Business Overview This section should be read in conjunction with our condensed consolidated financial statements included elsewhere herein and our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2020 .AstroNova is 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 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 offers 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 services
that 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 that are used to print hard copies of data required
for the safe and efficient operation of aircraft including navigation
maps, clearances, arrival and departure procedures, 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. 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 2018, we entered into an Asset Purchase and License Agreement ("Honeywell Agreement") with Honeywell International, Inc. ("Honeywell") pursuant to which, we acquired the exclusive perpetual world-wide license to manufacture Honeywell's narrow format flight deck printers for the Boeing 737 and Airbus 320 aircraft. This added the two highest volume commercial aircraft programs in regular production to our product portfolio. InMarch 2019 , all major civil aviation authorities worldwide grounded the Boeing 737 MAX aircraft for safety reasons. InApril 2019 , Boeing reduced the number of 737 MAX aircraft produced per month from 52 to 42, and inJanuary 2020 , Boeing ceased production of the 737 MAX completely. At this time, it is not known when the Boeing 737 MAX will be certified to return to service by the various civil aviation authorities. However, onMay 27, 2020 , in anticipation of an eventual certification, Boeing announced that it would re-start production at low initial rates and gradually increase production in the future. 23 -------------------------------------------------------------------------------- Table of Contents OnAugust 3, 2020 theUnited States Federal Aviation Administration issued a notice of proposed rulemaking for a Boeing 737 MAX airworthiness directive , which is the first step in a multi-step process that we expect to result in the 737 MAX being certified to return to service within the current fiscal year. Once the timing of the recertification and return to service is clear, and Boeing's manufacturing dates and delivery schedules for their 737 MAX aircraft customers are established, we expect that Boeing and Boeing's customers will begin to order printers from us for those aircraft. While we have experienced some low levels of new printer orders and shipments since the production halt, we expect that the adverse impact on our revenue and profitability by the 737 MAX production decline to date will continue until customer demand returns and expect that the impact will begin to abate as demand recovers. OnMarch 11, 2020 , theWorld Health Organization declared COVID-19, a respiratory illness caused by a novel coronavirus, to be a pandemic. COVID-19 has spread throughoutthe United States and the rest of the world and has impacted all major markets in which we, our customers, suppliers and other business partners conduct business. Since that time, governments in affected regions have implemented, and we expect that they will continue to implement and periodically change policies in relation to safety precautions including quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures as they deem necessary. Many organizations and individuals, including us and our employees have taken and are taking additional steps to avoid or reduce infection, including limiting travel and working from home when possible. These measures are disrupting normal business operations both inside our operations and in our customer base in the affected geographic areas and as a result have had significant negative impacts on businesses and financial markets worldwide. Independent of the impacts of the 737 MAX production declines, due to the COVID-19 pandemic, global air travel demand precipitously declined, and as a result the number of flights scheduled by airlines has declined sharply although during the past quarter the number of flights has increased modestly in several markets includingthe United States . It is unknown how this will develop due to the unpredictable course of the pandemic and the perceived risk of air travel. As a result, order demand for new deliveries of all aircraft models by airlines has declined and is expected to remain lower for an unknown period. Manufacturerswho make the airplanes that use our aerospace products have reduced their projected production rates across most or all of their product lines. As the COVID-19 pandemic impact on the air travel industry continues, the financial health of the airlines and airframe manufacturers is likely to become stressed, and the ultimate impact on the structure of the industry and the individual companies that comprise it is unknown. Because we are the primary source for aircraft cabin printers to the airframe manufacturers for a majority of aircraft models produced in the world, the longer term demand for our products is defined less by the impact of COVID-19 on particular airlines within the industry than the health of the industry as a whole, which in turn is driven by the demand for air travel. Although we do not know what the timing and rate of recovery will be, we do expect that the industry will recover when effective vaccines and treatments for COVID-19 become both widely available and accepted, and demand for air travel recovers, which will lead to increased demand for aircraft and our products. Demand for spare products, paper, parts and repairs has also been significantly impacted by the decline in air travel demand, and although during the past several weeks we have experienced modest increases in demand for these as flight hours have increased slightly, it is unknown whether this will continue or increase, or