, or $0.07 per diluted share) related to
the write-off of our Oracle EnterpriseOne ERP system and related prepaid service
and maintenance contracts.
Fiscal 2022 compared to Fiscal 2021
For a comparison of our results of operations for the fiscal years endedJanuary 31, 2022 , andJanuary 31, 2021 , see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our annual report on Form 10-K for the fiscal year endedJanuary 31, 2022 , filed with theSEC onApril 18, 2022 . 28
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Segment Analysis
We report two segments consistent with our product revenue groups: PI and T&M.
Segment performance is evaluated based on the operating segment's profit (loss)
before corporate and financial administration expenses. The following table
summarizes selected financial information by segment.
Segment Operating Profit Segment Operating Profit (Loss)
($ in thousands) Revenue (Loss) as a % of Revenue
2023 2022 2021 2023 2022 2021 2023 2022 2021
P I $ 103,089 $ 90,915 $ 90,268 $ 7,889 $ 10,411 $ 12,885 7.7 % 11.5 % 14.3 %
T&M 39,438 26,565 25,765 8,989 3,398 (1,032 ) 22.8 % 12.8 % (4.0 )%
Total $ 142,527 $ 117,480 $ 116,033 16,878 13,809 11,853 11.8 % 11.8 % 10.2 %
Corporate Expenses 11,435 9,553 9,420
Operating Income 5,443 4,256 2,433
Other Income (Expense), Net (2,033 ) 2,778 (254 )
Income Before Income Taxes 3,410 7,034 2,179 Income Tax Provision 749 605 895 Net Income$ 2,661 $ 6,429 $ 1,284 Product Identification Revenue from the PI segment increased 13.4% in fiscal 2023, with revenue of$103.1 million compared to revenue of$90.9 million in the prior year. The current year increase is attributable to the contribution of the newly acquired Astro Machine, which provided revenue of$12.5 million for the current year. Trojan Label related product supply revenue also grew in fiscal 2023 compared to the prior year due to the larger installed base of these printers. The current year increase in PI revenue was slightly offset by declines in the sales of Trojan label hardware products resulting from the market reaction to quality problems caused by quality and reliability issues we faced from one supplier. Quick Label revenues were essentially flat as compared to the prior year. At the current time, we expect PI revenue to increase in fiscal 2024 due to the impact of a full year of Astro Machine revenue and recovery in both hardware and supplies in the other product lines, partly as the result of new product introductions. PI current year segment operating profit was$7.9 million with a profit margin of 7.7%, compared to the prior year segment operating profit of$10.4 million and related profit margin of 11.5%. Despite the inclusion of$1.6 million in operating profit contribution from Astro Machine, the primary reason for the decline in operating profit and margin was the inclusion in fiscal 2022 of$1.4 million of net benefit from the ERC, which reduced payroll taxes in the segment. The decrease in current year segment operating profit and margin, was also due to the result of a higher relative mix of lower gross profit product sales, higher travel and trade show expense, and increased warranty expenses.
