AstroNova(ALOT) - 2021 Q3 - Quarterly Report

Part I. Financial Information This section presents AstroNova's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements This section presents AstroNova, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of income, comprehensive income, changes in shareholders' equity, and cash flows, along with detailed notes explaining the company's business, accounting policies, revenue recognition, debt, and segment performance Unaudited Condensed Consolidated Balance Sheets The balance sheets show AstroNova's financial position as of October 31, 2020, and January 31, 2020, indicating a decrease in total assets and liabilities, while shareholders' equity increased Unaudited Condensed Consolidated Balance Sheets | Metric | Oct 31, 2020 (in thousands) | Jan 31, 2020 (in thousands) | | :--------------------- | :-------------------------- | :-------------------------- | | Total Assets | $113,309 | $116,664 | | Total Liabilities | $40,271 | $45,289 | | Total Shareholders' Equity | $73,038 | $71,375 | Unaudited Condensed Consolidated Statements of Income The statements of income detail the company's financial performance for the three and nine months ended October 31, 2020, and November 2, 2019, revealing significant declines in revenue and net income for both periods Unaudited Condensed Consolidated Statements of Income | Metric (in thousands) | 3 Months Ended Oct 31, 2020 | 3 Months Ended Nov 2, 2019 | 9 Months Ended Oct 31, 2020 | 9 Months Ended Nov 2, 2019 | | :-------------------- | :-------------------------- | :------------------------- | :-------------------------- | :------------------------- | | Revenue | $28,017 | $33,318 | $86,595 | $102,967 | | Net Income | $12 | $456 | $447 | $3,108 | | Net Income per Share - Basic | $0.00 | $0.06 | $0.06 | $0.44 | | Net Income per Share - Diluted | $0.00 | $0.06 | $0.06 | $0.43 | Unaudited Condensed Consolidated Statements of Comprehensive Income The statements of comprehensive income (loss) show a shift from comprehensive income to loss for the three-month period and a significant decrease for the nine-month period ended October 31, 2020, primarily influenced by foreign currency translation adjustments and changes in derivative values Unaudited Condensed Consolidated Statements of Comprehensive Income | Metric (in thousands) | 3 Months Ended Oct 31, 2020 | 3 Months Ended Nov 2, 2019 | 9 Months Ended Oct 31, 2020 | 9 Months Ended Nov 2, 2019 | | :-------------------- | :-------------------------- | :------------------------- | :-------------------------- | :------------------------- | | Net Income | $12 | $456 | $447 | $3,108 | | Other Comprehensive Income (Loss) | $(142) | $152 | $36 | $(305) | | Comprehensive Income (Loss) | $(130) | $608 | $483 | $2,803 | Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity This statement details the changes in shareholders' equity for the nine months ended October 31, 2020, and November 2, 2019, showing an increase in total shareholders' equity in 2020, driven by share-based compensation and net income, despite a cash dividend payment and other comprehensive loss Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity | Metric | Balance Feb 1, 2020 | Balance Oct 31, 2020 | | :-------------------- | :------------------ | :------------------- | | Total Shareholders' Equity | $71,375 | $73,038 | Key Changes (Nine Months Ended Oct 31, 2020): * Share-Based Compensation: $1,687k * Common Stock – Cash Dividend: $(497)k * Net Income: $447k * Other Comprehensive Loss: $(221)k Unaudited Condensed Consolidated Statements of Cash Flows The cash flow statements outline the company's cash movements for the nine months ended October 31, 2020, and November 2, 2019, highlighting a significant increase in net cash provided by operating activities in 2020, alongside substantial financing activities including new debt and repayments Unaudited Condensed Consolidated Statements of Cash Flows | Metric (in thousands) | 9 Months Ended Oct 31, 2020 | 9 Months Ended Nov 2, 2019 | | :-------------------- | :-------------------------- | :------------------------- | | Net Cash Provided by Operating Activities | $11,667 | $988 | | Net Cash Used for Investing Activities | $(2,102) | $(2,422) | | Net Cash Used for Financing Activities | $(3,580) | $(1,574) | | Cash and Cash Equivalents, End of Period | $9,603 | $4,468 | Notes to the Condensed Consolidated Financial Statements (unaudited) These notes provide detailed explanations and disclosures for the condensed consolidated financial statements, covering business operations, significant accounting policies, revenue recognition, debt, segment performance, and other financial instruments Note 1 – Business and Basis of Presentation AstroNova, Inc. designs, develops, manufactures, and distributes specialty printers and data acquisition/analysis systems globally, operating through two segments: Product Identification (PI) and Test & Measurement (T&M). The financial statements are unaudited and prepared in accordance with U.S. GAAP, with estimates considering the impact of COVID-19 - AstroNova operates two business segments: Product Identification (PI) for specialty printing systems and related supplies, and Test & Measurement (T&M) for aerospace flight deck printers and data acquisition systems[17][18] - The company has a global presence with direct sales/service centers in multiple countries and over 225 independent dealers in more than 60 countries[16] - Management's financial estimates consider the unknown future impacts of the COVID-19 pandemic[20] Note 2 – Summary of Significant Accounting Policies Update The