at what pace. While the major aircraft manufacturers have provided limited guidance about their projected production rate changes that we are using to align our overall production capacity, in general, we project our production of products according to customer forecasts and order rates and at this time, the actual rates and timing of increased production requirements remains uncertain. The decline in demand has had and will continue to have a material adverse impact on our revenues and results of operations until demand recovers. Our strategy and operational plans are to maintain sufficient capabilities to satisfy demand as and when it occurs, while prudently adjusting costs as appropriate in the interim. The COVID-19 pandemic has also had an adverse impact on the sales of our Product Identification hardware products due to travel restrictions, because in most cases customers have preferred in-person demonstrations of these printers at their production sites prior to placing orders with us and those visits have been severely limited. Additionally, the widespread cancellation of trade shows, which traditionally provided an effective forum for customers to consider our products, has also had an adverse impact on traditional methods of sales lead generation. However, a greater reliance on and the increasing effectiveness of various forms of digital advertising and internet-based marketing techniques, including remote video demonstrations and support, has proven effective in obtaining sales, which has begun to offset this impact. Our customers' acceptance of remote methods in their buying processes has changed, but the degree to which that will continue to be the case in the coming months and once the current COVID-19 crisis has abated is unknown. Despite favorable market reception to our recently refreshed and expanded product lines, the degree to which the level of hardware sales will be mitigated by altering our go-to-market strategies until it is possible for our direct sales force and distributors to travel to visit customers and attend and present products at trade shows is unknown. These same dynamics have also affected our Test and Measurement product lines. Immediately after the COVID-19 crisis began, we experienced a greater demand for ink, toner, media and parts supplies that are used in our digital label printers. While those initial increases have abated modestly in certain markets in the most recent quarter, we believe, based on backlog and inquiries from customers that underlying overall demand remains strong. Increased demand for supplies from our food & beverage and other consumer goods product customers, and from customers selling products that have experienced higher demand as a result of the COVID-19 crisis, such as certain medical, janitorial and sanitation related products, have continued. As the COVID -19 crisis has developed, we believe that the health and safety protocols and scheduling innovations we have 24 -------------------------------------------------------------------------------- Table of Contents implemented in our production facility, the relative effectiveness of public policies to control the pandemic inRhode Island and near our production facilities inGermany andCanada , and the efforts of our employees to adapt to altered schedules, have contributed to our ability to re-establish normal order fulfillment lead times after some initial periods of extended lead times because of temporary labor shortages. In general, we believe that the very diversified nature of our end markets and the relative concentration of business in consumer non-durable market related applications impart a greater degree of near- and longer-term stability to our Product Identification segment. Since the COVID-19 pandemic began to impact us in earlyMarch 2020 , we have closely monitored the government and health authority recommendations applicable to us and have made modifications to our operations based on that guidance and based on our growing experience. Since March, a large majority of non-production related team members have worked remotely, and more recently some have split time between on-site and remote work. When and to what degree team members will return to on premises work is still unknown. Some inefficiencies related to remote work have occurred, but we believe overall effectiveness and productivity have been satisfactorily maintained. We have maintained sufficient capacity and employment levels in our manufacturing facilities located inWest Warwick, Rhode Island , as well as in our manufacturing facilities inCanada andGermany to satisfy customer demand and related contractual commitments. The heightened cleaning and sanitization standards, as well as several new health and safety protocols, procedures and workplace modifications implemented to safeguard our team member will be maintained as long as necessary. The future course of the COVID-19 crisis is unknown and if it were to worsen it could have further material adverse impacts on our ability to maintain workforce levels, productivity and output. 