Test & Measurement
Revenue from the T&M product group was$39.4 million for fiscal 2023, a 48.5% increase compared to revenue of$26.6 million in the prior year. The current year increase in T&M revenue is primarily due to a 44.2% or$7.5 million increase in hardware sales resulting primarily from increased aerospace printer product unit volume. Demand for printers, especially for narrow body aircraft, has increased due to the post-pandemic recovery in air travel demand and new orders of airplanes and the corresponding increase in production rates. The sales of printers for wide-body aircraft have increased but at much slower rates compared with narrow body demand. Sales of ToughSwitch ethernet products also recovered to levels consistent with the fiscal 2019 through 29 -------------------------------------------------------------------------------- fiscal 2021 period after a large decline in fiscal 2022, and we currently expect comparable revenue from those products in fiscal 2024. Our current expectation is that printers narrow-body aircraft will continue to recover to pre-pandemic levels over the next two years, although at a slower rate than the recovery in fiscal 2023. We believe any recovery in shipments for larger wide-body aircraft will take longer. The increase in fiscal 2023 hardware revenue in the T&M segment was also impacted by$1.1 million in revenue recognized in the fourth as the result of successful claims for component cost increases for printer shipments to one customer throughout most of fiscal 2023 as described in Note 3, "Revenue Recognition," in our consolidated financial statements included elsewhere in this report. In the fourth quarter, we recognized revenue of$0.8 million in connection with a new Asset Purchase and License Agreement withHoneywell Inc. ("New HW Agreement") as described in Note 12, "Royalty Obligation," in our consolidated financial statements included elsewhere in this report. The current year increase in T&M revenue was additionally favorably impacted by increased repair, parts and paper supply revenue related to aerospace printers, as flight hours and product utilization increased. At this time, we believe the outlook for T&M supplies, service and other revenue is favorable as the expected higher flight hours in commercial aviation should correlate favorably to higher aerospace printer supplies, parts and repair revenue. T&M current year segment operating profit was$9.0 million resulting in a 22.8% profit margin compared to the prior year segment operating profit of$3.4 million and related operating margin of 12.8%. The increased profit and margins were primarily attributable to the robust turnaround in revenue, particularly in repair, parts and supplies revenues at high margins, and were offset by the impact of higher components costs, as well as the fact that prior year's operating profit included the impact of$0.8 million in net employee retention tax credits that reduced manufacturing and operating costs. Also contributing to the increase was the favorable impact in the fourth quarter of the receipt of improved pricing on certain contracts that related to the entire year and the impact of the New HW Agreement. Selling, marketing and administrative expense grew in total by$0.6 million in support of the revenue growth, which was a significantly lower rate than revenue growth, demonstrating favorable operating leverage.
Liquidity and Capital Resources
Overview
Historically, our primary sources of short-term liquidity have been cash generated from operating activities and borrowings under our revolving credit facility. In fiscal 2023, we used our credit facilities, as further described below, to acquire Astro Machine. We also used our credit facilities and operating cash flow to fund increases in inventories. Substantial increases in inventories were the result of the need to support higher levels of shipments in the aerospace product lines within our T&M segment, and the buildup of inventory buffers to respond to supply chain risks. In the fourth quarter of fiscal 2023, we were able to reduce our outstanding line of credit balance by$4.0 million . Capital spending was very low in fiscal 2023 compared to our historical levels of spending. We believe that in the coming year, cash flow generation from operations and available unused credit capacity under our credit facility will support our anticipated needs. In fiscal 2024 (after required debt amortization and payment of minimum guaranteed royalty payments to Honeywell), we will be focused on inventory reduction and reduction of debt outstanding under our revolving credit facility, to the degree possible as constrained by supply chain management challenges. We also anticipate that we will have the capacity to spend$1.5 million to$2.0 million in capital to upgrade production machinery to support planned revenue growth and cost reduction objectives. Finally, if further acquisition opportunities develop that would require additional cash above our current available capacity, based on regular communication with our lender, we believe that our current operating performance and the reduction in leverage ratios as measured by the covenants within our credit facilities since the acquisition of Astro Machine would permit us to obtain sufficient additional debt financing, barring any unforeseen changes in the credit and capital markets. . 30