company's accounting policies remain consistent with its prior annual report, with the recent adoption of ASU 2018-13 (Fair Value Measurement) having no material impact. The company is evaluating ASU 2020-04 (Reference Rate Reform) but does not expect a material impact - ASU 2018-13, 'Fair Value Measurement,' was adopted effective February 1, 2020, with no material impact on consolidated financial statements[23] - ASU 2020-04, 'Reference Rate Reform,' is currently being evaluated, but no material impact on consolidated financial statements is expected[24] Note 3 – Revenue Recognition Revenue is primarily derived from hardware sales, related supplies, repairs, maintenance, and service agreements. The report disaggregates revenue by geographic market and major product types, showing a decline in hardware and service revenue but a slight increase in supplies revenue for the three months ended October 31, 2020 - Revenue is derived from the sale of hardware (digital color label printers, OEM printing systems, portable data acquisition systems, airborne printers), related supplies, repairs and maintenance, and service agreements[26] Revenue by Major Product Types (in thousands) | Product Type | 3 Months Ended Oct 31, 2020 | 3 Months Ended Nov 2, 2019 | Change (%) | | :----------- | :-------------------------- | :------------------------- | :--------- | | Hardware | $7,667 | $12,160 | -36.9% | | Supplies | $17,996 | $17,655 | +1.9% | | Service & Other | $2,354 | $3,503 | -32.8% | | Total | $28,017 | $33,318 | -15.9% | | Product Type | 9 Months Ended Oct 31, 2020 | 9 Months Ended Nov 2, 2019 | Change (%) | | :----------- | :-------------------------- | :------------------------- | :--------- | | Hardware | $25,021 | $37,514 | -33.3% | | Supplies | $54,254 | $55,463 | -2.2% | | Service & Other | $7,320 | $9,990 | -26.7% | | Total | $86,595 | $102,967 | -15.9% | - Contract liabilities (deferred revenue) decreased from $466,000 at January 31, 2020, to $313,000 at October 31, 2020, primarily due to revenue recognition from advanced billings[30] Note 4 – Net Income Per Common Share This note provides the calculation of basic and diluted net income per common share, showing a decrease in both basic and diluted EPS for the three and nine months ended October 31, 2020, compared to the prior year Net Income Per Common Share | Metric | 3 Months Ended Oct 31, 2020 | 3 Months Ended Nov 2, 2019 | 9 Months Ended Oct 31, 2020 | 9 Months Ended Nov 2, 2019 | | :----- | :-------------------------- | :------------------------- | :-------------------------- | :------------------------- | | Basic | $0.00 | $0.06 | $0.06 | $0.44 | | Diluted | $0.00 | $0.06 | $0.06 | $0.43 | Weighted Average Common Shares Outstanding (in thousands) | Metric | 3 Months Ended Oct 31, 2020 | 3 Months Ended Nov 2, 2019 | 9 Months Ended Oct 31, 2020 | 9 Months Ended Nov 2, 2019 | | :----- | :-------------------------- | :------------------------- | :-------------------------- | :------------------------- | | Basic | 7,120 | 7,047 | 7,100 | 7,013 | | Diluted | 7,185 | 7,199 | 7,137 | 7,272 | Note 5 – Intangible Assets This note details the company's intangible assets, primarily customer contract relationships and existing technology, which decreased from $25.383 million at January 31, 2020, to $22.413 million at October 31, 2020, due to amortization. No impairments were recorded Intangible Assets, Net (in thousands) | Metric | Oct 31, 2020 | Jan 31, 2020 | | :----- | :----------- | :----------- | | Net Carrying Amount | $22,413 | $25,383 | Amortization Expense (in thousands) | Period | 3 Months Ended Oct 31, 2020 | 3 Months Ended Nov 2, 2019 | 9 Months Ended Oct 31, 2020 | 9 Months Ended Nov 2, 2019 | | :----- | :-------------------------- | :------------------------- | :-------------------------- | :------------------------- | | Expense | $1,000 | $1,100 | $3,100 | $3,200 | Estimated Amortization Expense for Next Five Fiscal Years (in thousands) | Fiscal Year | Estimated Amortization Expense | | :---------- | :----------------------------- | | 2021 | $999 | | 2022 | $3,979 | | 2023 | $3,972 | | 2024 | $3,975 | | 2025 | $3,395 | Note 6 – Inventories Inventories are valued at the lower of cost (first-in, first-out) and net realizable value, comprising materials, work-in-process, and finished goods. Total inventories, net of reserve, decreased from $33.925 million at January 31, 2020, to $30.868 million at October 31, 2020, primarily due to an increased inventory reserve Inventories, Net (in thousands) | Metric | Oct 31, 2020 | Jan 31, 2020 | | :----- | :----------- | :----------- | | Materials and Supplies | $21,058 | $20,151 | | Work-In-Process | $1,631 | $1,408 | | Finished Goods | $16,464 | $17,992 | | Inventory Reserve | $(8,285) | $(5,626) | | Total Inventories, net | $30,868 | $33,925 | Note 7 – Credit Agreement and Debt AstroNova entered into an Amended and Restated Credit Agreement on July 30, 2020, refinancing existing debt with a new $15.2 million term loan and a $10.0 million revolving credit facility. The company repaid the entire outstanding balance under the revolving line of credit by October 31, 2020, and the new agreement includes various financial and non-financial covenants - On July 30, 2020, AstroNova entered into an Amended and Restated Credit Agreement (A&R Credit Agreement) with Bank of America, N.A., refinancing outstanding term loans and a portion of revolving loans[39][41] - The A&R Credit Agreement provides for a $15.2 million term loan and a $10.0 million revolving credit facility, with no outstanding balance on the revolving line of credit at October 31, 2020[41][42] - The