The following discussion and analysis are meant to provide material information relevant to an assessment of the financial condition and results of operations of our company, including an evaluation of the amounts of cash flows from operations and outside resources, liquidity and certain other factors that may affect future results so as to allow investors to better view our company from management's perspective. The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and other financial information included elsewhere in this annual report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on Form 10-K, including information with respect to our plans and strategy for our business and financing, includes forward-looking statements that involve risks and uncertainties. Carefully review the "Forward-Looking Statements" and "Risk Factors" sections of this annual report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
We are a multi-national enterprise that leverages its proprietary data visualization technologies to design, develop, manufacture, distribute and service a broad range of products that acquire, store, analyze and present data in multiple formats. We organize our structure around a core set of competencies, including research and 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 images
label printers, overprinters and custom OEM printers. PI also provides
software to design, manage and print labeling and packaging 21
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 range of
aerospace printers used to print hard copies of data required for the vault
and efficient operation of aircraft, including navigational charts,
authorizations, arrival and departure procedures, flight routes, weather
maps, performance data, passenger data and various air traffic controls
The data. Aerospace products also include aircraft networking systems for
high-speed on-board data transfer. T&M also provides repairs, services and
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 2022, 2021 and 2020, revenue from customers in various geographic areas outside
the United States, primarily in Western Europe, Canadaand Asia, amounted to $49.3 million, $45.1 millionand $49.8 million, respectively. We maintain an active program of product research and development. During fiscal 2022, 2021 and 2020, we spent $6.8 million, $6.2 millionand $8.1 million, respectively, on Company-sponsored product development. We are committed to continuous product development as essential to our organic growth and expect to continue our focus on research and development efforts in fiscal 2022 and beyond. We also continue to invest in sales and marketing initiatives by expanding the existing sales force and using various marketing campaigns to achieve our goals of sales growth and increased profitability notwithstanding the challenging economic environment. COVID-19 Update All of our global operations have been materially adversely affected by the worldwide COVID-19 pandemic during the past two years. We expect this adverse impact to continue to a degree that we cannot predict. We made significant modifications to our global pre-pandemic operations because of the COVID-19 pandemic. We initially required most non-production related team members to work remotely. Although this is no longer required for health and safety reasons, for many of our team members, remote work has become a preference and we believe we have to a large degree successfully adapted to it through the use of technology and changed management practices, but further adaptations, unknown at this time, may be required. We expect that our operations and modalities of on-site and remote work will be impacted permanently, as will our increased safety protocols and the other adaptations undertaken during the pandemic, but our practices and plans are still developing and we cannot predict the results yet. Since the COVID-19 pandemic began we have experienced difficulties in obtaining raw materials and components for our products. Some of the structural dislocations in the global economy caused by the pandemic are deepening and prolonging these difficulties. We have had to incur additional costs, such as expedited and express shipping fees (i.e., air rather than ocean freight). These difficulties have also negatively impacted our efficiency, delayed shipments and caused product shortages . We are currently monitoring the world-wide delays in transit time, as freight carriers continue to experience significant delays in overseas shipments. We are addressing these issues through long range planning and procuring higher inventory on severely allocated items to help mitigate potential shortages whenever practicable. We are also monitoring and reacting to extended lead times on electronic components and utilizing a variety of strategies, including blanket orders, vendor-bonded inventories, extended commitments to our supply base, and seeking alternative suppliers. Additionally, we have
taken actions to increase regular contact with our essential vendors and increased our forecasting horizon for our products to help us better manage our supply chain. In some cases, we are working with our vendors to help them procure components. Our strategies to counteract the impact of the pandemic and the related supply chain dislocations have increased the amount of inventory we maintain to support our product sales. We have also experienced several situations where component shortages and scarcity have required us to pay significantly higher costs to obtain those components. We will continue to monitor our supply chain going forward and update our mitigation strategies as we determine appropriate. We are not able to predict how current supply chain difficulties will develop in the future, and if the steps we are taking are not effective, it could have a material adverse impact on our results of operations.
Product ID Update
Our Product Identification business has been negatively impacted by the COVID-19 pandemic because our ability to meet with customers to demonstrate our products at trade shows and on-site in their facilities has been curtailed. We have partially countered this through a variety of virtual, on-line selling and digital marketing strategies, but the degree to which this will be successful to mitigate the lack of face-to-face selling is unclear. Test & Measurement Update The aerospace industry, which we serve through our aerospace product line, has also been significantly disrupted by the COVID-19 pandemic, both inside and outside of
the United Statesbecause of the severe decline in the demand for air travel and aircraft, and a general curtailment of aircraft production rates. This has had a material adverse impact on our financial results. While air travel demand and aircraft production demand has recovered to some extent, it remains unclear whether these demand factors will continue to recover and to what extent. The secondary impacts of the demand decline and resulting financial losses on the economic structure of the airline industry could become a negative factor for demand for aircraft due to industry consolidation. Individually or in combination, these factors may continue to have a material adverse impact on our business operations and financial results.