-------------------------------------------------------------------------------- In connection with our purchase of Astro Machine onAugust 4, 2022 , we entered into a Second Amendment to Amended and Restated Credit Agreement (the "Second Amendment") withBank of America, N.A ., as lender (the "Lender"). The Second Amendment amended the Amended and Restated Credit Agreement dated as ofJuly 30, 2020 , as amended by the First Amendment to Amended and Restated Credit Agreement, dated as ofMarch 24, 2021 , and the LIBOR Transition Amendment, dated as ofDecember 24, 2021 (the "Existing Credit Agreement," and the Existing Credit Agreement as amended by the Second Amendment, the "Amended Credit Agreement"), between the Company and the Lender. The Amended Credit Agreement provides for (i) a new term loan in the principal amount of$6.0 million , which term loan was in addition to the existing term loan outstanding under the Existing Credit Agreement in the principal amount of$9.0 million as of the effective date of the Second Amendment, and (ii) an increase in the aggregate principal amount of the revolving credit facility available thereunder from$22.5 million to$25.0 million . Under the Amended Credit Agreement, revolving credit loans may continue to be borrowed, at our option, inU.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars orDanish Kroner . While we expected that as a result of the impact of the COVID-19 pandemic, some of our customers would experience liquidity pressure and be unable to pay us for products on a timely basis, in general, our recent receivables collection experience has been consistent with our historical experience and a significant deterioration in receivables collection has not occurred. In response to the COVID-19 pandemic and related economic dislocation, we have implemented and will continue to implement a variety of expense reduction and cash preservation initiatives. OnApril 27, 2020 , our board of directors suspended our quarterly cash dividend beginning with the second quarter of our fiscal year 2021. AtJanuary 31, 2023 , our cash and cash equivalents were$3.9 million . During fiscal 2023, we borrowed a net of$15.9 million on our revolving line of credit, and atJanuary 31, 2023 , we had$9.1 million available for borrowing under that facility. Indebtedness Term Loan The Amended Credit Agreement requires that the term loan be paid in quarterly installments on the last day of each of our fiscal quarters over the term of the Amended Credit Agreement on the following repayment schedule: the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or aboutOctober 31, 2022 throughJuly 31, 2023 is$375,000 ; and the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or aboutOctober 31, 2023 throughApril 30, 2027 is$675,000 . The entire remaining principal balance of the term loan is required to be paid onAugust 4, 2027 . 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 thanAugust 4, 2027 , and any outstanding revolving loans thereunder will be due and payable in full, and the revolving credit facility will terminate, on such date. We may reduce or terminate the revolving line of credit at any time, subject to certain thresholds and conditions, without premium or penalty. The loans under the Amended Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from (a) net cash proceeds from certain dispositions of property, (b) net cash proceeds from certain issuances of equity, (c) net cash proceeds from certain issuances of additional debt and (d) net cash proceeds from certain extraordinary receipts. 31 -------------------------------------------------------------------------------- Amounts repaid under the revolving credit facility may be reborrowed, subject to our continued compliance with the Amended Credit Agreement. No amount of the term loan that is repaid may be reborrowed. The interest rates under the Amended Credit Agreement 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 Amended Credit Agreement (or, in the case of revolving credit loans denominated in a currency other thanU.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.60% to 2.50% 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 plus 1.00%, or (iv) 0.50%, plus a margin that varies within a range of 0.60% to 1.50% 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 0.35% based on our consolidated leverage ratio. We must comply with various customary financial and non-financial covenants under the Amended Credit Agreement. The financial covenants under the Amended Credit Agreement consist of a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio and a minimum consolidated asset coverage ratio. The primary non-financial covenants limit our and our subsidiaries' ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on our or our subsidiaries' capital stock, to repurchase or acquire our or our subsidiaries' capital stock, to conduct mergers or acquisitions, to sell assets, to alter our or our subsidiaries' capital structure, to make investments and loans, to change the nature of our or our subsidiaries' business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the Amended Credit Agreement, certain of which provisions were modified by the Second Amendment. As ofJanuary 31, 2023 , we believe we are in compliance with all of the covenants in the Credit Agreement. The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Amended Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries' significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or a change of control. Our obligations under the Amended Credit Agreement continue to be secured by substantially all of our personal property assets (including a pledge of the equity interests we hold inANI ApS ,AstroNova GmbH and AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property inWest Warwick, Rhode Island , and are guaranteed by, and secured by substantially all of the personal property assets of Astro Machine.