loans bear interest at a variable rate based on LIBOR or a fluctuating reference rate, plus a margin tied to the company's consolidated leverage ratio, and are subject to various financial and non-financial covenants[45][49] Long-Term Debt (in thousands) | Metric | Oct 31, 2020 | Jan 31, 2020 | | :----- | :----------- | :----------- | | USD Term Loan | $13,628 | $13,034 | | Debt Issuance Costs, net | $(156) | $(111) | | Current Portion of Term Loans | $(4,984) | $(5,208) | | Long-Term Debt | $8,488 | $7,715 | Note 8 – Paycheck Protection Program Loan On May 6, 2020, AstroNova secured a $4.4 million PPP Loan, maturing May 6, 2022, with a 1.0% annual interest rate. Payments are deferred until SBA forgiveness determination, and the company intends to apply for full forgiveness in Q4 fiscal 2021, having utilized proceeds for qualifying expenses - AstroNova borrowed $4.4 million under the Paycheck Protection Program (PPP Loan) on May 6, 2020, with a 1.0% annual interest rate and a maturity date of May 6, 2022[55][56] - No payments are due on the PPP Loan until the SBA determines the forgiveness amount, provided an application is submitted within ten months from the end of the twenty-four-week period following disbursement[56] - The company has fully utilized the PPP Loan proceeds for qualifying expenses (payroll, rent, utilities, interest on certain debt) and expects to apply for full forgiveness in the fourth quarter of the current fiscal year[58] Note 9 – Derivative Financial Instruments and Risk Management AstroNova terminated its cross-currency interest rate swap and interest rate swap on July 30, 2020, due to the A&R Credit Agreement, incurring a cash cost of approximately $0.7 million. The termination resulted in reclassification of accumulated other comprehensive loss related to the cross-currency swap into earnings, while the interest rate swap balance is being amortized - On July 30, 2020, AstroNova terminated its cross-currency interest rate swap and interest rate swap agreements, which were previously used to manage interest rate and foreign currency exchange risks[62] - The termination resulted in a cash cost of approximately $0.7 million[62] - A balance of $58,000 in accumulated other comprehensive loss related to the cross-currency interest rate swap was reclassified into earnings, while $0.2 million related to the interest rate swap is being amortized into earnings[62] Note 10 – Royalty Obligation The company has a guaranteed minimum royalty obligation of $15.0 million over ten years to Honeywell International, Inc. for a license to manufacture flight deck printers. As of October 31, 2020, $5.0 million has been paid, with $2.0 million classified as current liability and $6.6 million as long-term. No excess royalty expense was incurred in the current three or nine-month periods - AstroNova has a guaranteed minimum royalty payment obligation of $15.0 million over ten years to Honeywell International, Inc. for an exclusive license to manufacture narrow-format flight deck printers[65] - As of October 31, 2020, $5.0 million of the guaranteed minimum royalty obligation has been paid[67] Royalty Obligation (in thousands) | Metric | Oct 31, 2020 | | :----- | :----------- | | Current Portion of Royalty Obligation | $2,000 | | Long-Term Portion of Royalty Obligation | $6,624 | - No excess royalty expense was incurred for the three and nine months ended October 31, 2020, compared to $0.1 million and $0.8 million, respectively, in the prior year periods[67] Note 11 – Leases AstroNova leases facilities globally, with remaining lease terms of 1 to 8 years. As of October 31, 2020, Right of Use Assets were $1.436 million and total lease liabilities were $1.481 million, with a weighted-average remaining lease term of 5.3 years and a discount rate of 4.0% Operating Leases (in thousands) | Metric | Oct 31, 2020 | Jan 31, 2020 | | :----- | :----------- | :----------- | | Right of Use Assets | $1,436 | $1,661 | | Lease Liabilities – Current | $376 | $416 | | Lease Liabilities – Long Term | $1,105 | $1,279 | - As of October 31, 2020, the weighted-average remaining lease term for operating leases is 5.3 years, and the weighted-average discount rate is 4.0%[69] Operating Lease Costs (in thousands) | Period | 3 Months Ended Oct 31, 2020 | 3 Months Ended Nov 2, 2019 | 9 Months Ended Oct 31, 2020 | 9 Months Ended Nov 2, 2019 | | :----- | :-------------------------- | :------------------------- | :-------------------------- | :------------------------- | | Operating Lease Costs | $120 | $119 | $362 | $329 | Note 12 – Accumulated Other Comprehensive Loss Accumulated Other Comprehensive Loss (AOCL) decreased from $(1,093)k at January 31, 2020, to $(1,057)k at October 31, 2020. This change was influenced by foreign currency translation adjustments and reclassifications from cash flow hedges to earnings due to derivative terminations Changes in Accumulated Other Comprehensive Loss (in thousands) | Component | Balance at Jan 31, 2020 | Other Comprehensive Loss before reclassification | Amounts reclassified from AOCL to Earnings | Cross-Currency Interest Rate Swap Termination | Balance at Oct 31, 2020 | | :-------- | :---------------------- | :--------------------------------------------- | :----------------------------------------- | :------------------------------------------ | :---------------------- | | Foreign Currency Translation Adjustments | $(985) | $53 | — | — | $(932) | | Cash Flow Hedges | $(108) | $(255) | $193 | $45 | $(125) | | Total | $(1,093) | $(202) | $193 | $45 | $(1,057) | Note 13 – Share-Based Compensation AstroNova has several equity incentive