EDGAR 10-K Filing

Company CIK: 8146
Filing Year: 2023
Filename: 8146_10-K_2023_0001193125-23-103662.json

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ITEM 1. BUSINESS
Item 1. Business
General
Unless otherwise indicated, references to “AstroNova,” the “Company,” “we,” “our,” and “us” in this Annual Report on Form 10-K refer to AstroNova, Inc. and its consolidated subsidiaries.
We design, develop, manufacture and distribute a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software, which incorporate advanced technologies to acquire, store, analyze, and present data in multiple formats. Target markets for our hardware and software products include aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging and transportation.
Our products are distributed worldwide through our own sales force, authorized dealers, and independent dealers and representatives.
Our business consists of two segments, Product Identification (“PI”) and Test & Measurement (“T&M”). The PI segment includes specialty printing systems and related supplies sold under the QuickLabel®, TrojanLabel® and GetLabels™ brand names. The T&M segment includes our line of aerospace printers, ethernet networking products and test and measurement data acquisition systems sold under the AstroNova ® brand name. Refer to Note 18, “Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding our segments.
On August 4, 2022, we acquired Astro Machine LLC (“Astro Machine”), an Illinois-based manufacturer of printing equipment, including label printers and related accessories, tabbers, conveyors, and envelope feeders. Astro Machine is reported as a part of our PI segment beginning with the third quarter of fiscal 2023. Refer to Note 2, “Acquisition,” in our audited consolidated financial statements included elsewhere in this report.
The following description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on pages 24 through 37 of this Annual Report on Form 10-K.
Description of Business
Product Overview
We leverage our expertise in data visualization technologies to design, manufacture and market specialty printing systems, test and measurement systems, and related services for select growing markets globally.
PI products sold under the QuickLabel, TrojanLabel and GetLabels brands are used in brand owner and commercial applications to provide product packaging, marketing, tracking, branding, and labeling solutions to a wide array of industries. The PI segment offers a variety of digital color label tabletop printers and light commercial label printers, direct-to-package printers, high-volume presses, and specialty original equipment manufacturer (“OEM”) printing systems, as well as a wide range of label, tag and flexible packaging material substrates and other supplies, including ink and toner, allowing customers to mark, track, protect and enhance the appearance of their products. PI products sold under the Astro Machine brand acquired on August 4, 2022, also include a variety of label printers, envelope and packaging printing, and related processing and handling equipment. In the T&M segment, we have a long history of using our technologies to provide networking systems and high-resolution flight deck and cabin printers for the aerospace market. In addition, the T&M segment includes data acquisition recorders, sold under the AstroNova brand, to enable our customers to acquire and record visual and electronic signal data from local and networked data streams and sensors. The recorded data is processed, analyzed, stored and presented in various visual output formats.
Product Identification
Our PI segment includes three brands: QuickLabel, TrojanLabel, and GetLabels. Additionally, PI includes the recently acquired Astro Machine brand that is sold directly to end users though our channel partners and to OEM customers, who generally rebrand these products for sales to their customers. The segment provides a wide array of digital end-to-end product marking and identification solutions including hardware, software, and supplies for OEMs, commercial printers, and brand owners. Our customers typically label or mark products on a short- to mid-size run basis and benefit from the efficiency, flexibility, and cost-savings of digitally printing labels or packaging in their facility, on-demand, with the ability to accommodate multiple SKUs or variable data such as bar codes, lot numbers or expiration dates. QuickLabel brand products include tabletop printers, production-ready digital color label printers, and specialty OEM printing systems for either standalone output or inline integration with existing pre-processing and finishing systems. Customers use our digital printing products in a wide variety of industries, including chemicals, cosmetics, food and beverage, medical products, nutraceuticals, pharmaceuticals, and many others. TrojanLabel expands our customer market by providing a range of higher volume digital color printers, OEM printing systems, and supplies that target the more demanding needs of brand owners, commercial printers, label converters, and packaging manufacturers, giving them the ability to digitally mark or encode products directly or to produce labels for post-printing applications. GetLabels brand products include a full line of media supplies, including label materials, tags, inks, toners, and thermal transfer ribbons designed for optimal performance with our printing hardware, and are also compatible with a wide variety of competitive and third-party printing hardware.
Current QuickLabel models include a selection of professional tabletop digital color label printers. We recently introduced the QL-E100, an entry-level, compact, full-color tabletop label printer. It delivers professional-quality output at a lower price point, which we believe is ideal for targeting smaller businesses entering the on-demand label market, and larger enterprises that require multiple on-demand label printers at distributed locations throughout their facilities. The high-speed QL-120X was built on our pioneering and successful Kiaro! platform. To expand the product line further, the QL-120Xe, a sister product to the dye ink QL-120X, was introduced in 2021 as a lower price point option for low-volume applications and price-sensitive customers. In 2020, we introduced the QL-120D, which features high-performance pigment inks that can produce durable BS5609-certified labels and labels that can withstand a wide range of demanding environmental conditions from sterilization to cryogenic freezing. Introduced early in 2019, the high-performance QL-300 was the first 5-color toner-based electrophotographic tabletop production label printer in the market. In addition, our
QuickLabel line of printers includes the QL-850, our next-generation wide-format inkjet color label printer, the QL-30 and QL-60 series, a family of high-end monochrome printers, and the QLS-4100 XE, a unique solution with the ability to digitally print full-color labels and tags using thermal transfer ribbon technology.
Our TrojanLabel portfolio includes a range of products from professional digital color label mini-presses to large-scale all-in-one inline specialty printing systems for both brand owners, OEMs, and commercial printers. The T2-C, a compact, digital mini-press designed for 24/7 label production, includes numerous differentiating features for several end-use market applications. The T2-L is a narrow-format digital press designed specifically for flexible packaging substrates. Beyond label printing, the T3-OPX, the first of its kind direct-to-package printer, which was introduced in late 2020, allows printing directly onto a range of flat products, including cardboard, paper bags, flat wood planks and many other items using pigment inks that are resistant to both water and UV exposure. A professional high-volume label press and finishing system, the T4, enables print, die-cut, and lamination in an all-in-one machine with a much smaller footprint than others in the market.
GetLabels provides a broad range of high-quality supplies for both our printers and third-party printers, including label and tag materials, inks, toner, and thermal transfer material, all specifically designed and constructed for a wide variety of labeling applications. Label material and substrates are carefully qualified and tested on-site in our Rhode Island Materials Research Laboratory to ensure durability and compatibility with our QuickLabel and TrojanLabel branded products, along with a variety of third-party printers.
Astro Machine sells a variety of label printers, envelope and package printers and related envelope tabbers, conveyors and feeders to OEM customers who re-label the products with their own brand.
The PI segment provides worldwide training and support as well as develops and licenses various specialized software programs to design and manage labels, print images, manage and operate our printers and presses, and coordinate printing on an automated basis directly over networked systems.
Test & Measurement
Products sold under our T&M segment are designed and manufactured for airborne printing and networking solutions and data acquisition. Our aerospace products include flight deck printing solutions, networking hardware and specialized aerospace-grade thermal paper. Our data acquisition systems are used in research and development, flight testing, missile/rocket telemetry production monitoring, power and maintenance applications. These products are sold to customers in various industries, including aerospace & defense, automotive, commercial airline, energy, manufacturing and transportation, to meet their need to acquire and record data from local and networked data streams and sensors.