PPP Loan
OnMay 6, 2020 , we entered into a Loan Agreement with and executed a promissory note in favor ofGreenwood Credit Union ("Greenwood") pursuant to which we borrowed$4.4 million (the "PPP Loan") from Greenwood pursuant to the Paycheck Protection Program (the "PPP") administered by theUnited States Small Business Administration (the "SBA") and authorized by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), enacted onMarch 27, 2020 . The terms of the PPP Loan were subsequently revised in accordance with the provisions of the Paycheck Protection Flexibility Act of 2020 (the "PPP Flexibility Act"), which was enacted onJune 5, 2020 .
The PPP Loan, which would have matured on
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On June 15, 2021 , Greenwood 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
the extinguishment of debt in Other Income (Expense) in our condensed
consolidated income statement for the year ended January 31, 2022 .
Cash Flow
The statements of cash flows for the years endedJanuary 31, 2023 , 2022, and 2021 are included on page F-9 of this Form 10-K. Net cash used by operating activities was$2.9 million in fiscal 2023 compared to net cash provided by operating activities of$1.4 million in the previous year. The increase in net cash used by operations for the current year is primarily due to an$11.5 million increase in cash used for working capital. The changes in accounts receivable, inventory, income taxes, accounts payable and accrued expenses for the current year decreased cash by$14.3 million in fiscal 2023 compared to$2.8 million in the prior year. The increase in cash used for operations for fiscal 2023 was partially offset by the$3.1 million of ERC receivable received in the first quarter of the current year. Cash from operations for fiscal 2022 was also impacted by the$3.1 million ERC receivable and the$4.5 million gain on the forgiveness of the PPP Loan. The accounts receivable balance increased to$21.6 million atJanuary 31, 2023 , compared to$17.1 million atJanuary 31, 2022 . The increase in the accounts receivable balance is related to sales product mix in fiscal 2023 compared to the prior year, as well as the addition of Astro Machine. The days sales outstanding increased to 49 days at year end compared to 45 days at the end of fiscal 2022 contributing to the higher receivables balance atJanuary 31, 2023 . The days sales outstanding increase in the current year is due to customer mix, as aerospace receivables typically take longer to collect. The year-end inventory balance increased to$51.3 million atJanuary 31, 2023 versus$34.6 million atJanuary 31, 2022 , a$16.7 million increase from the prior year end. The increase in our inventory balance is primarily due to difficulty in the supply chain environment, including increased pricing and long lead times to obtain components and supplies, which has required us to increase our component and supply buffer stock to support the demands of our customers in our PI segment. We have also experienced increased inventory levels related to our T&M products to maintain our targeted inventory levels as a result of increased sales in that segment and parts shortage issues. In addition, the acquisition of Astro Machine resulted in increased levels of inventory to support their operations. Inventory days on hand increased to 176 days at the end of the current quarter from 156 days at the prior year end. This increase in working capital has been funded in part by borrowings under our credit facilities and has increased our interest expense.
Net cash used by investing activities for fiscal 2023 was
Net cash provided by financing activities for fiscal 2023 was$18.8 million . Cash provided from financing activities for fiscal 2023 includes$15.9 million for borrowings under the revolving line of credit and$6.0 million of proceeds from long term borrowings. Cash outflows for financing activities for fiscal 2022 include principal payments on long-term debt and the guaranteed royalty obligation of$1.0 million and$2.0 million , respectively.
Fiscal 2022 compared to Fiscal 2021
For a comparison of our cash flow for the fiscal years endedJanuary 31, 2022 andJanuary 31, 2021 , see "Part II, Item 7. Management's Discussion and Analysis of Liquidity and Capital Resources" in our annual report on Form 10-K for the fiscal year endedJanuary 31, 2022 , filed with theSEC onApril 18, 2022 .