plans, including the 2018 Plan, 2015 Plan, and 2007 Plan, and a Non-Employee Director Annual Compensation Program. Total share-based compensation expense for the nine months ended October 31, 2020, was $1.687 million, an increase from the prior year Share-Based Compensation Expense (in thousands) | Metric | 3 Months Ended Oct 31, 2020 | 3 Months Ended Nov 2, 2019 | 9 Months Ended Oct 31, 2020 | 9 Months Ended Nov 2, 2019 | | :----- | :-------------------------- | :------------------------- | :-------------------------- | :------------------------- | | Stock Options | $126 | $148 | $390 | $487 | | Restricted Stock Awards and Units | $462 | $371 | $1,284 | $1,074 | | Employee Stock Purchase Plan | $3 | $6 | $13 | $15 | | Total | $591 | $525 | $1,687 | $1,576 | - As of October 31, 2020, approximately $0.4 million of unrecognized compensation expense related to stock options and $2.0 million related to RSUs and RSAs are expected to be recognized over a weighted average period of approximately 0.9 years[77][78] - Under the Employee Stock Purchase Plan, 12,098 shares were purchased during the nine months ended October 31, 2020, at a 15% discount[79] Note 14 – Income Taxes The effective tax rate for the three months ended October 31, 2020, was 160.0% (benefit of $32k), and for the nine months, it was 45.9% (expense of $379k). These rates were significantly impacted by decreased forecasted operating results, shortfall tax expenses, and adjustments from foreign tax returns, partially offset by tax benefits from the expiration of the statute of limitations Effective Tax Rates | Period | Fiscal 2021 (Oct 31, 2020) | Fiscal 2020 (Nov 2, 2019) | | :----- | :------------------------- | :------------------------ | | 3 Months Ended | 160.0% | (118.2)% | | 9 Months Ended | 45.9% | 5.5% | Income Tax (Benefit) Provision (in thousands) | Period | 3 Months Ended Oct 31, 2020 | 3 Months Ended Nov 2, 2019 | 9 Months Ended Oct 31, 2020 | 9 Months Ended Nov 2, 2019 | | :----- | :-------------------------- | :------------------------- | :-------------------------- | :------------------------- | | Income Tax (Benefit) Provision | $(32) | $(247) | $379 | $182 | - The effective tax rates were impacted by a significant decrease in forecasted operating results for fiscal 2021, shortfall tax expenses, and adjustments from foreign tax returns, partially offset by tax benefits from the expiration of the statute of limitations on uncertain tax positions[81][82] - Cumulative unrecognized tax benefits totaled $319,000 as of October 31, 2020, down from $362,000 as of January 31, 2020[83] Note 15 – Segment Information AstroNova reports two segments: Product Identification (PI) and Test & Measurement (T&M). PI revenue increased by 5.3% in Q3 2021, while T&M revenue decreased by 55.8% due to the Boeing 737 MAX grounding and COVID-19. For the nine months, PI revenue slightly decreased by 0.9%, and T&M revenue significantly decreased by 44.5% Revenue by Segment (in thousands) | Segment | 3 Months Ended Oct 31, 2020 | 3 Months Ended Nov 2, 2019 | Change (%) | | :------ | :-------------------------- | :------------------------- | :--------- | | Product Identification | $22,898 | $21,749 | +5.3% | | Test & Measurement | $5,119 | $11,569 | -55.8% | | Total | $28,017 | $33,318 | -15.9% | | Segment | 9 Months Ended Oct 31, 2020 | 9 Months Ended Nov 2, 2019 | Change (%) | | :------ | :-------------------------- | :------------------------- | :--------- | | Product Identification | $66,907 | $67,484 | -0.9% | | Test & Measurement | $19,688 | $35,483 | -44.5% | | Total | $86,595 | $102,967 | -15.9% | Segment Operating Profit (Loss) (in thousands) | Segment | 3 Months Ended Oct 31, 2020 | 3 Months Ended Nov 2, 2019 | Change (%) | | :------ | :-------------------------- | :------------------------- | :--------- | | Product Identification | $3,521 | $1,880 | +87.3% | | Test & Measurement | $(751) | $1,397 | -153.8% | | Segment | 9 Months Ended Oct 31, 2020 | 9 Months Ended Nov 2, 2019 | Change (%) | | :------ | :-------------------------- | :------------------------- | :--------- | | Product Identification | $9,813 | $6,990 | +40.4% | | Test & Measurement | $(1,314) | $5,533 | -123.7% | Note 16 – Fair Value The company's financial liabilities measured at fair value, primarily derivative instruments, were zero at October 31, 2020, following the termination of swap contracts. Long-term debt is not recorded at fair value but its fair value is estimated using discounted cash flows and classified as Level 3 Liabilities Measured at Fair Value (in thousands) | Liability | Oct 31, 2020 | Jan 31, 2020 | | :-------- | :----------- | :----------- | | Cross-Currency Interest Rate Swap Contract | $0 | $250 | | Interest Rate Swap Contract | $0 | $96 | | Earnout Liability | $0 | $14 | | Total Liabilities | $0 | $360 | Long-Term Debt and Related Current Maturities (in thousands) | Metric | Fair Value (Oct 31, 2020) | Carrying Value (Oct 31, 2020) | | :----- | :------------------------ | :---------------------------- | | Long-Term debt and related current maturities | $13,637 | $13,628 | - Derivative instruments were measured at fair value using readily observable market inputs and classified as Level 2. Long-term debt's fair value is estimated by discounting future cash flows using current interest rates and classified as Level 3[85][87] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on AstroNova's financial condition and operational results, detailing business segments, the impact of COVID-19 on both Product Identification and Test & Measurement segments, a comparative analysis of financial performance, and