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 decided to suspend our quarterly cash dividend beginning with the second quarter of our fiscal year 2021. As the COVID-19 related economic impact has continued and various governmental economic support programs have ended, more recently, we have reduced our direct labor staffing levels and implemented furloughs and work-share programs. We continue to monitor and examine our overall and product line-specific cost structures and customer demand patterns, and as time progresses and the near and longer-term business outlook becomes clearer, we may make additional adjustments to employment levels. In addition to the reductions in demand for many of our products and the workforce impacts caused by the COVID-19 pandemic, we have also experienced some limited and temporary difficulties in obtaining raw materials and components for our products. These difficulties have had no meaningful negative impact on our production efficiency or our ability to satisfy customer requirements. However, more extensive and disruptive impacts may be experienced in the future, depending on how the COVID-19 pandemic and its impacts on the economy evolve. Despite disruptions in the capital markets as a result of impact of the COVID-19 outbreak, we successfully renegotiated the terms of our credit facilities withBank of America , and we believe that this, together with our internal cash generation capacity and the receipt of a PPP loan, will provide us with sufficient liquidity in the future assuming consistent market conditions. However, if the negative impacts of the COVID-19 pandemic become worse, and we were to need additional capital resources, there is no assurance that we could obtain them, and the failure to do so could have a material adverse impact on our business prospects. Results of Operations Three Months EndedAugust 1, 2020 vs.August 3, 2019 Revenue by segment and current quarter percentage change over the prior year for the three months endedAugust 1, 2020 andAugust 3, 2019 were: % Change As a As a Compared August 1, % of August 3, % of to (Dollars in thousands) 2020 Revenue 2019 Revenue Prior Year Product Identification$ 21,629 78.2 %$ 22,144 66.2 % (2.3 )% T&M 6,029 21.8 % 11,324 33.8 % (46.8 )% Total$ 27,658 100.0 %$ 33,468 100.0 % (17.4 )% Revenue for the second quarter of the current year was$27.7 million , representing a 17.4% decrease compared to the previous year second quarter revenue of$33.5 million . Revenue through domestic channels for the second quarter of the current year was$17.9 million , a decrease of 13.5% from the prior year's second quarter. International revenue for the second quarter of the current year was$9.8 million , representing 35.4% of our second quarter revenue and reflects a 23.6% decrease from the previous year second quarter. Current year second quarter international revenue includes an unfavorable foreign exchange rate impact of$0.1 million . 25 -------------------------------------------------------------------------------- Table of Contents Hardware revenue in the current quarter was$8.4 million , a 32.1% decrease compared to the prior year's second quarter revenue of$12.4 million . The decrease is primarily attributable to the T&M segment, as hardware revenue for that segment decreased 44.3% compared to the second quarter of the prior year. The decrease in T&M segment hardware sales primarily resulted from decreased aerospace printer product line sales of both the ToughWriter and Honeywell product lines. The PI segment also contributed to the overall decline in hardware sales for the current quarter, as hardware sales in that segment decreased 3.2% for the current quarter, with small declines in sales of most hardware products, which were partially offset by sales related to the product launch of the new T3-OPX in the TrojanLabel product group, as well as increased sales of the T2-C and T-4 product lines, all of which provided a significant contribution to second quarter revenue. Supplies revenue in the current quarter was$17.1 million , a 5.2% decrease compared to the prior year's second quarter supplies revenue of$18.1 million . The decrease is primarily attributable to the lower ink jet and thermal transfer ribbon supplies in the QuickLabel product group in the PI segment, as well as reduced revenue from supplies sales in the aerospace product group in the T&M segment. These current quarter declines in supplies revenue were partially offset by increased revenue from sales of electrophotographic supplies in the Quick Label product group and Trojan Label supplies, both in the PI segment. Service and other revenues of$2.1 million in the current quarter decreased 29.5% compared to second quarter revenue of$3.0 million in the prior year. The decrease is due primarily to declines in repair revenue related to the aerospace printer product line in the T&M segment, as well as declines in parts and repair revenue in the Product Identification segment. Current year second quarter gross profit was$9.8 million , an 18.3% decrease compared to prior year second quarter gross profit of$12.0 million . Our current quarter gross profit margin of 35.4% reflects a 0.4 percentage point decline from the prior year's second quarter gross profit margin of 35.8%. The lower gross profit and related profit margin for the current quarter compared to the prior year's second quarter is primarily attributable to decreased revenue and less favorable product mix, which were slightly offset by current quarter reductions in manufacturing and period costs. Operating expenses for the current quarter were$9.6 million , an 11. 4% decrease compared to the prior year second quarter operating expenses of$10.8 million . Specifically, current quarter selling and marketing expenses were$5.5 million , a 13.4% decrease compared to the second quarter of the prior year. The decline for the current quarter was primarily due to a decrease in travel and entertainment expenses; employee wage, benefit and commission expenses, and advertising and trade show expenditures. Current quarter general and administrative expenses were$2.5 million , a 3.1% decrease compared to the second quarter of the prior year. The decline for the current year was primarily due to a decrease in fees paid for outside services and employee expenses, offset by increases in employee benefits and professional fee expenses. Research and development ("R&D") expenses were$1.5 million in the current quarter, a 16.4% decrease compared to$1.8 million in the second quarter of the prior year primarily due to decreases in employee wage and benefits, supplies expenditures and travel and entertainment expenses. The