Contractual Obligations, Commitments and Contingencies
As of
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The lease arrangements are for certain of our facilities at various locations
worldwide. As of January 31, 2023 , we had fixed lease payment obligations of
$0.8 million , with $0.3 million due within 12 months. Refer to Note 13,
"Leases," in our audited consolidated financial statements included in this
Annual Report on Form 10-K for further details.
Debt arrangements under our Amended Credit Agreement with
We are subject to a guaranteed minimum royalty payment obligation over the next five years pursuant to the Honeywell Agreements, which, atJanuary 31, 2023 included a balance due of$5.1 million , with$1.7 million due within 12 months. Refer to Note 2 "Acquisitions" and Note 12, "Royalty Obligation," in our audited consolidated financial statements included in this Annual Report on Form 10-K for further details. In order to meet our manufacturing demands and, in some cases, lock in particular pricing structures for specific goods used in manufacturing, we enter into purchase commitments with our suppliers. AtJanuary 31, 2023 our purchase commitments totaled$25.8 million , with$22.8 million due within 12 months, some of which are non-cancelable. We are also subject to contingencies, including legal proceedings and claims arising out of our business that cover a wide range of matters, such as: contract and employment claims; workers' compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided, or covered by insurance, will not have a material adverse effect on our consolidated financial position or results of operations. It is possible, however, that our results of operations for any future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements. These judgments and estimates are based on our historical experience, current trends and information available from other sources, as appropriate. We do not believe there is a great likelihood that materially different amounts would be reported using different assumptions pertaining to the accounting policies described below, however, if actual conditions differ from the assumptions used in our judgments, our financial results could be materially different from our estimates.
We believe the following critical accounting policies require significant judgments and estimates in the preparation of our consolidated financial statements:
Revenue Recognition: We recognize revenue in accordance with Accounting Standards Codification (ASC) 606, "Revenue from Contracts with Customers." Under ASC 606, based on the nature of our contracts, we recognize most of our revenue upon shipment, which is when the performance obligation has been satisfied.
Our accounting policies relating to the recognition of revenue under ASC 606 require management to make estimates, determinations and judgments based on historical experience and on various other assumptions, which
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include (i) the existence of a contract with the customer, (ii) the
identification of the performance obligations in the contract, (iii) the value
of any variable consideration in the contract, (iv) the standalone selling price
of multiple obligations in the contract, for the purpose of allocating the
consideration in the contract, and (v) determining when a performance obligation
has been met. Recognition of revenue based on incorrect judgments, including the
identification of performance obligation arrangements as well as the pattern of
delivery for those services, could result in inappropriate recognition of
revenue, or incorrect timing of revenue recognition, which could have a material
effect on our financial condition and results of operations.
We recognize revenue for non-recurring engineering (NRE) fees, as necessary, for
product modification orders upon completion of agreed-upon milestones. Revenue
is deferred for any amounts received prior to completion of milestones. Certain
of our NRE arrangements include formal customer acceptance provisions. In such
cases, we determine whether we have obtained customer acceptance for the
specific milestone before recognizing revenue.
Infrequently, we receive requests from customers to hold product being purchased
from us for the customers' convenience. We recognize revenue for such bill and
hold arrangements in accordance with the guidance provided by ASC 606, which
requires the transaction to meet the following criteria in order to determine
that the customer has obtained control: (a) the reason for the bill and hold is
substantive, (b) the product has separately been identified as belonging to the
customer, (c) the product is currently ready for physical transfer to the
customer, and (d) we do not have the ability to use the product or direct it to
another customer.
Allowance for Doubtful Accounts: Accounts receivable consists primarily of
receivables from our customers arising from the sale of our products. We
actively monitor our exposure to credit risk through the use of credit approvals
and credit limits. Accounts receivable is presented net of reserves for doubtful
accounts.