PPP loan forgiveness
May 6, 2020, we entered into a loan agreement with, and executed a promissory note in favor of Greenwood Credit Union("Greenwood") pursuant to which we borrowed $4.4 million(the "PPP Loan") from Greenwood pursuant to the Paycheck Protection Program ("PPP") administered by the United States Small Business Administration(the "SBA") and authorized by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), enacted on March 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 on June 5, 2020. On June 15, 2021, the SBA approved our application for forgiveness of the entire $4.4 millionprincipal balance of our PPP Loan and all accrued interest thereon. As a result, we recorded a $4.5 milliongain on extinguishment of debt, which is included in the accompanying consolidated income statement for the period ended January 31, 2022. Employee Retention Credits The CARES Act provides an employee retention credit ("ERC") that is a refundable tax credit against certain employer taxes. On December 27, 2020, Congressenacted the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which amended and extended ERC availability under Section 2301 of the CARES Act. Before the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, we were ineligible for the ERC because we received the PPP Loan. Following enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, we and other businesses that received loans under that program became retroactively eligible for the ERC. 23
In the second quarter of fiscal 2022, we determined that we qualified for an employee retention credit of
$3.1 millionfor wages paid in calendar year 2020 and the first calendar quarter of 2021. We recorded a receivable in the second quarter of fiscal 2022 within prepaid expenses and other current assets in the condensed consolidated balance sheet. Such amount remains outstanding as of January 31, 2022and was received subsequent to year end on March 22, 2022. The $3.1 millionof ERCs was recognized as a reduction in employer payroll taxes and allocated to the financial statement captions from which the employer's payroll taxes were originally incurred. As a result, we recorded a reduction in expenses of $1.7 millionin cost of revenue, $0.8 millionin selling and marketing, $0.3 millionin research and development and $0.3 millionin general and administrative which is included in the accompanying condensed consolidated income statement for the period ended January 31, 2022.
Fiscal 2022 vs. Fiscal 2021
The following table presents the revenue of each of our segments, as well as the percentage of total revenue and the variation compared to the previous year.
($ in thousands) 2022 2021 As a % of % Change As a % of Revenue Total Revenue Over Prior Year Revenue Total Revenue Product Identification
$ 90,91577.4 %
$ 90,26877.8 % T&M 26,565 22.6 % 3.1 % 25,765 22.2 % Total $ 117,480100.0 % 1.2 % $ 116,033100.0 % Net revenue in fiscal 2022 was $117.5 million, a 1.2% increase compared to net revenue of $116.0 millionfor fiscal 2021. Current year revenue through domestic channels was $68.2 million, a decline of 3.8% from prior year domestic revenue of $70.9 million. International revenue of $49.3 millionfor fiscal 2022 increased 9.2% compared to prior year international revenue of $45.1 million. Fiscal 2022 international revenue reflects a favorable foreign exchange rate impact of $1.1 million, compared to a favorable impact of $0.8 millionin fiscal 2021. Hardware revenue in fiscal 2022 was $31.5 million, a $2.6 millionor 7.7% decrease compared to fiscal 2021 hardware revenue of $34.1 million. The current year decrease in hardware revenue is due to the decline in hardware revenue in both the PI and T&M segments. The decrease in hardware revenue is primarily due to a 10.1% decline in hardware sales in the T&M segment resulting from overall lower aerospace printer product line sales in the T&M segment as a result of the continuing effects of the Boeing 737 MAX grounding and the impact of the sharp decline in air travel due to COVID-19. T&M hardware revenue for the current year was also negatively impacted by a decline in sales of data recorders. Also contributing to the overall decline in hardware revenue for the current year was a more modest decline in sales in the PI segment of QuickLabel model printers which was partially offset by sales related to printers in the TrojanLabel product group. Revenue from supplies in fiscal 2022 was $73.2 million, a 2.1% increase compared to fiscal 2021 supplies revenue of $71.8 million. Supplies revenue increased in both the PI and T&M segment in the current year, with the increase primarily due to increased demand for Trojan Label product supplies due to increased market penetration of these printers. Also contributing to the current year increase in supplies revenue was the increase in sales of supplies in both our aerospace printer and data recorder product lines, and a slight increase in ink jet supply sales in the QuickLabel product group. The current year increase was offset to a large extent by a decline in sales of EP and Thermal film supplies in the QuickLabel product group due to a shift from legacy thermal transfer and electrophotographic products to newer ink jet products. Service and other revenue in fiscal 2022 was $12.7 million, a 25.6% increase compared to fiscal 2021 service and other revenue of $10.2 million. The increase is due primarily to overall increased repair and parts revenue in both the T&M and PI segments. 24