R&D spending as a percentage of revenue for the current quarter is 5.4% compared to 5.3% for the same period of the prior year. Other income in the second quarter of the current year was$0.3 million compared to other expense of$0.2 million in the second quarter of the prior year. Current quarter other income includes$0.6 million of gain on the translation of Eurodollar andDanish Kroner receivable balances at significantly higher exchange rates for those currencies as compared to the US Dollar, which was partially offset by interest expense on debt and the revolving line of credit of$0.2 million and$0.1 million related to the termination of the cross-currency interest rate swap. Other expense for the second quarter of the prior year consisted primarily of interest expense on debt of$0.2 million . The provision for federal, state and foreign income taxes for the second quarter of the current year is$0.5 million , resulting in an effective tax rate of 99.4%. This rate was impacted by a significant increase in forecasted operating results for our fiscal 2021 as compared to operating results forecasted at the end of our first quarter of fiscal year 2021, a$122,000 expense arising from a windfall shortfall tax expense related to the vesting of stock grants to directors and officers and a$79,000 expense related to return to provision adjustments from foreign tax returns filed in the quarter. This compares to the prior year's second quarter tax provision of$29,000 , resulting in an effective tax rate of 3.0% The effective tax rate for the prior year second quarter of 3.0% reflected a significant reduction in forecasted operating results for fiscal 2020 as compared to operating results at the end for the first quarter of fiscal 2020 and also reflected a$135,000 tax benefit related to windfall tax benefits related to the vesting of stock grants. We reported net income of$3,000 or$0.00 per diluted share for the second quarter of the current year. On a comparable basis, net income for the prior year's second quarter was$1.0 million or$0.13 per diluted share. Return on revenue was 0.0% for the second quarter of fiscal 2021 compared to 2.8% for the second quarter of fiscal 2020. 26 -------------------------------------------------------------------------------- Table of Contents Six Months EndedAugust 1, 2020 vs. Six Months EndedAugust 3, 2019 Revenue by product group and current period percentage change over the prior year for the six months endedAugust 1, 2020 andAugust 3, 2019 were: % Change As a As a Compared August 1, % of August 3, % of to (Dollars in thousands) 2020 Revenue 2019 Revenue Prior Year Product Identification$ 44,009 75.1 %$ 45,735 65.7 % (3.8 )% T&M 14,569 24.9 % 23,914 34.3 % (39.1 )% Total$ 58,578 100.0 %$ 69,649 100.0 % (15.9 )% Revenue for the first six months of the current year was$58.6 million , representing a 15.9% decrease compared to the previous year's first six months revenue of$69.6 million . Revenue through domestic channels for the first half of the current year was$37.7 million , a decrease of 11.7% from prior year domestic revenue of$42.6 million . International revenue for the first six months of the current year was$20.9 million , a 22.5% decrease from the previous year international revenue of$27.0 million . The current year's first six months international revenue reflected an unfavorable foreign exchange rate impact of$0.3 million . Hardware revenue in the first six months of the current year was$17.4 million , a 31.6% decrease compared to the prior year's first six months of revenue of$25.4 million . The decrease in hardware revenue is primarily due to a 38.8% decline in the T&M segment resulting from lower aerospace printer product line sales for both the ToughWriter and Honeywell product lines. The PI segment also contributed to the overall decline in hardware sales for the first six months of the current year, as hardware sales decreased 13.6% on declines in sales of most hardware products in the PI segment other than sales related to the TrojanLabel launch of the new T3-OPX which provided a significant contribution to revenue for the first six months of fiscal 2021. Supplies revenue in the first half of the current year was$36.3 million , representing a 4.1% decrease over prior year's first six months revenue of$37.8 million . The decrease in the current year supplies revenue is primarily attributable to the decrease in sales of supplies in the aerospace product group in the T&M segment. The current year decline in supplies revenue was also impacted by declines in sales in the PI segment related to decreased ink jet and thermal film supplies sales, which were slightly offset by increases in sales of transfer ribbon products within the QuickLabel product group and ink and media supplies in the TrojanLabel product group. Service and other revenues were$5.0 million in the first six months of the current year, a 23.4% decrease compared to the prior year's first six months service and other revenues of$6.5 million . The current year decrease is primarily due to a decline in repair and parts revenue related to the aerospace printer product line, as well as sales declines in parts and repair revenue in the Product Identification segment. Current year first six months gross profit was$20.6 million , a 21.3% decrease from prior year's first six months gross profit of$26.2 million . Our gross profit margin of 35.2% in the current year reflects a decrease from the prior year's first six months gross profit margin of 37.6%. The lower gross profit margin for the current year compared to the prior year is primarily due to lower revenue, higher manufacturing costs and less favorable product mix. Operating expenses for the first six months of the current fiscal year were$19.8 million , a 12.4% decrease compared to prior year's first six months operating expenses of$22.6 million . Selling