Our airborne printers, which include our flagship ToughWriter® series, are used in the flight decks and cabins of military, commercial, and business aircraft to print hard copies of data to enhance flight safety and reduce pilot workload by providing ready access to many types of critical flight-specific information required for the safe and efficient operation of aircraft. Examples of printed data include navigation maps, arrival and departure information, flight itineraries, weather maps, notice to air missions or NOTAMS, performance data, passenger data, and air traffic control data. ToughSwitch® Ethernet switches are used primarily in military aircraft and military vehicles to connect multiple computers or Ethernet devices. The airborne printers and Ethernet switches are ruggedized to comply with rigorous military and commercial flight-worthiness standards for operation under extreme environmental conditions. We are currently furnishing ToughWriter printers for various aircraft made by Airbus, Boeing, Bombardier, Lockheed, Gulfstream, and others. In addition to the ToughWriter products, we furnish other acquired flight deck printer products, including the TP/NP series, the RTP80 series and the PTA-45B series of airborne printers. The PTA-45B is subject to the Asset Purchase and License Agreement with Honeywell International, Inc. (the “Honeywell Agreement”), pursuant to which in 2017 we acquired an exclusive perpetual worldwide license to manufacture and support Honeywell’s narrow-format flight deck printers for the Boeing 737 and Airbus 320 aircraft. Over time we expect customers to replace the
PTA-45B and other acquired printer product lines with the AstroNova designed ToughWriter products because of the numerous technical features, functional advantages and significant weight savings. Currently, approximately one-third of the airborne printers sold are ToughWriter branded, and we expect the percentage of ToughWriter products to continue to grow over the next several years, and notably in fiscal 2025.
Other T&M products include the TMX® all-in-one high-speed data acquisition system for applications requiring high channel counts and acquisition rates; the Daxus® DXS-100 distributed data acquisition platform; the SmartCorder® DDX-100, a portable all-in-one data acquisition system for R&D facility and field testing; and the Everest® EV-5000 digital strip chart recording system used mainly in aerospace and defense applications. The Daxus DXS-100 can be connected to the SmartCorder to increase channel count or networked as part of a distributed measurement system spanning vast distances.
Technology
Our core technologies are data visualization technologies that relate to (1) acquiring data, (2) conditioning the data, (3) displaying or printing the data on hard copy, visual displays or electronic storage media, and (4) analyzing the data. To support our data visualization technology, we maintain technological core competencies and trade secret know-how concerning the subject matter peculiar to each business unit. The technological disciplines are diverse and include electronic, software, mechanical and industrial engineering aspects. Additionally, we possess engineering expertise in digital signal processing, image processing, fluidics, color theory, high-speed material handling, and airworthiness design.
Patents and Copyrights
We hold several product patents in the United States and in foreign countries. We rely on a combination of copyright, patent, trademark, and trade secret laws in the United States and other jurisdictions to protect our technology and brand names. We consider our intellectual property to be critical to the operation of our business. In particular, we believe that the loss of the trademarks QuickLabel, TrojanLabel, ToughWriter, or ToughSwitch or the loss of the license provided under the Honeywell Agreement could have a material adverse impact on our business taken as a whole. Because of the OEM nature of the Astro Machine business model (and the similarity of that brand name to the AstroNova name), its trademark and brand name, while important, are less critical.
Manufacturing and Supplies
We manufacture many of the products that we design and sell. Raw materials and supplies are typically available from a wide variety of sources. We manufacture many sub-assemblies and parts in-house, including certain specialty printed circuit board assemblies and harnesses, and we have extensive electronic and mechanical final assembly and test operations. Many parts are not manufactured in-house are standard electronic items available from multiple sources. Other printers and parts are designed or modified by us and manufactured by outside vendors according to our specifications. We also purchase certain components, assembled products, and supplies used to manufacture or sell with our products, from single-or limited- source suppliers. Although we believe the majority of these sole or limited source components, assembled products, and supplies could be sourced elsewhere with appropriate changes in the design of our products, the required design changes might not be feasible on a timely basis, and any interruption in these components, products or supplies could adversely affect our business. When circumstances cause us to anticipate that we may not be able to acquire such components, products or supplies on a timely basis, our practice is to procure a sufficient quantity in advance. In the past, we have made such advanced purchases primarily for aerospace products and in quantities that we anticipate will suffice for the life of the aircraft program for which those printers are designed.
Marketing and Competition
We compete worldwide in multiple markets. Through our existing network of manufacturing, sales and support facilities, we have sold our products to customers in over 150 countries.
We believe we are a market leader in tabletop digital color label printing technology in the specialty on-demand printing field, the market leader in flight deck printers, and an innovator in digital color mini-press systems. In the data acquisition area, we are one of the leaders in general-purpose, portable, high-speed data acquisition systems.
Management believes that we have a market leadership position in many of the markets we serve. We retain our leadership position by virtue of our proprietary technology, product reputation, delivery, our channels to market, technical assistance and service to customers. The number of competitors varies by product line. Key competitive factors vary among our product lines but include technology, quality, service and support, distribution network and breadth of product and service offerings.
Our PI products are sold by direct field salespersons as well as independent dealers and representatives, while our T & M products are sold predominantly through direct sales and manufacturers’ representatives. In the United States, we have factory-trained direct-field salespeople located throughout the country specializing in PI products. We also have direct field sales or service centers in Canada, China, Denmark, France, Germany, Malaysia, Mexico, Singapore, and the United Kingdom staffed by our own employees and dedicated third-party contractors. Additionally, we utilize over 100 independent dealers and representatives selling and marketing our products in over 60 countries.
No single customer accounted for 10% or more of our net revenue in any of the last three fiscal years.
Order Backlog
Our order backlog is predominantly but not exclusively for products that will be delivered within twelve months, and backlog scheduled for beyond twelve months is predominantly within the T&M segment. However, backlog varies regularly and is not a highly reliable predictive indicator of near-term future sales trends, primarily due to the frequent longer-term original equipment and supplies orders within the T&M segment. In the PI segment, we have multi-period (but typically not multi-year) blanket order arrangements with many customers for labels and other supplies. Printer hardware in the PI segment is typically shipped within a short period of time after orders are booked. Manufacturing production is designed to meet forecasted demands and built-to-order customer requirements. Backlog at January 31, 2023 and 2022 was $35.8 million and $27.8 million, respectively.
Government Regulation
We are subject to a wide variety of laws, rules, mandates, and regulations, some of which apply or may apply to us as a result of our business, particularly with respect to our aircraft cockpit printer business which sells in a highly regulated industry. For example, material modifications to an airborne printer cannot be made without having progressed through an extensive series of product qualification and certification steps that are technically complicated, expensive to execute, typically slow the pace of product development in that industry and can constrain our ability to quickly respond to pricing fluctuations or disruptions to our supply chain for products.
Other applicable and potentially applicable regulations and laws include regulations and laws regarding taxation, accounting and U.S. Securities and Exchange Commission (“SEC”) reporting, privacy, data protection, pricing, content, distribution, energy consumption, environmental regulation, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health, safety, and sanitation standards, the characteristics and quality of products and services, product labeling and unfair and deceptive trade practices.
Our business outside of the U.S. exposes us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties.
Environmental Matters
We believe that we are in compliance with all applicable federal, state, and local laws concerning the discharge of material into the environment or otherwise relating to the protection of the environment. We have not experienced any material costs in connection with environmental compliance and do not believe that such compliance will have any material effect on our financial position, results of operations, cash flows, or competitive position.
Employees
As of January 31, 2023 we employed 394 full-time employees, including 40 employees added as a result of the Astro Machine acquisition in August 2022. Of our full-time employees, 295 were in the United States, 77 in Europe, 10 in Canada, 10 in Asia and two in Mexico.