Gross profit was
$43.7 millionfor fiscal 2022, reflecting a 5.8% increase compared to fiscal 2021 gross profit of $41.4 million. Our gross profit margin of 37.2% in fiscal 2022 reflects a 2.4 percentage point increase compared to fiscal 2021 gross profit margin of 35.6%. The higher profit and related margin for the current year compared to the prior year is primarily attributable to increased revenue and the impact of the ERC, which reduced manufacturing payroll taxes in the amount of $1.7 millionin the second quarter of the current year. Operating expenses for the current year were $39.5 million, representing a 1.4% increase from the prior year's operating expenses of $38.9 million. Specifically, selling and marketing expenses of $23.2 millionin fiscal 2022 decreased 0.5% from the prior year amount of $23.3 million. The decrease in selling and marketing expenses for the current year is primarily due to a decrease in payroll taxes in the second quarter of the current year related to the ERC, as well as a decrease in amortization expense related to the second quarter's change in the remaining useful lives and amortization methods for certain of our customer relationship intangibles. The current year decline in selling and marketing expenses was partially offset by an increase in employee wages and bonuses as well as increased travel and entertainment, commissions, and advertising expenses. General and administrative expenses increased 1.4% to $9.6 millionin the current year compared to $9.4 millionin the prior year, primarily due to an increase in outside service fees, employee wages, bonuses and fees, partially offset by a decrease in payroll taxes related to the ERC. Research & development ("R&D") costs in fiscal 2022 of $6.8 millionincreased 8.8% from $6.2 millionin fiscal 2021, primarily due to an increase in employee wages and bonus and outside consulting fees. The current year increase in R&D costs was partially offset by a decline in payroll taxes related to the ERC. The R&D spending level for fiscal 2022 represents 5.7% of net revenue, compared to the prior year level of 5.3%. Other income in fiscal 2022 was $2.8 millioncompared to other expense of $0.3 millionin fiscal 2021. Current year other income includes $4.5 millionrelated to the forgiveness of our PPP Loan, partially offset by $0.7 millionrelated to the write-off of our Oracle EnterpriseOne ERP system and related prepaid service and maintenance contracts as a result of the full implementation of a new ERP system in our US based operations in the fourth quarter of fiscal 2022, interest expense on debt of $0.7 million, and net foreign exchange loss of $0.3 million. Prior year other expense includes $1.0 millionof interest expense on debt and revolving line of credit, offset by a net foreign exchange gain of $0.6 millionand other income of $0.1 million. We recognized $0.6 millionof income tax expense for the current fiscal year, resulting in an effective tax rate of 8.6%. The decrease in the effective tax rate in 2022 from 2021 is primarily related to the PPP loan forgiveness tax-exempt income. Specific items decreasing the effective tax rate include PPP loan forgiveness tax-exempt income, R&D tax credits, foreign derived intangible income ("FDII") deductions, and a change in reserves related to ASC 740 liabilities. This decrease was offset by state taxes, return to provision adjustments, and taxes on foreign earnings. The PPP Loan forgiveness is excluded from taxable income under Section 1106(i) of the CARES Act. During fiscal 2021 we recognized a $0.9 millionincome tax expense, or a 41.1% effective tax rate. The effective tax rate in this period was directly impacted by the change in mix of income between relevant jurisdictions in which we are subject to income taxes. Specific items increasing the fiscal 2021 effective tax rate include foreign rate differential, Denmarkstatutory audit adjustments, stock-based compensation, and Canadawithholding taxes. This increase was offset by the foreign derived intangible income deduction, the release of a valuation allowance in China, and R&D tax credits expected to be utilized. Net income for fiscal 2022 was $6.4 million, or $0.88per diluted share. The results for the current period were impacted by income of $4.5 million( $4.4 millionnet of tax or $0.60per diluted share) related to the forgiveness of our PPP Loan, income of $2.1 million( $1.6 millionnet of tax or $0.22per diluted share) related to the net ERC and expense of $0.7 million( $0.5 millionnet of tax or $0.07per diluted share) related to the write-off of our Oracle EnterpriseOne ERP system and related prepaid service and maintenance contracts. Net income for the prior year was $1.3 millionor $0.18per diluted share. Return on revenue was 5.5% for fiscal 2022 compared to 1.1% for fiscal 2021. 25
Fiscal 2021 vs. Fiscal 2020
For a comparison of our results of operations for the fiscal years ended
January 31, 2021, and January 31, 2020, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our annual report on Form 10-K for the fiscal year ended January 31, 2021, filed with the SECon April 13, 2021.