and marketing expenses for the current year of$11.5 million decreased by 12.9% compared to the previous year's first six months primarily due to decreases in travel and entertainment expenses, advertising and trade show expenditures, and wage, employee benefit and commission expenditures. General and Administrative expenses decreased 13.4% to$4.9 million in the first six months of the current year compared to$5.6 million in the first six months of the prior year, primarily due to a decrease in outside service fees, as well as lower travel costs and professional service fees, partially offset by an increase in bonus expense. R&D spending in the first six months of the current year was$3.4 million , a slight decrease compared to the prior year's first six months spending of$3.8 million . Current year spending on R&D represents 5.9% of revenue compared to the prior year's first six months level of 5.4%. Other expense during the first six months of the current year was$23,000 compared to$0.6 million in the first six months of the previous year. Current year other expense primarily includes interest expense of$0.5 million on our debt and revolving credit line and$0.1 million related to the termination of the cross-currency interest rate swap $, which were largely offset by a$0.5 million gain on the translation of Eurodollar andDanish Kroner receivable balances at significantly higher exchange rates for those currencies as compared to the US Dollar and investment income of$0.1 million . Other expense during the first six months of fiscal 2020 primarily included interest expense on debt of$0.4 million , foreign exchange loss of$0.2 million and other expense of$0.1 million , partially offset by investment income of$0.1 million . 27 -------------------------------------------------------------------------------- Table of Contents We recognized$0.4 million of income tax expense for the first six months of the current fiscal year, which reflects a significant increase in forecasted operating results for our fiscal 2021 as compared to operating results forecasted at the end of our first quarter of fiscal 2021, a$118,000 expense arising from a shortfall tax expense related to our stock, a$79,000 expense related to return to provision adjustments from several foreign tax returns filed in the current year and a$78,000 tax benefit related to the expiration of the statute of limitations on previously uncertain tax positions resulting in a 48.6% effective tax rate. We recognized$0.4 million of income tax expense for the first six months of the prior fiscal year, which reflects a$232,000 tax benefit arising from windfall tax benefits related to our stock and a$53,000 tax benefit related to the expiration of the statute of limitations on a previously uncertain tax position resulting in a 13.9% effective tax rate. We reported net income of$0.4 million , or$0.06 per diluted share, for the first six months of the current year. On a comparable basis, net income for the first six months of the prior year was$2.7 million , or$0.36 per diluted share. Return on revenue was 0.7% for the first six months of fiscal 2021 compared to 3.8% for the first six months of fiscal 2020. Segment Analysis We report two segments: Product Identification and Test & Measurement and evaluate segment performance based on the segment profit before corporate and financial administration expenses. Summarized below are the Revenue and Segment Operating Profit (Loss) for each reporting segment: Three Months Ended Six Months Ended Segment Operating Profit Segment Operating Profit Revenue (Loss) Revenue (Loss) August 1, August 3, August 1, August 3, August 1, August 3, August 1, August 3, (In thousands) 2020 2019 2020 2019 2020 2019 2020 2019 Product Identification$ 21,629 $ 22,144 $
3,146$ 2,224 $ 44,009 $ 45,735 $ 6,292 $ 5,110 T&M 6,029 11,324 (407 ) 1,555 14,569 23,914 (563 ) 4,136 Total$ 27,658 $ 33,468 2,739 3,779$ 58,578 $ 69,649 5,729 9,246 Corporate Expenses 2,535 2,616 4,861 5,615 Operating Income 204 1,163 868 3,631 Other Income (Expense), Net 328 (183 ) (23 ) (550 ) Income Before Income Taxes 532 980 845 3,081 Income Tax Provision 529 29 411 429 Net Income $ 3$ 951 $ 434 $ 2,652 Product Identification Revenue from the Product Identification segment decreased 2.3% in the second quarter of the current year, with revenue of$21.6 million compared to$22.1 million in the same period of the prior year. The current quarter decrease in revenue is primarily attributable to declines in the QuickLabel product group as a result of lower ink jet, thermal paper supplies and hardware product sales, as well as lower parts and repair revenue. The overall revenue decrease in PI was tempered by increased sales of both hardware and supplies within the TrojanLabel product group, specifically, TrojanLabel's T2-C and T-4 printers which experienced continued growth during the current quarter. There was also a significant contribution to current quarter revenue as a result of the new product launch of TrojanLabel's T3-OPX product. Product Identification's current quarter segment operating profit was$3.1 million , reflecting a profit margin of 14.5%. This compares to the prior year's second quarter segment profit of$2.2 million and related profit margin of 10.0%. The increase in Product Identification current year second quarter segment operating profit and margin is primarily due to lower period and operating costs. Revenues from the Product Identification segment decreased 3.8% to$44.0 million in the first six months of the current year from$45.7 million in the same period of the prior year. The current period decrease in revenue is primarily attributable to the decline in revenue from QuickLabel product group ink jet and thermal paper supplies, hardware and parts and repairs. The overall revenue decrease in PI was slightly tempered by an increase in sales of supplies in the TrojanLabel product group, as well as the significant contribution to current year revenue as a result of the new product launch of TrojanLabel's T3-OPX product. Product Identification current year segment operating profit was$6.3 million with a profit margin of 14.3%, compared to the prior year segment operating profit of$5.1 million and related profit margin of 11.2 %. The increase in current year segment operating profit and margin is primarily due to lower period and operating costs. 