None of our employees are represented by a labor union or covered by a collective bargaining agreement; except for our employees in France, where local regulations generally require collective bargaining agreements.
Successful execution of our business strategy depends on our ability to retain several key employees in both individual contributor and management roles. We continuously assess the risk of losing our key employees through regular communications, engagement surveys and assessments in the labor market. Our retention strategy is focused on ensuring competitive compensation packages, career and professional development, leadership coaching and other actions to improve overall engagement with our key employees.
Culture
We are deeply committed to and invest substantial resources in maintaining and improving a strong and definable company culture that shapes how we operate and engage with stakeholders and employees. Our culture consists of four key components:
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A powerful set of core values: Customer First, One Global Team, Innovation, Continuous Improvement and Building Shareholder Value.
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The AstroNova Operating System (AOS), the comprehensive business management process which helps us manage the business to achieve continuous improvements in quality, delivery, cost, and growth.
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A commitment to operating with integrity and compliance to ensure our business is conducted in an honest, legal, and environmentally responsible manner.
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A passionate commitment to quality that drives our goal to achieve zero defects and understand our customers’ changing needs and expectations.
Our objective is for these core values to guide our employees’ behavior and direct how we conduct our business. These core values are reinforced during new hire orientation, ongoing engagement surveys, leadership development, and team development activities and are also demonstrated through teamwork, leadership, and everyday interactions.
Diversity and Inclusion
We believe that our culture and core values are strengthened through diversity and inclusion. Our diversity initiatives include-but are not limited to-our practices and policies on recruitment and selection; compensation and benefits; professional development and training; promotions; transfers; social and recreational programs; layoffs; terminations; and the ongoing development of a work environment built on the premise of gender and diversity equity. These initiatives include targeted recruitment of women in technical, engineering and sales
roles, leadership development programs for women, periodic evaluation of our workforce demographics as compared to the demographics in the workforce market, and an affirmative effort to attract, recruit, retain and train a diverse workforce that is representative of the populations in the regions in which we do business. Metrics that track performance against these goals are regularly reported to and monitored by the Compensation Committee of our Board of Directors.
Other Information
Our business is not seasonal in nature. However, our revenue is impacted by the variable size of certain individual customer revenue transactions, which can cause fluctuations in revenue from quarter to quarter and which may be inconsistent with the underlying business or general economic trends. For example, in our T&M segment, government procurement and contracting practices can result in material fluctuations in our backlog and revenues.
Information about our Executive Officers
The following sets forth certain information with respect to all executive officers of the Company. All officers serve at the pleasure of the Board of Directors.
Name
Age
Position
Gregory A. Woods
President, Chief Executive Officer and Director
David S. Smith
Vice President, Chief Financial Officer and Treasurer
Stephen M. Petrarca
Vice President-Operations
Michael J. Natalizia
Vice President Technology & Strategic Alliances, Chief Technology Officer
Tom Carll
Vice President and General Manager-Aerospace
Mr. Woods has served as Chief Executive Officer of the Company since February 1, 2014. Mr. Woods joined the Company in September 2012 as Executive Vice President and Chief Operating Officer and was appointed President and Chief Operating Officer on August 29, 2013. Prior to joining the Company, Mr. Woods served from January 2010 to August 2012 as Managing Director of Medfield Advisors, LLC, an advisory firm located in Medfield, Massachusetts focused on providing corporate development and strategy guidance to technology driven manufacturing firms. From 2008 to 2010, Mr. Woods served as President of Performance Motion Devices, a specialty semiconductor and electronics manufacturer located in Lincoln, Massachusetts.
Mr. Smith was appointed Vice President, Chief Financial Officer and Treasurer of the Company effective January 22, 2018. Prior to joining the Company, Mr. Smith served as Managing Partner of S.C. Advisors LLC, a financial management consultancy firm from 2008 through January 2018. Mr. Smith has also held a variety of senior finance positions at semiconductor and manufacturing companies, including Senior Vice President and Chief Financial Officer of Standard Microsystems Corporation, a global semiconductor company, from 2005 to 2008 and Vice President, Finance and Chief Financial Officer of both Dover Corporation, a diversified global manufacturing company, from 2000 to 2002 and Crane Company, a diversified manufacturing company from 1994 to 2000.
Mr. Petrarca was appointed Vice President-Operations in 1998. He has previously held positions as General Manager of Manufacturing, Manager of Grass Operations and Manager of Grass Sales. He has been with the Company since 1980.
Mr. Natalizia was appointed Vice President and Chief Technology Officer of the Company on March 9, 2012. Prior to this appointment, Mr. Natalizia held the position of Director of Product Development of the Company since 2005.
Mr. Carll joined the Company in 1989 and has held the position of Vice President and General Manager-Aerospace since 2011. Previously, Mr. Carll was Product Manager and National Sales Manager of the AstroNova Test & Measurement product group and from its formation in 2004, the AstroNova Aerospace business group.
Code of Ethics
We have adopted a Code of Conduct which applies to all of our directors, officers and employees of the Company, including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and principal accounting officer which meets the requirements of a “code of ethics” as defined in Item 406 of Regulation S-K. A copy of the Code of Conduct will be provided to shareholders, without charge, upon request directed to Investor Relations or can be obtained on our website, (www.astronovainc.com), under the heading “Investors-Corporate Governance-Governance Documents.” We intend to disclose any amendment to, or waiver of, a provision of the Code of Conduct for the CEO, CFO, principal accounting officer, or persons performing similar functions by posting such information on our website.
Available Information
We make available on our website (www.astronovainc.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. These filings are also accessible on the SEC’s website at http://www.sec.gov.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
The following risk factors should be carefully considered in evaluating AstroNova, because such factors may have a significant impact on our business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements. Additional risks and uncertainties not presently known to us, or that we currently consider to be immaterial, may also impact our business operations.
Business and Industry Risks:
The structural impacts on the economy as a result of the COVID-19 pandemic and its aftermath have adversely affected and will likely continue to adversely affect our revenues, results of operations and financial condition.
All of our global operations were materially adversely affected by the worldwide COVID-19 pandemic and the related supply-chain disruptions. The aftermath of the immediate severe impacts of COVID-19 on our operations and financial performance, the changes in our customers’ purchasing behavior, the post-pandemic impact of inflation from macroeconomic factors, and the continued and lingering structural impacts on our global supply chain, particularly with respect to the availability and costs of electronic components, have made planning for customer demand and manufacturing production more difficult. Also, it has led to a rise in the cost of a number of classes of acquired goods for both the T&M and PI segments. We will continue to evaluate the impact of COVID-19 and its aftermath effects on our business, results of operations and cash flows throughout fiscal 2024, including the potential impacts on various estimates and assumptions inherent in the preparation of our condensed consolidated financial statements.