We report two segments consistent with our product revenue groups: PI and T&M. Segment performance is evaluated based on the operating segment's profit (loss) before corporate and financial administration expenses. The following table summarizes selected financial information by segment. Segment Operating Profit ($ in thousands) Revenue Segment Operating Profit (Loss) (Loss) as a % of Revenue 2022 2021 2020 2022 2021 2020 2022 2021 2020 PI
$ 90,915 $ 90,268 $ 88,116 $ 10,411 $ 12,885 $ 7,50911.5 % 14.3 % 8.5 % T&M 26,565 25,765 45,330 3,398 (1,032 ) 6,281 12.8 % (4.0 )% 13.9 % Total $ 117,480 $ 116,033 $ 133,44613,809 11,853 13,790 11.8 % 10.2 % 10.3 % Corporate Expenses 9,553 9,420 11,357 Operating Income 4,256 2,433 2,433 Other Expense, Net 2,778 (254 ) (1,063 ) Income Before Income Taxes 7,034 2,179 1,370 Income Tax Provision (Benefit) 605 895 (389 ) Net Income $ 6,429 $ 1,284 $ 1,759Product Identification Revenue from the PI segment increased 0.7% in fiscal 2022, with revenue of $90.9 millioncompared to revenue of $90.3 millionin the prior year. The current year increase is primarily attributable to growth in demand for ink jet and media supplies for the Trojan Label product line, the increase in current year sales of QuickLabel's ink jet printer supplies and an increase in parts and repairs revenue in both the QuickLabel and Trojan Label product groups. Also contributing to the increase in revenue for the current year was an increase in hardware sales in the Trojan Label product group for certain new products such as the Trojan Two Compact printer and the T3-OPX label press. PI current year segment operating profit was $10.4 millionwith a profit margin of 11.5%, compared to the prior year segment operating profit of $12.9 millionand related profit margin of 14.3%. The decrease in current year segment operating profit and margin is primarily due to increased operating expenses.
Test & Measurement
Revenue from the T&M product group was
$26.6 millionfor fiscal 2022, a 3.1% increase compared to revenue of $25.8 millionin the prior year. The increase in revenue for the current year is primarily attributable to the increase in repairs and parts sales for the aerospace printer product lines. To a lesser degree, the increase in the current year revenue was also impacted by the increase in supplies revenue in the aerospace product lines. T&M current year segment operating profit was $3.4 millionresulting in a 12.8% profit margin compared to the prior year segment operating loss of $1.0 millionand related negative operating margin of 4.0%. The increased profit and margins are a result of increased sales and lower manufacturing and operating costs.
Cash and capital resources
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 typically funded acquisitions by borrowing under bank term loan facilities. On
July 30, 2020, we entered into an Amended and Restated Credit Agreement (the "A&R Credit Agreement") with Bank of America, N.A. (the "Lender"), our wholly owned subsidiary ANI ApS, a Danish private limited liability company and ANI ApS'swholly-owned subsidiary TrojanLabel ApS, a Danish private limited liability company ("TrojanLabel"). The A&R Credit Agreement amended and restated the Credit Agreement dated as of February 28, 2017, by and among us, ANI ApS, TrojanLabel and the Lender. 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 in West Warwick, Rhode Island. Under the A&R Credit Agreement, AstroNova, Inc.is the sole borrower, and, prior to the effectiveness of the Amendment (as defined below), its obligations were guaranteed by ANI ApSand TrojanLabel. On March 24, 2021, we entered into a First Amendment to Credit Agreement (the "Amendment") to our A&R Credit Agreement (the "A&R Credit Agreement amended by the Amendment, the "Amended Credit Agreement") with the Lender, ANI ApSand TrojanLabel. Immediately prior to the closing of the Amendment, we repaid $2.6 millionin principal amount of the term loan outstanding under the A&R Credit Agreement, resulting in an outstanding balance of the term loan of $10.0 millionand no amount drawn and outstanding under the revolving credit facility under the Amended Credit Agreement. The Amended Credit Agreement expires on September 30, 2025, a significant extension of tenor. It also eliminated a minimum adjusted EBITDA covenant, an asset coverage covenant and a minimum liquidity covenant, and, subject to ongoing covenant compliance, significantly reduced limitations on restricted payments such as dividends, eliminated restrictions on capital expenditures and increased operating flexibility with respect to funding our global operations. The Amended Credit Agreement provides for (i) a term loan in the principal amount of $10.0 million, and (ii) a $22.5 millionrevolving credit facility available for general corporate purposes. At the closing of the Amended Credit Agreement, we borrowed the entire $10.0 millionterm loan which was used to refinance in full the outstanding term loan under the A&R Credit Agreement. Under the Amended Credit Agreement, revolving credit loans may continue to be borrowed, at our option, in U.S.Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Kroner. While we expected that as a result of the impact of the COVID-19 pandemic, some of our customers would experience liquidity pressure and be unable to pay us for products on a timely basis, in general our recent receivables collection experience has been consistent with our historical experience and a significant deterioration in receivables collection has not occurred. In response to the COVID-19 pandemic and related economic dislocation, we have implemented and will continue to implement a variety of expense reduction and cash preservation initiatives. On April 27, 2020, our board of directors suspended our quarterly cash dividend beginning with the second quarter of our fiscal year 2021. At January 31, 2022, our cash and cash equivalents were $5.3 million. There was no outstanding balance on our revolving line of credit at January 31, 2022and we have $22.5 millionavailable for borrowing under that facility. We believe that our available cash and credit facilities combined with our cash generated from operations will be sufficient to support our operating requirements including our capital expenditure commitments.
Table of Contents Indebtedness Term Loan The Amended Credit Agreement requires that the term loan be paid as follows: the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about
April 30, 2021through January 31, 2022is $187,500; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2022through January 31, 2023is $250,000; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2023through January 31, 2025is $312,500; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2025and July 31, 2025is $500,000; and the entire remaining principal balance of the term loan is required to be paid on September 30, 2025. We may voluntarily prepay the term loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later than September 30, 2025, at which time any outstanding revolving loans will be due and payable in full, and the revolving credit facility will terminate. We may reduce or terminate the revolving line of credit at any time, subject to certain thresholds and conditions, without premium or penalty. The Amended Credit Agreement includes an uncommitted accordion provision under which the term loan and/or revolving credit facility commitments may be increased in an aggregate principal amount not exceeding $10.0 million, subject to obtaining the agreement of the Lender and the satisfaction of certain other conditions. As under the A&R Credit Agreement, the loans under the Amended Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from (a) net cash proceeds from certain dispositions of property, (b) net cash proceeds from certain issuances of equity, (c) net cash proceeds from certain issuances of additional debt and (d) net cash proceeds from certain extraordinary receipts. Amounts repaid under the revolving credit facility may be reborrowed, subject to continued compliance with the Amended Credit Agreement. No amount of the term loan that is repaid may be reborrowed. On December 14, 2021, we and Bank of America, N.A. entered into a LIBOR Transition Amendment (the "LIBOR Amendment") with regard to the Amended Credit Agreement. The LIBOR Amendment, among other things, (i) changes the rate under the Amended Credit Agreement for borrowings denominated in U.S.Dollars from a LIBOR-based rate to a BSBY (Bloomberg Short-Term Bank Yield Index)-based rate, subject to certain adjustments, (ii) changes the rate under the Amended Credit Agreement for borrowings denominated in British Pounds Sterling from a LIBOR-based rate to a SONIA (Sterling Overnight Index Average)-based rate, subject to certain adjustments, (iii) changes the rate under the Amended Credit Agreement for borrowings denominated in Euros from a LIBOR-based rate to a EURIBOR (Euro Interbank Offered Rate)-based rate, subject to certain adjustments, and (iv) updates certain other provisions of the Amended Credit Agreement regarding successor interest rates to LIBOR. Prior to giving effect to the LIBOR Amendment, the interest rates under Amended Credit Agreement were as follows: the term loan and revolving credit loans bore interest at a rate per annum equal to, at our option, either (a) the LIBOR Rate as defined in the A&R Credit Agreement (or in the case of revolving credit loans denominated in a currency other than U.S.Dollars, the applicable quoted rate), plus a margin that varied within a range of 1.60% to 2.30% based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50%, (ii) Bank of America's publicly announced prime rate, (iii) the LIBOR Rate plus 1.00% or (iv) 0.50%, plus a margin that varied within a range of 0.60% to 1.30% based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15% and 0.30% based on our consolidated leverage ratio.