28 -------------------------------------------------------------------------------- Table of Contents Test & Measurement-T&M Revenue from the T&M segment was$6.0 million for the second quarter of the current fiscal year, representing a 46.8% decrease compared to revenue of$11.3 million for the same period in the prior year. The decrease in revenue for the current quarter is primarily attributable to the decline in sales of our aerospace product lines as a result of the Boeing 737 MAX grounding and the dramatic drop in air travel due to the impact of COVID-19. To a lesser degree, the decrease in current quarter revenue was also impacted by a decline in T&M's TMX hardware sales , as well as a decline in supplies and service and other revenue in the aerospace product lines, offset slightly by an increase in sales of the EV-5000 data recorder. T&M's second quarter segment operating loss was$0.4 million , reflecting a negative profit margin of 6.8%, a decrease compared to the prior year segment operating profit of$1.6 million and related operating margin of 13.7%. The decrease in segment operating profit and related margin were due to lower sales revenue in the current quarter. Revenue from the T&M segment was$14.6 million for the first six months of the current fiscal year, a 39.1% decrease compared to sales of$23.9 million for the same period in the prior year. The decrease in revenue for the current year is primarily attributable to the decline in sales of our aerospace product lines as a result of the Boeing 737 MAX grounding and the dramatic drop in air travel due to the impact of COVID-19. The decrease in current period revenue was also driven to a lesser degree by a decline in data recorder hardware sales, as well as a decline in supplies and service and other revenue in the aerospace product lines. The segment's first six months operating loss of$0.6 million resulted in a negative 3.9% profit margin compared to the prior year segment operating profit of$4.1 million and related operating margin of 17.3%. The lower segment operating profit and related margin for the current year is due to lower sales revenue in the current year. Financial Condition and Liquidity Overview Historically, our primary sources of short-term liquidity have been cash generated from operating activities and borrowings under our revolving credit facility. These sources have also funded a portion of our capital expenditures and contractual contingent consideration obligations. We have funded acquisitions by borrowing under bank term loan facilities. At the end of last quarter, the deterioration of our financial condition and operating results due to the decline in 737 MAX-related revenue and COVID-19 impacts caused us to violate the financial covenants in our Credit Agreement datedFebruary 28, 2017 (the "Existing Credit Agreement") withBank of America, N.A . (the "Lender"). OnJune 22, 2020 , we entered into a letter agreement with the Lender wherein it agreed to waive compliance with those financial covenants for the measurement period endedMay 2, 2020 . OnJuly 30, 2020 , we entered into an Amended and Restated Credit Agreement (the "A&R Credit Agreement") with the Lender, our wholly owned subsidiaryANI ApS , a Danish private limited liability company andANI ApS's wholly-owned subsidiaryTrojanLabel ApS , a Danish private limited liability company ("TrojanLabel"). The A&R Credit Agreement amended and restated the Existing Credit Agreement. In connection with our entry into the A&R Credit Agreement, we entered into an Amended and Restated Security and Pledge Agreement and a mortgage in favor of the Lender with respect to our owned real property inWest Warwick, Rhode Island . Under the A&R Credit Agreement,AstroNova, Inc. is the sole borrower and its obligations are guaranteed byANI ApS and TrojanLabel. Immediately prior to the closing of the A&R Credit Agreement, we repaid$1.5 million in principal amount of term loans outstanding under the Existing Credit Agreement. The A&R Credit Agreement provides for (i) a term loan in the principal amount of$15.2 million , which we used to refinance the outstanding term loans borrowed by us andANI ApS under the Existing Credit Agreement and a portion of the outstanding revolving loans borrowed by us under the Existing Credit Agreement, and (ii) a$10.0 million revolving credit facility available to us for general corporate purposes. Revolving credit loans may be borrowed, at our option, inU.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars orDanish Kroner . 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 . We believe that our obtaining the PPP Loan and suspending the payment of dividends on our common stock were instrumental in our ability to successfully negotiate the A&R Credit Facility. 