Since the COVID-19 pandemic began we have experienced difficulties in obtaining raw materials and components for our products. Some of the structural dislocations in the global economy that were triggered by the pandemic are prolonging these difficulties. Particularly with respect to certain electronic components for legacy products in our T&M segment, availability has been curtailed and may not recover, and in certain cases we have had to accelerate product redesign efforts and quickly transition customers to products with more viable
long-term product configurations. We expect to incur substantial costs in doing so but we are unable to accurately estimate the financial impact due to the rapidly changing environment. We also have had to incur additional costs, such as higher shipping fees (i.e., air rather than ocean freight) and though these have abated to a degree, they have not returned to pre-pandemic levels. These factors negatively impacted our efficiency, delayed shipments in each of the fiscal quarters of 2023, and caused what we believe are product shortages. We are addressing these issues through long-range planning and procuring higher inventory levels for affected items to help mitigate potential shortages whenever practicable. For our T&M segment, we are also monitoring and reacting to extended lead times on electronic components, and utilizing a variety of strategies, including blanket orders, vendor-bonded inventories, extended commitments to our supply base, and seeking alternative suppliers. Additionally, we have taken actions to increase regular contact with our essential vendors and increased our forecasting horizon for our products to help us better manage our supply chain. In some cases, we are working with our vendors to help them procure components. Similarly, in our PI segment, we are increasing our inventory levels to ensure the adequacy of the supplies we sell to customers who use our printers. Our strategies to counteract these supply chain dislocations have significantly increased the amount of inventory we maintain to support our product sales. We have also experienced several situations where component shortages and scarcity have required us to pay significantly higher costs to obtain those components, particularly electronic components and circuit board assemblies in the T&M segment and inks and printer machine parts in the PI segment. We will continue to monitor our supply chain going forward and update our mitigation strategies as we determine appropriate. We are not able to predict how current supply chain difficulties will develop in the future, and if the steps we are taking are not effective, it could have a material adverse impact on our business and results of operations.
Our PI business was impacted by the COVID-19 pandemic as it limited our ability to meet with customers to demonstrate our products at trade shows and on-site in their facilities was curtailed. We partially countered this through a variety of virtual, on-line selling and digital marketing strategies, a number of which we continue to emphasize today. The degree to which post-pandemic selling practices will revert to those that were dominant previously, and the ultimate mix of customer engagement methods of face-to-face selling versus digital selling methods remains uncertain. For example, throughout fiscal 2023 we have attended numerous trade shows, but demand generation through those selling methods have not fully recovered to pre-pandemic levels. We believe that digital marketing has become a more permanent element of our go-to-market strategy. This has required us to shift resources to those technologies. Further, in the PI segment, the timely and reliable delivery of acceptable quality printer components from certain of our suppliers has declined post-pandemic, causing us to incur additional direct procurement costs, to carry higher inventories to assure adequate supplies to satisfy customers, to incur additional warranty and technical service costs to offset those impacts and to accelerate alternative technology development.
The aerospace industry, which we serve through our aerospace product line, was significantly disrupted by the COVID-19 pandemic, both inside and outside of the United States because of the severe decline in the demand for air travel, demand for aircraft, and a general curtailment of aircraft production rates. This had a material adverse impact on our financial results. Now that air travel demand and aircraft production demand have substantially improved, the direct and secondary impacts of the demand decline have abated, but demand for our products has not yet fully recovered to pre-pandemic levels. Our current belief is that it may take two or more years before we reach full revenue recovery, and lingering impacts of the COVID-19 pandemic on the economic structure of the airline industry, and general economic conditions could still become a negative factor for demand for aircraft, which could stall or reverse current favorable trends. If this were to happen individually or in combination, these factors would be difficult for us to respond to quickly, which could have a material adverse impact on our business operations and financial results.
Our operating results and financial condition could be harmed if the markets into which we sell our products decline or do not grow as anticipated.
Any decline in our customers’ markets or their general economic conditions would likely result in a reduction in demand for our products. For example, the 2020 grounding, suspension and subsequent slow restart of production of the Boeing 737 MAX, coupled with the negative impact of the COVID-19 pandemic on the demand for new aircraft and travel, reduced the demand for our airborne printers, as well as for the related repairs and supplies which has negatively affected our results of operations. While these effects have been abating, demand remains lower than it was pre-pandemic, and currently the outlook is uncertain. While demand for air travel has recently increased, the impact of another viral pandemic or other widespread health emergency could negatively impact this trend in the future. Also, we believe that the pandemic has negatively impacted our customers’ financial capacity materially enough to alter their strategies and industry dynamics so as to make changes in their demand more volatile. These factors may in particular cause demand for aircraft to grow slowly or decline, which would reduce demand for our products, and in turn harm our results of operations, financial position and cash flows.
Our future revenue growth depends on our ability to develop and introduce new products and services on a timely basis and achieve market acceptance of these new products and services.
The markets for our products are characterized by evolving technologies which in turn effect our product introduction cycles. Our future success depends largely upon our ability to address the rapidly changing needs of our customers by developing and supplying high-quality, cost-effective products, product enhancements and services on a timely basis and by keeping pace with technological developments and emerging industry standards. The success of our new products will also depend on our ability to differentiate our offerings from our competitors’ offerings, price our products competitively, anticipate our competitors’ development of new products, and maintain high levels of product quality and reliability. We spend a significant amount of time and effort on the development of our airborne and color printer products as well as our data acquisition and recorder products. Failure to meet our customers’ changing business needs or to further develop any of our new products and their related markets as anticipated could adversely affect our future revenue growth and operating results.
As we introduce new or enhanced products, we must also successfully manage the transition from older products to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. The introduction of new or enhanced products may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing existing products in anticipation of the new products. Additionally, when we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand, manage excess and obsolete inventories, address new or higher product cost structures, and manage different sales and support requirements due to the type or complexity of the new products. Any customer uncertainty regarding the timeline for rolling out new products or our plans for future support of existing products may cause customers to delay purchase decisions or purchase competing products which would adversely affect our business and operating results.
Operational and Business Strategy Risks:
We are dependent upon contract manufacturers for some of our products. If these manufacturers do not meet our requirements, either in volume or quality, then we could be materially harmed.
We subcontract the manufacturing and assembly of certain of our products to independent third parties at facilities located in various countries. Relying on subcontractors involves a number of significant risks, including:
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Disruptions in the global supply chain;
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Limited control over the manufacturing process;
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Potential absence of adequate production capacity;
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Potential delays in production lead times;
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Unavailability of certain process technologies;
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Reduced control over delivery schedules, manufacturing yields, quality and costs and
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Exposure to rapid unplanned cost increases that cannot be adequately recovered by customer price increases due to market competition or contractual constraints.
If one of our significant subcontractors becomes unable or unwilling to continue to manufacture or provide these products in required volumes, fails to meet our quality standards, or imposes rapid price increases that we cannot recover in the market, we will have to identify alternate qualified subcontractors, take over the manufacturing ourselves, or redesign our products to use components from other suppliers. Additional qualified subcontractors may not be available or may not be available on a timely or cost-competitive basis. Any interruption in the supply, increase in the cost of the products manufactured by a third-party subcontractor or failure of a subcontractor to meet quality standards could have a material adverse effect on our business, operating results and financial condition.
For certain components, assembled products and supplies, we are dependent upon single or limited source suppliers. If these suppliers do not meet demand, either in volume or quality, then we could be materially harmed.
Although we use standard parts and components for our products where possible, we purchase certain components, assembled products and supplies used in the manufacture of our products from a single source or limited supplier sources. If the supply of a key component, assembled products or certain supplies were to be delayed or curtailed or, in the event a key manufacturing or sole supplier delays shipment of such components or assembled products, our ability to ship products in desired quantities and in a timely manner would be adversely affected. For example, as a result of the global COVID-19 pandemic, there was a disruption to our supply chain due to the delays of component shipments from our vendors in China and other jurisdictions in which normal business operations were disrupted. Our business, results of operations and financial position could also be adversely affected, depending on the time required to obtain sufficient quantities from the original source or, if possible, to identify and obtain sufficient quantities from an alternative source.