The interest rates under the Amended Credit Agreement, giving effect to the LIBOR Amendment, are as follows: the term loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the BSBY Rate as defined in the LIBOR Amendment (or in the case of revolving credit loans denominated in a Pounds Sterling, Euros or another currency other than
U.S.Dollars, the SONIA Rate as defined in the LIBOR Amendment, EURIOBOR Rate as defined in the LIBOR Amendment, or the applicable quoted rate, respectively), plus a margin that varies within a range of 1.60% to 2.30% based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50%, (ii) Bank of America's publicly announced prime rate, (iii) the BSBY Rate, SONIA Rate, EURIBOR Rate or other applicable quoted rate plus 1.00% or (iv) 0.50%, plus a margin that varies within a range of 0.60% to 1.30% based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15% and 0.30% based on our consolidated leverage ratio. We must comply with various customary financial and non-financial covenants under the Amended Credit Agreement. The financial covenants under the Amended Credit Agreement consist of a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. The minimum EBITDA, minimum consolidated asset coverage ratio, minimum liquidity and maximum capital expenditures covenants with which we were required to comply under the A&R Credit Agreement were eliminated by the Amendment. 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 their capital stock, to repurchase or acquire their 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 Amended Credit Agreement, certain of which provisions were modified by the Amendment. The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Amended Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries' significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or a change of control. Our obligations under the Amended Credit Agreement continue to be secured by substantially all of our personal property assets (including a pledge of the equity interests held by us in ANI ApS, in our wholly-owned German subsidiary AstroNova GmbH, and in our wholly-owned French subsidiary AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property in West Warwick, Rhode Island. Pursuant to the Amendment, the guarantees of our obligations under the A&R Credit Agreement that were previously provided by ANI ApSand TrojanLabel were released.
May 6, 2020, we entered into a Loan Agreement with and executed a promissory note in favor of Greenwood Credit Unionpursuant to which we borrowed $4.4 millionfrom Greenwood pursuant to the Paycheck Protection Program administered by the United States Small Business Administration(the "SBA") and authorized by the CARES Act enacted on March 27, 2020. The terms of the PPP Loan were subsequently revised in accordance with the provisions of the Paycheck Protection Flexibility Act of 2020, which was enacted on June 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 Agreement. The PPP Loan, which would have matured on May 6, 2022, was unsecured and bore interest at a rate of 1.0% per annum, accruing from the loan date. No payments would have been due on the PPP Loan until the date on which the lender determined the amount of the PPP Loan that was eligible for forgiveness.
June 15, 2021, Greenwood notified us that the SBA approved our application for forgiveness of the entire $4.4 millionprincipal balance of our PPP Loan and all accrued interest thereon. As a result, we recorded a $4.5 milliongain on extinguishment of debt in other income (expense) which is included in our consolidated income statement for the period ended January 31, 2022.
The statements of cash flows for the years ended
January 31, 2022, 2021 and 2020 are included on page 50 of this Form 10- K. Netcash provided by operating activities was $1.4 millionin fiscal 2022 compared to net cash provided by operating activities of $15.5 millionin the previous year. The decrease in net cash provided by operations for the current year is primarily due to a decrease in cash provided by working capital of $11.3 millionfrom fiscal 2021. The changes in accounts receivable, inventory, income taxes, accounts payable and accrued expenses for the current year decreased cash by $3.9 millionin fiscal 2022 compared to an increase to cash of $7.4 millionin the prior year. The decrease in cash from operations for fiscal 2022 was also impacted by the $3.1 millionERC receivable and the $4.5 milliongain on the forgiveness of the PPP Loan. The accounts receivable balance decreased to $17.1 millionat January 31, 2022, compared to $17.4at January 31, 2021. The slight decrease in the accounts receivable balance is related to sales product mix in fiscal 2022 compared to the prior year. The days sales outstanding dropped to 45 days at year end compared to 51 days at the end of fiscal 2021 contributing to the lower receivables balance at January 31, 2022. The days sales outstanding decrease in the current year is due to customer mix, as aerospace receivables typically take longer to collect, and these revenues continued to represent a lesser percentage of total sales in fiscal 2022.
end of the year
inventory balance increased to
$34.6 millionat January 31, 2022versus $30.1 millionat January 31, 2021, and the days inventory on hand increased to 156 days at the end of fiscal 2022 as compared to 147 days at the end of the fiscal 2021. The current period increase in inventory is due to increased production demand. Net cash used by investing activities for fiscal 2022 was $1.8 millionfor capital expenditures, of which $1.6 millionrelated to the capitalization of our new ERP system and the related hardware, and the remaining $0.2 millionwas for machinery and tools. Net cash used by financing activities for fiscal 2022 was $5.6 million. Cash outflows for financing activities for fiscal 2022 included the refinancing of debt, which resulted in a net outflow of cash of $2.6 million, and principal payments on the new long-term debt and the guaranteed royalty obligation of $0.8 millionand $2.0 million, respectively.