an overview of liquidity and indebtedness Business Overview AstroNova is a multinational company specializing in data visualization technologies, offering specialty printers and data acquisition/analysis systems through its Product Identification (PI) and Test & Measurement (T&M) segments. The company's growth strategy focuses on organic innovation and strategic acquisitions, notably the Honeywell agreement for aerospace printers - AstroNova leverages proprietary data visualization technologies to design, develop, manufacture, distribute, and service specialty printers and data acquisition/analysis systems[89] - The company operates through two segments: Product Identification (PI), offering digital label printers and supplies, and Test and Measurement (T&M), providing data acquisition systems and aerospace printers[89] - Growth strategy centers on organic growth through product innovation (R&D) and strategic acquisitions, such as the exclusive license to manufacture Honeywell's narrow-format flight deck printers for Boeing 737 and Airbus 320 aircraft[90][91] COVID-19 Update - Overview The COVID-19 pandemic has materially impacted AstroNova's business, leading to operational modifications, staffing reductions (furloughs, work-share programs), and increased remote work. While manufacturing capacity was maintained initially, a recent surge in infections has caused increased absenteeism, longer order fulfillment times, and reduced revenue, with potential for future raw material difficulties - The global COVID-19 pandemic has materially and adversely affected AstroNova's business, impacting operations, customers, suppliers, and financial markets[93] - The company implemented staffing reductions (furloughs, work-share programs) and increased remote work for non-production team members[94][95] - Subsequent to the fiscal third quarter, increased COVID-19 infections in manufacturing facilities led to higher absenteeism, reduced productive capacity, longer order fulfillment times, and reduced revenue[97] - Experienced limited and temporary difficulties in obtaining raw materials and components, with potential for more extensive impacts in the future[98] Product Identification Update The PI segment experienced adverse impacts on hardware sales due to travel restrictions and trade show cancellations, but offset this with digital advertising and remote demonstrations. Demand for ink, toner, media, and parts supplies remained strong, particularly from food & beverage and other consumer goods customers, contributing favorably to operating results - Sales of Product Identification hardware products were adversely impacted by travel restrictions and the cancellation of trade shows[99] - Negative impacts were offset by increased reliance on digital advertising and internet-based marketing techniques, including remote video demonstrations[99] - Demand for ink, toner, media, and parts supplies remained strong, especially from food & beverage and other consumer goods customers, favorably contributing to operating results[101] Test & Measurement Update The T&M segment has been severely impacted by the Boeing 737 MAX grounding and the COVID-19 pandemic's effect on global air travel. This has led to very low new printer orders and shipments, reduced demand for most aircraft models, and declines in aerospace spare products, paper, parts, and repairs. The recovery timing and pace remain uncertain, dependent on vaccine availability and air travel demand - Sales of flight deck printers for narrow-body Boeing 737 aircraft were severely impacted by the 737 MAX grounding and production halt[103][105] - Global air travel demand precipitously declined due to the COVID-19 pandemic, leading to reduced order demand from airlines for new aircraft and significantly impacting demand for aerospace spare products, paper, parts, and repairs[106][107] - The timing and rate of industry recovery remain uncertain, dependent on the availability and acceptance of effective vaccines and treatments for COVID-19[106] Results of Operations This section analyzes AstroNova's financial performance for the three and nine months ended October 31, 2020, compared to the prior year, highlighting significant revenue declines, particularly in the T&M segment, and the resulting impact on gross profit, operating expenses, and net income Three Months Ended October 31, 2020 vs. Three Months Ended November 2, 2019 For the three months ended October 31, 2020, total revenue decreased by 15.9% to $28.0 million, primarily due to a 55.8% decline in the T&M segment, partially offset by a 5.3% increase in PI. Net income significantly dropped to $12k ($0.00 diluted EPS) from $0.5 million ($0.06 diluted EPS) in the prior year, driven by lower revenue, less favorable product mix, and increased other expenses Revenue by Segment (in thousands) | Segment | Oct 31, 2020 | Nov 2, 2019 | % Change | | :------ | :----------- | :---------- | :------- | | Product Identification | $22,898 | $21,749 | 5.3% | | T&M | $5,119 | $11,569 | (55.8)% | | Total | $28,017 | $33,318 | (15.9)%| - Hardware revenue decreased by 36.9% to $7.6 million, primarily due to a 56.2% decrease in the T&M segment, partially offset by a 4.8% increase in PI hardware sales[110] - Supplies revenue increased by 1.9% to $18.0 million, driven by ink jet and electrophotographic supplies in the PI segment[111] - Gross profit margin declined by 2.2 percentage points to 34.7%, primarily due to decreased revenue and less favorable product mix[113] - Operating expenses decreased by 21.4% to $9.3 million, driven by reductions in selling and marketing, general and