Additionally, if any single or limited source supplier becomes unable or unwilling to continue to supply components, assembled products or supplies in required volumes or at acceptable prices, we will have to identify and qualify acceptable replacements or redesign our products with different components. Alternative sources may not be available, or product redesign may not be feasible on a timely basis. For example, in fiscal 2023, we experienced increased difficulty in obtaining certain technology-based parts, components and supplies from the largest single supplier of our PI segment at stable or predictable prices. Additionally, we experienced repeated significant quality problems with that supplier. We have responded to these issues by increasing our inventories of those products to mitigate supply risk, negotiating quality related cost reimbursements, and in some cases, accelerating our development of PI products that rely on alternative suppliers. Any interruption in the supply of or increase in the cost of the components, assembled products and supplies provided by single or limited source suppliers could have a material adverse effect on our business, operating results, and financial condition.
We face significant competition, and our failure to compete successfully could adversely affect our results of operations and financial condition.
We operate in an environment of significant competition, especially in the markets in which we sell our PI printers and T&M data acquisition products. This competition is driven by rapid technological advances, evolving industry standards, frequent new product introductions and the demands of customers to become more efficient. Our competitors range from large international companies to relatively small firms. We compete based
on technology, performance, price, quality, reliability, brand, distribution and customer service and support. Our success in future performance is largely dependent upon our ability to compete successfully in the markets we currently serve and to expand into additional market segments. Additionally, current competitors or new market entrants may develop new products or services with features that could adversely affect the competitive position of our products. To remain competitive, we must develop new products, services and applications and periodically enhance our existing offerings. If we are unable to compete successfully, our customers could seek alternative solutions from our competitors and we could lose market share, which could materially and adversely affect our business, results of operations and financial position.
Our profitability is dependent upon our ability to obtain adequate pricing for our products and to control our cost structure.
Our success depends on our ability to obtain adequate pricing for our products and services. For a variety of complex reasons, many of which were triggered by the COVID-19 pandemic, the general economy has been significantly impacted by supply chain disruptions. Examples of some of these impacts on us include reduced availability of certain electronic components and the need to pay premium prices to obtain them, and noticeably higher costs for a wide array of other parts and raw material components in both of our product segments. This has been exacerbated by increases in the cost of transportation to expedite incoming components and supplies. In many cases, we have had to expedite delivery of critical materials through significantly higher cost airfreight methods. Our ability to offset these effects through pricing actions for our products and services may not prove sufficient to offset these or further cost increases. Attempts to increase prices may not hold in the face of customer resistance and/or competition. If we are unable to obtain adequate pricing for our products and services, our results of operations and financial position could be materially adversely affected.
We are also continually reviewing our operations with a view towards reducing our cost structure, including but not limited to reducing our labor cost-to-revenue ratio, improving process and system efficiencies and outsourcing certain internal functions. From time to time, we also engage in restructuring actions to reduce our cost structure. However, if these efforts to constrain the cost of our operations are inadequate to offset higher product and employee wage costs, our results of operations and financial position could be materially adversely affected.
Our inability to adequately enforce and protect our intellectual property defend against assertions of infringement or the loss of certain licenses could prevent or restrict our ability to compete.
We rely on patents, trademarks, licenses, and proprietary knowledge and technology, both internally developed and acquired, in order to maintain a competitive advantage. Our competitors may develop technologies that are similar or superior to our proprietary technologies or design technologies around the intellectual property protections or licenses that we currently own. The loss of the trademarks QuickLabel, TrojanLabel, ToughWriter and ToughSwitch or the loss of the licenses provided under the Honeywell Agreement could have a material adverse impact on our business. Operating outside the United States also exposes us to additional intellectual property risk. The laws and enforcement practices of certain jurisdictions in which we operate do not protect our intellectual property rights to the same extent as in the United States. Any diminution in our ability to defend against the unauthorized use of these rights and assets could have an adverse effect on our results of operations and financial condition. Litigation may be necessary to protect our intellectual property rights or defend against claims of infringement, which could result in significant costs and divert our management’s focus away from operations.
We have significant inventories on hand.
We maintain a significant amount of inventory, and as a result of recent supply chain disruptions and announced or anticipated price increases from suppliers, we have further increased the amount of inventory we maintain on hand to ensure we are able to meet market demand for our products at a reasonable price. These
increases have been concentrated in label printing machines and supplies sold by our PI business, as well as in electronic components and assemblies in our T&M business. We maintain allowances for slow-moving and obsolete inventory that we believe are adequate, but any significant unanticipated changes in future product demand or market conditions, could have an impact on the value of inventory and adversely affect our business, operating results and financial condition.
We could incur liabilities as a result of installed product failures due to design or manufacturing defects.
We have incurred and could in the future incur additional liabilities because of product failures due to design or manufacturing defects. Our products may have defects despite our internal testing or testing by customers. These defects could result in, among other things, a delay in recognition of sales, loss of sales, loss of market share, failure to achieve market acceptance or damage to our reputation. We could be subject to material claims by customers and may incur substantial expenses to correct any product defects. While in the past, we have successfully obtained partial compensation from suppliers for their contribution to product quality issues, we may not be successful in such a recovery in the future, and these recoveries have not in the past and are not in the future likely to fully offset the full financial impact on us. For example, in fiscal 2023, the quality of products obtained from one of the key suppliers to our PI segment declined and we were unable to detect latent defects in their products in a timely manner, which resulted in our incurring increased technical service and warranty expenses. We obtained partial compensation from that supplier, but this was insufficient to fully cover all of our costs related to this issue. We also believe we have experienced demand declines as a result of customers’ perceptions of the quality defects related to this supplier.
In addition, through our acquisitions, we have assumed, and may in the future assume, liabilities related to products previously developed by an acquired company that may not have been subjected to adequate product development, testing and quality control processes, and may have unknown or undetected defects. Some types of defects may not be detected until the product is installed in a user environment. This may cause us to incur significant warranty, repair or re-engineering costs. As such, it could also divert the attention of engineering personnel from product development efforts, which may result in increased costs and lower profitability.
We could experience a significant disruption in or security breach of our information technology system which could harm our business and adversely affect our results of operations.
We rely on on-premise and cloud-based information technology systems, some of which are managed by or licensed from third parties, to support many critical aspects of our business, as well as to process, transmit and store our own electronic proprietary or confidential information, and confidential information of customers, employees, suppliers and others, including personally identifiable information, credit card data, and other proprietary confidential information. These systems are vulnerable to damage, disruptions and/or shutdowns due to attacks by cyber-criminals, data breaches, employee error, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, catastrophic events or other unforeseen events. These vulnerabilities could interfere with our operations, compromise our data processing capacity and the security of our information and that of our customers and suppliers, and expose us to liability which could adversely impact our business and reputation. We actively manage these risks through a variety of hardware and software-based techniques that we own, license or otherwise procure from third parties under contract to safeguard our systems, and we own or procure from third parties system data storage redundancy and disaster recovery capability. In particular, we have increased our investment in tools, techniques and training that we believe will reduce our vulnerability to attacks from cyber-criminals. However, due to the complexity of our systems, and especially due to the ever-increasing sophistication of cyber-criminals, there is no assurance that our efforts will be sufficient to prevent cyber-attacks, security breaches, or the other potential exploitation of vulnerabilities or systems failures. In any such circumstance, our system redundancy and other disaster recovery planning may be ineffective or inadequate. While we have experienced, and expect to continue to experience, these types of threats to our information technology networks and infrastructure, none of them to date has had a material impact. However, in the future, such events could result in legal claims or proceedings, liability or
penalties under privacy laws, disruption in operations, and damage to our brand and reputation, all of which could adversely affect our business, operating results and financial condition.