Fiscal 2021 vs. Fiscal 2020
For a comparison of our cash flow for the fiscal years ended
January 31, 2021and January 31, 2020, see "Part II, Item 7. Management's Discussion and Analysis of Liquidity and Capital Resources" in our annual report on Form 10-K for the fiscal year ended January 31, 2021, filed with the SECon April 13, 2021.
Contractual obligations, commitments and contingencies
The lease arrangements are for certain of our facilities at various locations worldwide. As of
January 31, 2022, we had fixed lease payment obligations of $1.1 million, with $0.3 milliondue within 12 months. Refer to Note 12, "Leases," in our audited consolidated financial statements included in this Annual Report on Form 10-K for further details. 30
Debt arrangements under our Amended Credit Agreement with
Bank of America, N.A., consist of the balance due of $9.3 millionat January 31, 2022. For additional details regarding our long-term debt obligations, see Note 7, "Debt," in our audited consolidated financial statements included in this Annual Report on Form 10-K. We are subject to a guaranteed minimum royalty payment obligation over the next six years pursuant to the Honeywell Agreement, which, at January 31, 2022, included a balance due of $6.4 million, with $2.0 milliondue within 12 months. Refer to Note 11, "Royalty Obligation," in our audited consolidated financial statements included in this Annual Report on Form 10-K for further details. In order to meet our manufacturing demands and, in some cases, lock in particular pricing structures for specific goods used in manufacturing, we enter into purchase commitments with our suppliers. At January 31, 2022our purchase commitments totaled $37.5 million, with $35.4 milliondue within 12 months, most of which are non-cancelable. We are also subject to contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, such as: contract and employment claims; workers compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided, or covered by insurance, will not have a material adverse effect on our consolidated financial position or results of operations. It is possible, however, that results of operations for any future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control.
Significant Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in
the United States. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements. These judgments and estimates are based on our historical experience, current trends and information available from other sources, as appropriate. We do not believe there is a great likelihood that materially different amounts would be reported using different assumptions pertaining to the accounting policies described below, however, if actual conditions differ from the assumptions used in our judgments, our financial results could be materially different from our estimates.
We believe that the following critical accounting policies require significant judgments and estimates in the preparation of our consolidated financial statements:
Revenue Recognition : We recognize revenue in accordance with Accounting Standards Update (ASU) 2014-9, Revenue from Contracts with Customers (also referred to as Topic 606). Under Topic 606, based on the nature of our contracts and consistent with prior practice, we recognize most of our revenue upon shipment, which is when the performance obligation has been satisfied. Our accounting policies relating to the recognition of revenue under Topic 606 require management to make estimates, determinations and judgments based on historical experience and on various other assumptions, which include (i) the existence of a contract with the customer, (ii) the identification of the performance obligations in the contract, (iii) the value of any variable consideration in the contract, (iv) the stand alone selling price of multiple obligations in the contract, for the purpose of allocating the consideration in the contract, and (v) determining when a performance obligation has been met. Recognition of revenue based on incorrect judgments, including the identification of performance obligation arrangements as well as the pattern of delivery 31
for those services, could result in inappropriate recognition of revenue, or incorrect timing of revenue recognition, which could have a material effect on our financial condition and results of operations. We recognize revenue for non-recurring engineering (NRE) fees, as necessary, for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue. Infrequently, we receive requests from customers to hold product being purchased from us for the customers' convenience. We recognize revenue for such bill and hold arrangements in accordance with the guidance provided by Topic 606, which requires the transaction to meet the following criteria in order to determine that the customer has obtained control: (a) the reason for the bill and hold is substantive, (b) the product has separately been identified as belonging to the customer, (c) the product is currently ready for physical transfer to the customer, and (d) we do not have the ability to use the product or direct it to another customer. Allowance for Doubtful Accounts: Accounts receivable consists primarily of receivables from our customers arising from the sale of our products. We actively monitor our exposure to credit risk through the use of credit approvals and credit limits. Accounts receivable is presented net of reserves for doubtful accounts. We estimate the collectability of our receivables and establish allowances for accounts receivable that we estimate to be uncollectible. We base these allowances on our historical collection experience, the length of time our accounts receivable are outstanding and the financial condition of individual customers. In situations where we are aware of a specific customer's inability to meet its financial obligation, such as in the case of a bankruptcy filing, we assess the need for a specific reserve for bad debts. We believe that our procedure for estimating such amounts is reasonable and historically have not resulted in material adjustments in subsequent periods. Bad debt expense was less than 1% of net sales in each of fiscal 2022 and 2021. Warranty Claims: We offer warranties on some of our products. We establish a reserve for estimated costs of warranties at the time the product revenue is recognized. This reserve requires us to make estimates regarding the amounts necessary to settle future and existing claims using historical data on products sold as of the balance sheet date. The length of the warranty period, the product's failure rates, and the customer's usage affect estimated warranty cost. If actual warranty costs differ from our estimated amounts, future results of operations could be affected adversely. Warranty cost is recorded as cost of revenue, and the reserve balance recorded as an accrued expense. While we maintain product quality programs and processes, our warranty obligation is affected by product failure rates and the related corrective costs. If actual product failure rates and/or corrective costs differ from the estimates, we revise our estimated warranty liability accordingly.