We estimate the collectability of our receivables and establish allowances for
accounts receivable that we estimate to be uncollectible. We base these
allowances on our historical collection experience, the length of time our
accounts receivable are outstanding and the financial condition of individual
customers. In situations where we are aware of a specific customer's inability
to meet its financial obligation, such as in the case of a bankruptcy filing, we
assess the need for a specific reserve for bad debts. We believe that our
procedure for estimating such amounts is reasonable and historically has not
resulted in material adjustments in subsequent periods. Bad debt expense was
less than 1% of net sales in each of fiscal 2023 and 2022.
Warranty Claims: We offer warranties on some of our products. We establish a
reserve for estimated costs of warranties at the time the product revenue is
recognized. This reserve requires us to make estimates regarding the amounts
necessary to settle future and existing claims using historical data on products
sold as of the balance sheet date. The length of the warranty period, the
product's failure rates, and the customer's usage affect estimated warranty
cost. If actual warranty costs differ from our estimated amounts, future results
of operations could be affected adversely. Warranty cost is recorded as cost of
revenue, and the reserve balance recorded as an accrued expense. While we
maintain product quality programs and processes, our warranty obligation is
affected by product failure rates and the related corrective costs. If actual
product failure rates and/or corrective costs differ from the estimates, we
revise our estimated warranty liability accordingly.
Inventories: Inventories are stated at the lower of average and standard cost or
net realizable value. The process for evaluating and recording obsolete and
excess inventory provisions consists of analyzing the inventory supply on hand
and estimating the net realizable value of the inventory based on historical
experience, current business conditions and anticipated future revenue. We
believe that our procedures for estimating such amounts are reasonable and
historically have not resulted in material adjustments in subsequent periods
when the estimates are adjusted to actual experience.
Income Taxes: A valuation allowance is established when it is "more-likely-than-not" that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence must be
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considered, including our performance, the market environment in which we
operate, length of carryforward periods, existing revenue backlog and future
revenue projections. If actual factors and conditions differ materially from the
estimates made by management, the actual realization of the net deferred tax
assets or liabilities could vary materially from the amounts previously
recorded. At January 31, 2023 , we had provided valuation allowances for future
tax benefits resulting from certain domestic R&D tax credits, foreign tax credit
carryforwards, and China net operating losses, all of which are expected to
expire unused.
The calculation of tax liabilities involves significant judgment in estimating
the impact of uncertainties in the application of complex tax laws and
regulations in a multitude of jurisdictions. Although guidance on the accounting
for uncertain income taxes prescribes the use of a recognition and measurement
model, the determination of whether an uncertain tax position has met those
thresholds will continue to require significant judgment by management. If the
ultimate resolution of tax uncertainties is different from what we have
estimated, our income tax expense could be materially impacted.
Business Combinations: We account for business acquisitions under the
acquisition method of accounting in accordance with ASC 805, ''Business
Combinations,'' where the total purchase price is allocated to the tangible and
identified intangible assets acquired and liabilities assumed based on their
estimated fair values. The purchase price is allocated using the information
currently available, and may be adjusted, up to one year from acquisition date,
after obtaining more information regarding, among other things, asset
valuations, liabilities assumed and revisions to preliminary estimates that, if
known, would have affected the measurement of the amounts recognized as of the
acquisition date. The purchase price in excess of the fair value of the tangible
and identified intangible assets acquired less liabilities assumed is recognized
as goodwill. Determining the fair value of assets acquired and liabilities
assumed requires management to use significant judgment and estimates, including
the selection of valuation methodologies, estimates of future revenue, costs and
cash flows, discount rates, and selection of comparable companies. Management's
estimates of fair value are based upon assumptions believed to be reasonable,
but which are inherently uncertain and unpredictable. As a result, actual
results may differ from these estimates. During the measurement period, we may
record adjustments to acquired assets and assumed liabilities, with
corresponding offsets to goodwill. Upon the conclusion of a measurement period,
any subsequent adjustments are recorded to earnings.