We maintain insurance for a variety of cybersecurity risks to mitigate their possible impact, but because of the prevalence of claims in the market for cybersecurity insurance, the cost for that insurance has increased and the underwriting criteria to obtain such insurance has become far more demanding. There is no assurance that we will be able to obtain such insurance in the future, despite our substantial investments in cybersecurity, and if we are able to do so, it may be at substantially higher costs. In addition, in response to these higher costs, we may choose to reduce the amount of insurance we maintain because we believe our improvements in our cybersecurity profile have reduced our risk exposure relative to the increased cost of insurance. If our risk assessments prove incorrect and we were to have a loss not fully covered by insurance, our financial condition and results of operations could be materially negatively impacted.
We depend on our key employees and other highly qualified personnel and our ability to attract and develop new, talented professionals. Our inability to attract and retain key employees, as well as challenges with respect to the management of human capital resources, could compromise our future success and our business could be harmed.
Our future success depends upon our ability to attract and retain, through competitive compensation and benefits programs, professional and executive employees, including sales, operating, marketing, and financial management personnel as well as our ability to manage human capital resources. There is substantial competition for skilled personnel, and the failure to attract, develop, retain and motivate adequately qualified personnel could negatively impact our business, financial condition, results of operations and prospects. In order to hire new personnel or retain or replace our key personnel, we must maintain competitive compensation and benefits, and we may also be required to increase compensation, which would decrease net income. Additionally, several key employees have special knowledge of customers, supplier relationships, business processes, manufacturing operations, regulatory and customer quality compliance management, and financial management issues. The loss of any of these employees as the result of competitive compensation pressures or ineffective management of human capital resources could harm our ability to perform efficiently and effectively until their knowledge and skills are replaced, which might be difficult to do quickly, and as a result could have a material adverse effect on our business, financial condition, and results of operations. Failure to retain or attract key personnel could impede our ability to grow and could result in our inability to operate our business profitably.
Although we have not experienced any material disruptions due to labor shortages to date, we have observed an overall tightening and increasingly competitive labor market, and the demand for qualified individuals is expected to remain strong for the foreseeable future. Any sustained labor shortage or increased turnover rates within our employee base, could lead to increased costs and lost profitability and could otherwise compromise our ability to efficiently operate our business.
We may record future impairment charges, which could materially adversely impact our results of operations.
We test our goodwill balances annually, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. We assess goodwill for impairment at the reporting unit level and monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. Declines in the future performance and cash flows of a reporting unit or asset group, changes in our reporting units or in the structure of our business as a result of future reorganizations, acquisitions or divestitures of assets or businesses, or changes in other key assumptions, may result in the recognition of significant asset impairment charges, which could have a material adverse impact on our results of operations.
We also review our long-lived assets including property, plant and equipment, and other intangibles assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.
Factors we consider include significant under-performance relative to expected historical or projected future operating results, significant negative industry or economic trends and our market capitalization relative to net book value. We may be required in the future to record a significant charge to earnings in our financial statements during the period in which any impairment of our long-lived assets is determined. Such charges could have a significant adverse impact on our results of operations and our financial condition.
Financial and Economic Risks:
We face risks related to recession, inflation, stagflation and other economic conditions.
Customer demand for our products may be impacted by weak economic conditions, inflation, stagflation, recession, rising interest rates, equity market volatility or other negative economic factors in the U.S. or other nations. For example, under these conditions or the expectation of such conditions, our customers may cancel orders, delay purchasing decisions or reduce their use of our services. In addition, these economic conditions could result in higher inventory levels and the possibility of additional charges if we request changes in delivery schedules or if suppliers incur additional costs that they pass on to us. Further, in the event of a recession or threat of a recession, our suppliers, distributors, and other third-party partners may suffer their own financial and economic challenges and, as a result, they may demand pricing accommodations, delay payment, or become insolvent, which could harm our ability to meet our customers’ demands or collect revenue or could otherwise harm our business. Similarly, disruptions in financial or credit markets may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors and might cause us to not be able to continue to access preferred sources of liquidity when we would like if at all, and our borrowing costs could increase. Thus, if general macroeconomic conditions continue to deteriorate, our business and financial results could adversely affect our business, operating results and financial condition.
In addition, we are subject to risks from inflation and increasing market prices of certain components, supplies, and raw materials, which are incorporated into our end products or used by our suppliers to manufacture our end products. These components, supplies and other raw materials have from time to time become restricted. General market factors and conditions have in the past and may in the future affect pricing of such components, supplies and commodities.
Economic, political and other risks associated with international sales and operations could adversely affect our results of operations and financial position.
Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. Revenue from international operations, which includes both direct and indirect sales to customers outside the U.S., accounted for approximately 35% of our total revenue for fiscal 2023, and we anticipate that international sales will continue to account for a significant portion of our revenue. In addition, we have employees, suppliers, contractors and facilities located outside the U.S. Accordingly, our business, operating results and financial condition could be harmed by a variety of factors, including:
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Interruption to transportation flows for delivery of parts to us and finished goods to our customers;
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Customer and vendor financial stability;
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Fluctuations in foreign currency exchange rates;
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Changes in a specific country’s or region’s environment including political, economic, monetary, regulatory or other conditions;
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Trade protection measures and import or export licensing requirements;
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Negative consequences from changes in tax laws;
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Difficulty in managing and overseeing operations that are distant and remote from corporate headquarters;
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Difficulty in obtaining and maintaining adequate staffing;
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Differing labor regulations;
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Failure to comply with complex and rapidly changing government economic sanctions against other countries, especially arising from responses to armed conflict;
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Unexpected changes in regulatory requirements;
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Uncertainty surrounding the implementation and effects of the United Kingdom’s withdrawal from the EU, commonly known as “Brexit”; and
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Geopolitical turmoil, including terrorism, war and public health disruptions, such as that caused by the COVID-19 pandemic or Russia’s invasion of Ukraine.
To date, the impact of the Russian invasion of Ukraine and the resulting governmental sanctions and our decision to halt all activities in the affected areas has had an immaterial direct impact on our revenues. We believe, however, that the impact on the economies of Western Europe, especially Germany, which is the largest non-North American market for our products, has had a negative impact on demand for our products.
Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods.
As a global company, we are subject to taxation in numerous countries, states and other jurisdictions. As a result, our effective tax rate is based on the tax rates in effect where we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each jurisdiction. Our effective tax rate may vary as a result of numerous factors, including changes in the mix of our profitability from jurisdiction to jurisdiction, the results of examinations and audits of our tax filings, whether we secure or sustain acceptable arrangements with tax authorities, adjustments to the value of our uncertain tax positions, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations.
Changes to tax laws and regulations or changes to the interpretation thereof, the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, uncertainties regarding the geographic mix of earnings in any particular period, and other factors, could have a material impact on our estimates of our effective tax rate and our deferred tax assets and liabilities. The impact of these factors may be substantially different from period-to-period. In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities. If audits result in payments or assessments different from our reserves, our future results may include unfavorable adjustments to our tax liabilities and our financial statements could be adversely affected. Any further significant changes to the tax system in the United States or in other jurisdictions (including changes in the taxation of international income as further described below) could adversely affect our financial statements.
We may have exposure to additional tax liabilities, which could negatively impact our income tax expense, net income and cash flow.
We are subject to income and other taxes in both the U.S. and the foreign jurisdictions in which we operate. The determination of our worldwide provision for income taxes and current and deferred tax assets and liabilities requires judgment and estimation. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to regular review and audit by both domestic and foreign tax authorities and to the prospective and retrospective effects of changing tax regulations and legislation. Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the amounts recorded in our consolidated financial statements and may materially affect our income tax benefit or expense, net loss or income, and cash flows in the period in which such determination is made.