Inventories are stated at the lower of cost or net realizable value. The process for evaluating and recording obsolete and excess inventory provisions consists of analyzing the inventory supply on hand and estimating the net realizable value of the inventory based on historical experience, current business conditions and anticipated future revenue. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to actual experience. Income Taxes: A valuation allowance is established when it is "more-likely-than-not" that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence must be considered, including our performance, the market environment in which we operate, length of carryforward periods, existing revenue backlog and future revenue projections. If actual factors and conditions differ materially from the estimates made by management, the actual realization of the net deferred tax assets or liabilities could vary materially from the amounts previously recorded. At
January 31, 2022, we had provided valuation allowances for future tax benefits resulting from certain domestic R&D tax credits and foreign tax credit carryforwards, both of which could expire unused. 32
The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. Although guidance on the accounting for uncertain income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what we have estimated, our income tax expense could be materially impacted. On
March 27, 2020, the CARES Act was signed into law. The legislation had sweeping effects including various types of economic relief for impacted businesses and industries. One such relief provision was the Paycheck Protection Program ("PPP"), which provided short-term cash flow assistance to finance employee payroll and qualified expenses. On May 6, 2020, we entered into a loan agreement with, and executed a promissory note in favor of Greenwood pursuant to which we borrowed $4.4 million. On December 27, 2020, the Consolidated Appropriations Act, 2021, H.R. 133 was signed into law. The legislation permits the deductibility of expenses to the extent that the payment of such expenses results (or is expected to result) in the forgiveness of a loan (covered loan) guaranteed under the PPP. We have fully utilized the PPP Loan proceeds for qualifying expenses and subsequent to year end have applied for forgiveness of the PPP Loan (including all associated accrued interest) in accordance with the terms of the CARES Act, as amended by the PPP Flexibility Act. Consistent with the legislation, we deducted the full $4.4 millionof qualified expenses on our 2020 federal tax return. On June 15, 2021, Greenwood notified us that the SBA approved our application for forgiveness of the entire $4.4 millionprincipal balance of our PPP Loan and all accrued interest thereon. As a result, in the second quarter of fiscal 2022, we recorded a $4.5 milliongain on extinguishment of debt. The PPP loan forgiveness recognized in the second quarter of fiscal 2022 is excluded from taxable income under Section 1106(i) of the CARES Act. Intangible and Long-Lived Assets: Long-lived assets, such as definite-lived intangible assets and property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, which is determined by the discounting of future cash flows.
Goodwillis tested for impairment at the reporting unit. A reporting unit is an operating segment or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic characteristics. Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwillis first qualitatively assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the reporting unit. The quantitative assessment compares the fair value of the reporting unit with its carrying value. If a quantitative assessment is required, we estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit's expected long-term operating cash flow performance. In addition, we use the market approach, which compares the reporting unit to publicly traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the
carrying value of the reporting unit's net assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. Share-Based Compensation: Share-based compensation expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires several complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and our dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted-average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of the option grants, we have observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grants and assessed the expected risk tolerance of different option groups. The risk-free interest rate used in the model is based on the actual
U.S. Treasuryzero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year's average dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards ("RSAs") and restricted stock units ("RSUs") is also based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of our common stock on the date of grant. Reductions in compensation expense associated with forfeited awards are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture experience.
Recent accounting pronouncements
Reference is made to Note 1 of our audited consolidated financial statements included elsewhere in this report.
© Edgar Online, source