administrative, and R&D expenses[114] - Net income was $12,000 ($0.00 diluted EPS), a significant decrease from $0.5 million ($0.06 diluted EPS) in the prior year[118] Nine Months Ended October 31, 2020 vs. Nine Months Ended November 2, 2019 For the nine months ended October 31, 2020, total revenue decreased by 15.9% to $86.6 million, with PI revenue slightly down by 0.9% and T&M revenue significantly down by 44.5%. Net income was $0.4 million ($0.06 diluted EPS), a substantial decrease from $3.1 million ($0.43 diluted EPS) in the prior year, primarily due to lower revenue and less favorable product mix, despite reduced operating expenses Revenue by Segment (in thousands) | Segment | Oct 31, 2020 | Nov 2, 2019 | % Change | | :------ | :----------- | :---------- | :------- | | Product Identification | $66,907 | $67,484 | (0.9)% | | T&M | $19,688 | $35,483 | (44.5)% | | Total | $86,595 | $102,967| (15.9)%| - Hardware revenue decreased by 33.3% to $25.0 million, primarily due to a 44.3% decline in the T&M segment[120] - Supplies revenue decreased by 2.2% to $54.3 million, mainly due to lower sales in the aerospace product group within the T&M segment[121] - Gross profit margin decreased by 2.3 percentage points to 35.1%, attributable to decreased revenue and less favorable product mix[123] - Operating expenses decreased by 15.5% to $29.1 million, driven by lower selling and marketing, general and administrative, and R&D expenses[124] - Net income was $0.4 million ($0.06 diluted EPS), a substantial decrease from $3.1 million ($0.43 diluted EPS) in the prior year[127] Segment Analysis This section provides a detailed analysis of the revenue and operating profit (loss) for AstroNova's Product Identification (PI) and Test & Measurement (T&M) segments for both the three and nine months ended October 31, 2020, highlighting the divergent performance of the two segments Product Identification The Product Identification segment saw a 5.3% revenue increase in Q3 2021 to $22.9 million, driven by supplies and the new T3-OPX product launch, leading to an 87.3% increase in segment operating profit to $3.5 million. For the nine months, revenue slightly decreased by 0.9% to $66.9 million, but operating profit increased by 40.4% to $9.8 million due to lower operating costs Product Identification Segment Performance (in thousands) | Metric | 3 Months Ended Oct 31, 2020 | 3 Months Ended Nov 2, 2019 | 9 Months Ended Oct 31, 2020 | 9 Months Ended Nov 2, 2019 | | :----- | :-------------------------- | :------------------------- | :-------------------------- | :------------------------- | | Revenue | $22,898 | $21,749 | $66,907 | $67,484 | | Segment Operating Profit | $3,521 | $1,880 | $9,813 | $6,990 | | Profit Margin | 15.4% | 8.6% | 14.7% | 10.4% | - Q3 revenue growth was primarily attributable to increases in supplies for TrojanLabel and QuickLabel product groups, and a significant contribution from the new T3-OPX product launch[129] - The increase in current year segment operating profit and margin for both periods was primarily due to increased sales (Q3) and lower operating costs (Q3 and 9M)[129][130] Test & Measurement—T&M The T&M segment experienced a significant 55.8% revenue decrease in Q3 2021 to $5.1 million, and a 44.5% decrease for the nine months to $19.7 million. This decline was primarily due to the Boeing 737 MAX grounding and reduced air travel from COVID-19, resulting in an operating loss of $0.8 million in Q3 and $1.3 million for the nine months Test & Measurement Segment Performance (in thousands) | Metric | 3 Months Ended Oct 31, 2020 | 3 Months Ended Nov 2, 2019 | 9 Months Ended Oct 31, 2020 | 9 Months Ended Nov 2, 2019 | | :----- | :-------------------------- | :------------------------- | :-------------------------- | :------------------------- | | Revenue | $5,119 | $11,569 | $19,688 | $35,483 | | Segment Operating Profit (Loss) | $(751) | $1,397 | $(1,314) | $5,533 | | Profit Margin | (14.7)% | 12.1% | (6.7)% | 15.6% | - The decrease in T&M revenue for both periods was primarily attributable to the decline in sales of aerospace product lines due to the Boeing 737 MAX grounding and the dramatic drop in air travel from COVID-19[131][132] - The segment shifted from an operating profit in the prior year to an operating loss in both the three and nine months ended October 31, 2020, due to lower sales revenue[131][132] Financial Condition and Liquidity This section discusses AstroNova's financial condition and liquidity, detailing the impact of COVID-19 and the 737 MAX grounding on its credit facilities, the successful renegotiation of debt, the acquisition of a PPP loan, and the company's cash flow dynamics Overview AstroNova's liquidity was impacted by declining 737 MAX revenue and COVID-19, leading to a waiver of financial covenants in Q1 fiscal 2021. The company subsequently renegotiated its credit facilities with Bank of America (A&R Credit Agreement) and secured a $4.4 million PPP Loan, significantly improving its liquidity profile. Cash and cash equivalents stood at $9.6 million at October 31, 2020, with $10.0 million available under the revolving credit facility - Deterioration of financial condition due to 737 MAX revenue decline and COVID-19 impacts led to a violation of financial covenants in Q1 fiscal 2021, for which a waiver was obtained[134] - A new Amended and Restated Credit Agreement (A&R Credit Agreement) was entered into on July 30, 2020, refinancing existing debt and providing a $10.0 million revolving credit facility[136][138] - A $4.4 million Paycheck Protection Program (PPP) Loan was secured on May 6, 2020, and the quarterly cash