29 -------------------------------------------------------------------------------- Table of Contents As a result of the impact of the COVID-19 pandemic, our customers may also experience liquidity pressure and be unable to pay us for products on a timely basis. During the first quarter we experienced a limited number of cases in which certain of our aerospace customers failed to pay us on a timely basis and we increased our reserves for potential losses on those accounts. In the second quarter, two small airlines we had small receivables balances with but which we had previously fully reserved, entered bankruptcy. In general, during the second quarter these problems abated and we did not increase our reserves. If the impact of the COVID-19 crisis continues for a prolonged period of time or worsens, we may experience further adverse impacts of delayed aerospace receivable collections. OnAugust 1, 2020 , our cash and cash equivalents were$11.2 million . The outstanding balance on our revolving line of credit is$2.0 million atAugust 1, 2020 and we have$8.0 million remaining available for borrowing. Obtaining the PPP Loan and completing the A&R Credit Facility along with the impact of increased cash generated from operations during the second quarter, have resulted in a significant improvement in our liquidity profile and we believe that our available cash and credit facilities combined with our cash generated from operations will be sufficient to support our operating requirements, so long as that the impact of COVID-19 does not worsen. Indebtedness Under the A&R Credit Agreement, the term loan repayments are as follows: the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters endingJuly 31, 2020 andOctober 31, 2020 is$0.8 million ; the principal amount of the quarterly installment required to be paid on the last day of our fiscal quarter endingJanuary 31, 2021 is$1.1 million ; the principal amount of the quarterly installment required to be paid on the last day of our fiscal quarter endingApril 30, 2021 is$1.1 million ; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters endingJuly 31, 2021 ,October 31, 2021 ,January 31, 2022 andApril 30, 2022 is s$1.4 million ; the entire remaining principal balance of the term loan is required to be paid onJune 15, 2022 . 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 thanJune 15, 2022 , 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 A&R 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. Amounts repaid under the revolving credit facility may be reborrowed, subject to continued compliance with the A&R Credit Agreement. No amount of the term loan that is repaid may be reborrowed. The interest rates under the A&R 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 applicable LIBOR rate (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 2.15% to 3.65% 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 applicable LIBOR rate plus 1.00% or (iv) 1.00%, plus a margin that varies within a range of 1.15% to 2.65% based on our consolidated leverage ratio. We are also required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of .25% and .675% based on our consolidated leverage ratio. Under the A&R Credit Agreement , we must comply with various customary financial and non-financial covenants including a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, a minimum level of EBITDA, a consolidated asset coverage ratio and a minimum level of liquidity. 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 capital stock, to repurchase or acquire capital stock, to conduct mergers or acquisitions, to sell assets, to alter their capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the A&R Credit Agreement. The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the A&R 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 our undergoing a change of control. In addition to the guarantees byANI ApS and TrojanLabel, our obligations under the A&R Credit Agreement are also secured by substantially all ofAstroNova, Inc.'s personal property assets (including a pledge of the equity interests it holds inANI ApS , in our wholly-owned German subsidiaryAstroNova GmbH , and in our wholly-owned French subsidiary AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property inWest Warwick, Rhode Island . 30 -------------------------------------------------------------------------------- Table of Contents In connection with our entry into the A&R Credit Agreement, and as a condition of the Lender's entry into the A&R Credit Agreement, we terminated our interest rate swap and cross-currency interest rate swap (the "Swaps") that we previously used to manage the interest rate and foreign currency exchange risks associated with borrowings under the Existing Credit Agreement. We paid$0.7 million in connection with the termination of the Swaps. The PPP Loan, which will mature onMay 6, 2022 , is unsecured and bears interest at a rate of 1.0% per annum, accruing from the loan date and is payable monthly. No payments are due on the PPP Loan for six months from the date of the first disbursement, but interest accrues during the deferral period. Interest accrued in the amount of$11,000 is included in other income (expense) for the three and six month periods endedAugust 1, 2020 . The PPP Loan may be prepaid at any time without penalty. The Loan Agreement and Promissory Note include customary provisions for a loan of this type, including prohibitions on our payment of dividends or repurchase of shares of our stock while the PPP Loan remains outstanding and events of default relating to, among other things, payment defaults, breaches of the provisions of the Loan Agreement or the Promissory Note and cross-defaults on other loans. Subject to the limitations and conditions set forth in the CARES Act, the PPP Flexibility Act and the regulations and guidance provided by the SBA with respect to the PPP, a portion of the PPP Loan in an amount up to the amount of the PPP Loan proceeds we spend on payroll, rent, utilities and interest on certain debt during the twenty-four week period following incurrence of the PPP Loan may be forgiven under the PPP. The amount of the PPP Loan to be forgiven in respect of rent, utilities and interest on certain debt will be capped at 40% of the forgiven amount, with the remaining forgiven amount allocated to payroll costs. We have fully utilized the PPP Loan proceeds for qualifying expenses and intend to apply for forgiveness of the PPP Loan during the third quarter of the current fiscal year. Whether our application for forgiveness will be granted and in what amount is subject to an application to, and approval by, the SBA and may also be subject to further requirements in any regulations and guidelines the SBA may adopt. 