Deferred tax assets are recognized for the expected future tax consequences of temporary differences between the carrying amount for financial reporting purposes and the tax bases of assets and liabilities, and for net operating losses and tax credit carry forwards. In some cases, we may record a valuation allowance to reduce our deferred tax assets to estimated realizable value. We review our deferred tax assets and valuation allowance requirements quarterly. If we are unable to demonstrate that it is more likely than not that we will not be able to generate sufficient future taxable income to realize the net carrying value of deferred tax assets, we will record a valuation allowance to reduce the deferred tax assets to estimated realizable value, which could result in a material income tax charge. As part of our review, we consider positive and negative evidence, including cumulative results of recent years.
If we are unable to successfully comply with our credit agreement with Bank of America or secure alternative financing, our business and financial condition could be materially adversely affected.
Our credit agreement with Bank of America requires us, among other things, to satisfy certain financial ratios on an ongoing basis, consisting of a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio and an asset coverage ratio. We are also required to comply with other covenants and conditions, set forth in the credit agreement, including, among others, limitations on 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 credit agreement. If we were to violate the terms of the credit agreement and we were unable to renegotiate its terms at that time or secure alternative financing, it could have a material adverse impact on us.
The agreements governing our indebtedness subject us to various restrictions that limit our ability to pursue business opportunities.
The credit agreement governing our credit facility with Bank of America, N.A., as amended, contains, and any future debt agreements may include, several restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries. Such restrictive covenants may significantly limit our ability to:
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Incur future indebtedness;
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Place liens on assets;
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Pay dividends or distributions on our and our subsidiaries’ capital stock;
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Repurchase or acquire our capital stock;
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Conduct mergers or acquisitions;
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Sell assets; and/or
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Alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness.
We may not realize the anticipated benefits of past or future acquisitions, divestitures and strategic partnerships, and integration of acquired companies or divestiture of businesses may negatively impact our overall business.
We have made strategic investments in other companies, products and technologies, including our August 2022 acquisition of Astro Machine LLC and 2017 acquisition of TrojanLabel. We will continue to identify and pursue acquisitions of complementary companies and strategic assets, such as customer bases, products and technology. However, there can be no assurance that we will be able to identify suitable acquisition opportunities. In any acquisition that we complete, we cannot be certain that:
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We will successfully integrate the operations of the acquired business with our own;
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All the benefits expected from such integration will be realized;
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Management’s attention will not be diverted or divided, to the detriment of current operations;
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Amortization of acquired intangible assets or possible impairment of acquired intangibles will not have a negative impact on operating results or other aspects of our business;
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Delays or unexpected costs related to the acquisition will not have a detrimental impact on our business, operating results and financial condition;
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Customer dissatisfaction with, or performance problems at, an acquired company will not have an adverse impact on our reputation; and
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Respective operations, management and personnel will be compatible.
For example, in the recently acquired Astro Machine business, revenues are concentrated in a relatively small number of customers. Failure to satisfy the delivery requirements of those customers or to adequately respond to their evolving product requirements could cause us to lose one or more customers which would have a material adverse impact on our financial condition and results of operation due to lower revenue and could result in intangible asset impairment.
In certain instances, as permitted by applicable law and NASDAQ rules, acquisitions, such as the Astro Machine acquisition, may be consummated without seeking and obtaining shareholder approval, in which case shareholders will not have an opportunity to consider and vote upon the merits of such an acquisition. Although we will endeavor to evaluate the risks inherent in an acquisition, there can be no assurance that we will properly ascertain or assess such risks.
We may also divest certain businesses from time to time. Divestitures will likely involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer relationships. A successful divestiture depends on various factors, including our ability to:
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Effectively transfer assets, liabilities, contracts, facilities and employees to the purchaser;
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Identify and separate the intellectual property to be divested from the intellectual property that we wish to keep; and
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Reduce fixed costs previously associated with the divested assets or business.
All of these efforts require varying levels of management resources, which may divert our attention from other business operations. Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions.
If we are not able to successfully integrate or divest businesses, products, technologies or personnel that we acquire or divest, or able to realize the expected benefits of our acquisitions, divestitures or strategic partnerships, our business, results of operations and financial condition could be adversely affected.
Changes in our business strategy or restructuring of our businesses may increase our costs or otherwise affect the profitability of our businesses.
We continually review our operations with a view toward reducing our cost structure, including but not limited to reducing our labor cost-to-revenue ratio, improving process and system efficiencies and increasing our revenues and operating margins. As changes in our business environment occur, we may need to adjust our business strategies to meet these changes, or we may otherwise find it necessary to restructure our operations or particular businesses or assets. When these changes or events occur, we may incur costs to change our business strategy and may need to write down the value of assets or sell certain assets. In any of these events our costs may increase, and we may have significant charges or losses associated with the write-down or divestiture of assets.
Adverse conditions in the global banking industry and credit markets could impair our liquidity or interrupt our access to capital markets, borrowings or financial transactions to hedge certain risks.
At the end of fiscal 2023, we had approximately $3.9 million of cash and cash equivalents. Our cash and cash equivalents are held in bank demand deposit accounts and foreign bank accounts. Disruptions in the financial markets may, in some cases, result in an inability to access assets such as money market funds that traditionally have been viewed as highly liquid. Any failure of our counterparty financial institutions or funds in which we have invested may adversely impact our cash and cash equivalent positions and, in turn, our financial position.
To date, we have been able to access financing that has allowed us to make investments in growth opportunities and fund working capital requirements as needed. In addition, we occasionally enter into financial transactions to hedge certain foreign exchange and interest rate risks. Our continued access to capital markets, the stability of our lenders and their willingness to support our needs, and the stability of the counterparties to our financial transactions that hedge risks are essential for us to meet our current and long-term obligations, fund operations, and fund our future strategic initiatives. An interruption in our access to external financing or financial transactions to hedge risk could materially and adversely affect our business and financial condition.
Inadequate self-insurance accruals or insurance coverage for employee healthcare benefits could have an adverse effect on our business, financial results or financial condition.
In the U.S., we maintain an employee health insurance coverage plan on a self-insured basis backed by stop-loss coverage which sets a limit on our liability for both individual and aggregate claim costs. We record expenses based on actual claims incurred and estimates of the costs of expected claims, administrative costs, and stop-loss insurance premiums.
We record a liability for our estimated cost of U.S. claims incurred and unpaid as of each balance sheet date. Our estimated liability is recorded on an undiscounted basis and is based on historical trends and data provided by our insurance broker. Our history of claims activity is closely monitored, and liabilities are adjusted as warranted based on changing circumstances. It is possible, however, that our actual liabilities may exceed our estimates of losses. We may also experience an unexpectedly large number of claims that result in costs or liabilities in excess of our projections, which could cause us to record additional expenses, which could adversely impact our business, financial condition, results of operations and cash flow.
Legal and Regulatory Risks:
Certain of our products require certifications by customers, regulators or standards organizations, and our failure to obtain or maintain such certifications could negatively impact our business.
In certain industries and for certain products, such as those used in aircraft, we must obtain certifications for our products by customers, regulators or standards organizations. If we fail to obtain required certifications for our products, or if we fail to maintain such certifications on our products after they have been certified, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
We are subject to laws and regulations; failure to address or comply with these laws and regulations could harm our business and adversely affect our results of operations.