dividend was suspended to preserve cash[139][141] - Cash and cash equivalents were $9.6 million at October 31, 2020, with $10.0 million available under the revolving credit facility, indicating a significant improvement in liquidity[142] Indebtedness The A&R Credit Agreement outlines term loan repayment schedules through June 2022 and allows for voluntary prepayments. Loans bear variable interest rates tied to LIBOR or a reference rate, plus a margin based on the consolidated leverage ratio. The agreement includes financial and non-financial covenants, and obligations are secured by company assets. The $4.4 million PPP Loan is unsecured, bears 1.0% interest, and is expected to be applied for forgiveness in Q4 fiscal 2021 - The A&R Credit Agreement term loan has quarterly principal payments ranging from $0.8 million to $1.4 million, with the remaining balance due on June 15, 2022[143] - Loans bear interest at a variable rate based on LIBOR or a fluctuating reference rate, plus a margin that varies with the consolidated leverage ratio (2.15%-3.65% for LIBOR, 1.15%-2.65% for reference rate)[147] - The agreement includes various financial covenants (e.g., maximum consolidated leverage ratio, minimum EBITDA) and non-financial covenants (e.g., limits on future indebtedness, dividends, M&A)[148] - The $4.4 million PPP Loan is unsecured, bears 1.0% interest, and the company intends to apply for forgiveness in Q4 fiscal 2021, having utilized proceeds for qualifying expenses[152][154] Cash Flow Net cash provided by operating activities significantly increased to $11.7 million for the nine months ended October 31, 2020, from $1.0 million in the prior year, primarily due to improved working capital. This was driven by a decrease in accounts receivable and inventory, partially offset by cash used for property, plant, and equipment, debt repayments, and dividends - Net cash provided by operating activities increased significantly to $11.7 million for the first nine months of fiscal 2021, compared to $1.0 million in the prior year, primarily due to increased cash from working capital changes[156] - Accounts receivable decreased by $4.1 million to $15.7 million, and days sales outstanding (DSO) improved to 47 days from 55 days, largely due to a decline in aerospace product sales which have longer collection cycles[157] - Inventory decreased to $30.9 million from $33.9 million, driven by sell-through of supplies in the Product Identification segment, though inventory days on hand slightly increased[158] - Key cash inflows included $4.4 million from the PPP loan and $3.5 million from long-term debt refinance, partially offset by $6.5 million net cash decrease on the revolving line of credit, debt repayments, and dividends paid[159] Contractual Obligations, Commitments and Contingencies There have been no material changes to the company's contractual obligations, commitments, and contingencies since the Annual Report on Form 10-K for the fiscal year ended January 31, 2020, other than those arising in the ordinary course of business - No material changes to contractual obligations, commitments, and contingencies have occurred since the Annual Report on Form 10-K for the fiscal year ended January 31, 2020, beyond those in the ordinary course of business[160] Critical Accounting Policies, Commitments and Certain Other Matters The preparation of financial statements requires management to make significant estimates and assumptions, which are continuously re-evaluated based on relevant factors, economic conditions, and product mix. While these estimates provide a meaningful basis, actual results may differ materially. No material changes to critical accounting policies have occurred since the prior Annual Report - The preparation of condensed consolidated financial statements requires management to make significant estimates and assumptions, including those related to revenue recognition, allowances for doubtful accounts, inventory valuation, income taxes, and impairment of long-lived assets and goodwill[161] - Estimates are based on available facts, historical experience, economic conditions, and management's assessment of future outcomes, with actual results potentially differing materially[162][163] - There have been no material changes to the application of critical accounting policies as disclosed in the Annual Report on Form 10-K for the fiscal year ended January 31, 2020[163] Forward-Looking Statements This section contains forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. Key risk factors include the ongoing COVID-19 pandemic, general economic conditions, declining demand in T&M markets, competition, ability to innovate, foreign currency impacts, integration of acquisitions, financing, and the 737 MAX certification - The report contains forward-looking statements reflecting current expectations about future events and results, identified by words such as 'believes,' 'expects,' 'intends,' and 'plans'[165] - Actual results may differ materially due to risks and uncertainties, including the impact of the COVID-19 pandemic, general economic conditions, declining demand in test and measurement markets (especially defense and aerospace), competition, and the ability to develop new products[165] - Other factors include the impact of foreign currency exchange rates, the ability to integrate acquisitions, manage indebtedness, obtain financing, and difficulties with the 737 MAX certification[165] Item 3. Quantitative and Qualitative Disclosures about Market Risk There were no material changes to the company's market risk disclosures during the nine months ended October 