31 -------------------------------------------------------------------------------- Table of Contents Cash Flow Our statements of cash flows for the six months endedAugust 1, 2020 andAugust 3, 2019 are included on page 7 of this report. Net cash provided by operating activities was$9.2 million for the first six months of fiscal 2021 compared to$1.0 million for the same period of the previous year. The increase in net cash provided by operations for the first six months of the current year is primarily due to the increase in cash provided by working capital. The combination of changes in accounts receivable, inventory, income taxes payable, accounts payable and accrued expenses increased cash by$5.7 million for the first six months of fiscal 2021, compared to a decrease of$5.6 million for the same period in fiscal 2020. Our accounts receivable balance decreased to$14.8 million at the end of the second quarter compared to$19.8 million at year end. The$5.0 million decrease in the accounts receivable balance from year end is directly related to the decrease in sales for the second quarter of the current year as compared to fourth quarter sales in fiscal 2020 and a decline in days sales outstanding for the second quarter of the current year, which was 47 compared to 55 days at prior year end. The decline in days sales outstanding is largely due to the relative decline in sales of aerospace products, which tend to have longer collection cycles. The inventory balance was$32.4 million at the end of the second quarter of fiscal 2021, compared to$33.9 million at year end and inventory days on hand increased to 163 days at the end of the current quarter from 151 days at the prior year end. The current period decrease in inventory is due to sell through of supplies inventory in the Product Identification segment. Demand declines in the aerospace product group resulted in unconsumed assembly and finished goods inventories, offsetting some of the Product Identification inventory decreases. Inventory days on hand increased by virtue of the lower aerospace sell through. The net increased cash position atAugust 1, 2020 primarily resulted from cash provided by operations, as discussed above, as well as$4.4 million received from PPP loan proceeds and an additional net$3.5 million of proceeds received in the second quarter of fiscal 2021 related to the refinance of long-term debt.. The increase in cash for the first six months of the current year was offset by a$4.5 million net cash decrease on the revolving line of credit, principal payments of long-term debt and the guaranteed royalty obligation of$2.1 million and$1.0 million , respectively; cash used to acquire property, plant and equipment of$1.2 million and dividends paid of$0.5 million . Contractual Obligations, Commitments and Contingencies There have been no material changes to our contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2020 other than those occurring in the ordinary course of business. Critical Accounting Policies, Commitments and Certain Other Matters The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate. While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. There have been no material changes to the application of critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2020 . Forward-Looking Statements This Quarterly Report on Form 10-Q may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect our current expectations concerning future events and results. We generally use the words "believes," "expects," "intends," "plans," "anticipates," "likely," "continues," "may," "will," and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors which could cause actual results to differ materially from those anticipated include, but are not limited to (a) the impact of the ongoing COVID-19 pandemic on us, our customers, our suppliers and the global economy; (b) general economic, financial and business conditions; (c) declining demand in the test and measurement markets, especially defense and aerospace; (d) competition in the specialty printer industry; (e) our ability to develop and introduce new products and achieve market acceptance of these products; (f) competition in the data acquisition industry; (g) the impact of changes in foreign currency 32
--------------------------------------------------------------------------------
Table of Contents exchange rates on the results of operations; (h) the ability to successfully integrate acquisitions and realize benefits from divestitures; (i) our ability to restructure the terms of our current credit facility and to otherwise manage our indebtedness; (j) our ability to obtain financing for working capital and capital expenditures; (k) the business abilities and judgment of personnel and changes in business strategy; (l) the efficacy of research and development investments to develop new products; (m) the launching of significant new products which could result in unanticipated expenses; (n) bankruptcy or other financial problems at major suppliers or customers that could cause disruptions in our supply chain or difficulty in collecting amounts owed by such customers; (o) any technology disruption or delay in implementing new technology; (p) a material security breach or cybersecurity attack impacting our business and our relationship with customers;( q) difficulties encountered in connection with the certification of the 737 MAX for return to service; and (r) other risks included under "Item 1A-Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2020 . We assume no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
© Edgar Online, source