Goodwill and Intangible Assets: We recognize goodwill in accordance with ASC
350, Intangibles-Goodwill and Other ("ASC 350"). Goodwill is the excess of cost
of an acquired entity over the fair value amounts assigned to assets acquired
and liabilities assumed in a business combination and is not amortized.
Goodwill is tested for impairment at the reporting unit. A reporting unit is an
operating segment or a business unit one level below an operating segment if
discrete financial information for that business is prepared and regularly
reviewed by segment management. However, components within an operating segment
are aggregated as a single reporting unit if they have similar economic
characteristics. Management evaluates the recoverability of goodwill annually or
more frequently if events or changes in circumstances, such as declines in
revenue, earnings or cash flows, or material adverse changes in the business
climate, indicate that the carrying value of an asset might be impaired.
Goodwill is first qualitatively assessed to determine whether it is more likely
than not that the fair value of a reporting unit is less than its carrying
value. Factors that management considers in this assessment include
macroeconomic conditions, industry and market considerations, overall financial
performance (both current and projected), changes in management and strategy and
changes in the composition or carrying amount of net assets. If this qualitative
assessment indicates that it is more likely than not that the fair value of a
reporting unit is less than its carrying value, then a quantitative assessment
is required for the reporting unit. The quantitative assessment compares the
fair value of the reporting unit with its carrying value. If a quantitative
assessment is required, we estimate the fair value of our reporting units using
the income approach based upon a discounted cash flow model. We believe that
this approach is appropriate because it provides a fair value estimate based
upon the reporting unit's expected long-term operating cash flow performance. In
addition, we use the market approach, which compares the reporting unit to
publicly traded companies and transactions involving similar business, to
support the conclusions based upon the income approach. The income approach
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requires the use of many assumptions and estimates including future revenue,
expenses, capital expenditures, and working capital, as well as discount factors
and income tax rates. If the fair value of the reporting unit exceeds the
carrying value of the net assets including goodwill assigned to that
unit, goodwill is not impaired. If the carrying value of the reporting unit's
net assets including goodwill exceeds the fair value of the reporting unit, then
we record an impairment charge based on that difference. No goodwill impairment
was identified for the years ended January 31, 2023 or January 31, 2022 .
We recognize intangibles assets in accordance with ASC 350. Acquired intangible
assets subject to amortization are stated at fair value and are amortized using
the straight-line method over the estimated useful lives of the assets.
Intangible assets that are subject to amortization are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. Determination of recoverability is based on
an estimate of undiscounted future cash flows resulting from the use of the
asset and its eventual disposition. If the projected undiscounted cash flows are
less than the carrying value, then an impairment charge would be recorded for
the excess of the carrying value over the fair value, which is determined by the
discounting of future cash flows. No impairment of intangible assets was
identified for the years ended January 31, 2023 or January 31, 2022 .
Share-Based Compensation: Compensation expense for time-based restricted stock
units is measured at the grant date and recognized ratably over the vesting
period. We determine the fair value of time-based and performance-based
restricted stock units based on the closing market price of our common stock on
the grant date. The recognition of compensation expense associated with
performance-based restricted stock units requires judgment in assessing the
probability of meeting the performance goals, as well as defined criteria for
assessing achievement of the performance-related goals. For purposes of
measuring compensation expense, the number of shares ultimately expected to vest
is estimated at each reporting date based on management's expectations regarding
the relevant performance criteria. The performance shares begin vesting only
upon the achievement of the performance criteria. The achievement of the
performance goals can impact the valuation and associated expense of the
restricted stock units. The assumptions used in accounting for the share-based
payment awards represent management's best estimates, but these estimates
involve inherent uncertainties and the application of management judgment. As a
result, if circumstances change and we use different assumptions, our
stock-based compensation expense could be materially different in the future.
Recent Accounting Pronouncements
Reference is made to Note 1 of our audited consolidated financial statements included elsewhere in this report.
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