31, 2020, compared to those reported in its Annual Report on Form 10-K for the fiscal year ended January 31, 2020 - No material changes to market risk disclosures occurred during the nine months ended October 31, 2020, compared to the Annual Report on Form 10-K for the fiscal year ended January 31, 2020[166] Item 4. Controls and Procedures This section addresses the effectiveness of AstroNova's disclosure controls and procedures and reports on any changes in internal control over financial reporting, concluding that controls are effective and no material changes have occurred despite the challenges posed by the COVID-19 pandemic Evaluation of Disclosure Controls and Procedures Management, with CEO and CFO participation, concluded that the company's disclosure controls and procedures were effective as of October 31, 2020, ensuring timely and accurate recording, processing, summarizing, and reporting of required information - Management, under the supervision of the CEO and CFO, concluded that disclosure controls and procedures were effective as of October 31, 2020[167] - The controls ensure that information required for Exchange Act reports is recorded, processed, summarized, and reported in a timely manner, and communicated to management for timely disclosure decisions[167] Changes in Internal Control over Financial Reporting There were no material changes in the company's internal control over financial reporting during the most recent fiscal quarter. Despite most non-production employees working remotely due to COVID-19, the company has not experienced any material impact on its internal controls and continues to monitor the situation - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[168] - Despite most non-production employees working remotely due to the COVID-19 pandemic, there has been no material impact on internal controls over financial reporting[168] - The company is continually monitoring and assessing the COVID-19 situation to minimize potential impacts on the design and operational effectiveness of internal controls[168] Part II. Other Information This section covers legal proceedings, updated risk factors, equity security sales, other material information, and a list of exhibits Item 1. Legal Proceedings There are no pending or threatened legal proceedings against AstroNova that are considered material to its financial position or results of operations - There are no pending or threatened legal proceedings against AstroNova that are material to its financial position or results of operations[170] Item 1A. Risk Factors This section updates previously disclosed risk factors, emphasizing the material adverse effects of the ongoing COVID-19 pandemic on revenues, operations, and financial condition, including increased absenteeism in manufacturing, potential supply chain disruptions, and significant disruption to the aerospace industry. The company also highlights the risk of non-compliance with credit agreement covenants and the need for alternative financing - The ongoing COVID-19 pandemic has adversely affected and will likely continue to adversely affect AstroNova's revenues, results of operations, and financial condition[172] - Increased COVID-19 cases among manufacturing staff have led to increased absenteeism, reduced production capacity, and longer order fulfillment times, impacting revenues[173] - The aerospace industry, a key market for AstroNova, has been significantly disrupted by the COVID-19 outbreak, leading to a material adverse impact on financial results[177] - There is a risk of inability to comply with financial and non-financial covenants in the credit agreement with Bank of America, which could materially and adversely affect the business and financial condition[178] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the third quarter of fiscal 2021 (August 1 to October 31), AstroNova did not repurchase any shares of its common stock under publicly announced plans or programs - No repurchases of common stock were made during the third quarter of fiscal 2021 (August 1 – October 31)[179] Item 5. Other Information On December 3, 2020, AstroNova and its Lender amended the A&R Credit Agreement to extend the deadline for property inspections and increase the maximum capital expenditures permitted for the second, third, and fourth quarters of fiscal year 2021 - On December 3, 2020, AstroNova and Bank of America, N.A. (the Lender) amended the A&R Credit Agreement[181] - The amendment extended the deadline for the Lender to complete certain property inspections[181] - The amendment increased the maximum amount of capital expenditures permitted during the second, third, and fourth quarters of fiscal year 2021[181] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including organizational documents, a change in control agreement, a letter agreement amending the A&R Credit Agreement, CEO/CFO certifications, and XBRL-related documents - Key exhibits include Restated Articles of Incorporation, By-laws, a Change in Control Agreement, a Letter Agreement dated December 3, 2020, with Bank of America, N.A., CEO and CFO Certifications (Sarbanes-Oxley Act), and various XBRL documents[182] Signatures The report is duly signed on behalf of AstroNova, Inc. by Gregory A. Woods, President and Chief Executive Officer, and David S. Smith, Vice President, Chief Financial Officer and Treasurer, as of December 9, 2020 - The report was signed by Gregory A. Woods, President and Chief Executive Officer, and David S. Smith, Vice President, Chief Financial Officer and Treasurer[185] - The signing date for the report was December 9, 2020[185]