Our operations are subject to laws, rules, regulations, including environmental regulations, government policies and other requirements in each of the jurisdictions in which we conduct business. Changes in laws, rules, regulations, policies or requirements could result in the need to modify our products and could affect the demand for our products, which may have an adverse impact on our future operating results. In addition, we must comply with regulations restricting our ability to include lead and certain other substances in our products. If we do not comply with applicable laws, rules and regulations we could be subject to costs and liabilities and our business may be adversely impacted.
We are subject to regulatory constraints and compliance requirements due to our status as a publicly held company. Public company compliance costs are increasing due to the increase in SEC regulations and enforcement actions, and the heightened scrutiny that we and the public accounting industry face from the Public Companies Accounting Oversight Board. Additionally, certain new and proposed regulations in the State of Rhode Island, where we are headquartered, are likely to increase compliance costs. In some instances, the regulations may mandate action on our part for which, to our knowledge, no current technical means to comply exist. If enacted, the costs to comply with these regulations could have a material adverse impact on our business.
Our business outside of the United States exposes us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, employee rights and protection, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties. For example, the increased use of sanctions in U.S. international relations recently has increased our cost of compliance with the regulations intended to enforce them.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on the effectiveness of their internal control over financial reporting and any inability to achieve and maintain effective disclosure controls and procedures and internal control over financial reporting, could adversely affect our results of operations, our stock price and investor confidence in our company.
We have identified a material weakness in our internal control over financial reporting and that weakness has led to a conclusion that our internal control over financial reporting and disclosure controls and procedures were not effective as of January 31, 2023. The material weakness related to our inability to maintain effective controls to properly identify and assess significant non-routine transactions. Management is taking action to remediate the deficiencies in its internal controls over financial reporting by augmenting resources in our financial organization.
If action to remediate this material weakness is not completed on a timely basis, or if other remediation efforts are not successful, we may, in the future, identify additional internal control deficiencies that could rise to the level of a material weakness or uncover other errors in financial reporting.
Failure to have effective internal control over financial reporting and disclosure controls and procedures could impair our ability to produce accurate financial statements on a timely basis, or provide reliable financial statements needed for business decision processes, and our business and results of operations could be harmed. Additionally, investors could lose confidence in our reported financial information and our ability to obtain additional financing, or additional financing on favorable terms, could be adversely affected. Also, failure to maintain effective internal control over financial reporting could result in sanctions by regulatory authorities.
Certain of our operations and products are subject to environmental, health and safety laws and regulations, which may result in substantial compliance costs or otherwise adversely affect our business.
Our operations are subject to numerous federal, state, local and foreign laws and regulations relating to protection of the environment, including those that impose limitations on the discharge of pollutants into the air and water, establish standards for the use, treatment, storage and disposal of solid and hazardous materials and wastes, and govern the cleanup of contaminated sites. As such, our business is subject to and may be materially and adversely affected by compliance obligations and other liabilities under those environmental, health and safety laws and regulations. Certain of our products contain, and some of manufacturing operations use various substances which have been or may be deemed to be hazardous or dangerous. Thus, we have and will continue to generate a generally limited amounts of hazardous waste in our operations. We manage our compliance with laws and regulations and the proper mitigation of risks internally and through the input of external consultants and outside service providers and we believe we are in material compliance with all applicable environmental laws and regulations. We desire to reduce and ultimately eliminate any adverse environmental impact of our
business and to comply with relevant laws and regulations. We expect this effort to affect our ongoing operations and require additional capital and operating expenditures. If we were to fail to manage our environmental compliance effectively, we could suffer economic or reputational harm.
Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, and any determination that we or any of our subsidiaries has violated the Foreign Corrupt Practices Act could have a material adverse effect on our business.
The U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and similar worldwide anti-corruption laws generally prohibit companies and their intermediaries from making improper payments to government officials and others for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. We operate in parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. Despite our training and compliance programs, there can be no assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by those of our employees or agents who violate our policies.
Unauthorized access to personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights and compliance with laws designed to prevent unauthorized access of personal data could be costly.
We collect and store certain data, including proprietary business information, and may have access to confidential or personal information that is subject to privacy and security laws, regulations and customer-imposed controls. Security breaches or other unauthorized access to, or the use or transmission of, personal user information could result in a variety of claims against us, including privacy-related claims. There are numerous federal, state, local, and international laws and regulations regarding privacy and the storage, sharing, use, processing, disclosure and protection of this kind of information, the scope of which are changing, inconsistent and conflicting and subject to differing interpretations.
We also expect that there will continue to be new laws, regulations, and industry standards concerning privacy, data protection, and information security proposed and enacted in various jurisdictions. For example, in 2016 the European Commission adopted the General Data Protection Regulation (GDPR), a comprehensive privacy and data protection reform that became effective in May 2018. The GDPR, which is applicable to all companies processing data of European Union residents, imposes significant fines and sanctions for violations. These requirements are complicated and compliance is technically complex to maintain. We contract with outside experts to advise us, conduct internal and external compliance training, and believe we are currently in compliance, however, maintaining compliance has increased costs and diverted resources. Similarly, the California Consumer Privacy Act of 2018, which was enacted in June 2018 and came into effect on January 1, 2020, provides a new private right of action for data breaches and requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices and allow consumers to opt out of certain data sharing with third parties.
Additionally, other jurisdictions have enacted or are enacting data localization laws that require data generated in or relating to the residents of those jurisdictions to be physically stored within those jurisdictions. In many cases, these laws and regulations apply not only to transfers between unrelated third parties but also to transfers between us and our subsidiaries. All these evolving compliance and operational requirements impose significant costs that are likely to increase over time.
While we continue to assess these requirements and the ways they may impact the conduct of our business, we believe that we materially comply with applicable laws and industry codes of conduct relating to privacy and data protection. There is no assurance that we will not be subject to claims that we have violated applicable laws or codes of conduct, that we will be able to successfully defend against such claims or that we will not be subject to significant fines and penalties in the event we are found not to be in compliance with such laws or codes of conduct.
Any failure or perceived failure by us (or any third parties with whom we have contracted to store such information) to comply with applicable privacy and security laws, policies or related contractual obligations or any compromise of security that results in unauthorized access to personal information may result in governmental enforcement actions, significant fines, litigation, claims of breach of contract and indemnity by third parties and adverse publicity. In the case of such an event, our reputation may be harmed, we could lose current and potential users and the competitive positions of our various brands could be diminished, any or all of which could adversely affect our business, financial condition and results of operations.
Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment and fair value determinations, inventories, business combinations and intangible asset valuations, income taxes, and warranties, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
The following table sets forth information regarding our principal owned properties. The West Warwick property is subject to a security agreement and a mortgage in favor of the lender under our credit facility.
Location
Approximate
Square
Footage
Principal Use
West Warwick, Rhode Island, United States
135,500
Corporate headquarters, research and development, manufacturing, sales and service
Elk Grove Village, Illinois
34,460
Astro Machine principal place of business
We also lease facilities in various other locations. The following information pertains to each location:
Location
Approximate
Square
Footage
Principal Use
Dietzenbach, Germany
18,630
Manufacturing, sales and service
Copenhagen, Denmark
4,800
R&D, sales and service
Brossard, Quebec, Canada
4,500
Manufacturing, sales and service
Elancourt, France
4,150
Sales and service
Irvine, California, United States
3,100
Sales
Shah Alam, Selangor, Malaysia
2,067
Sales
Guangzhou, China
1,253
Sales and service
Maidenhead, England
1,021
Sales and service
Shanghai, China
Sales
Mexico City, Mexico
Sales
The West Warwick facility is used by both of our business segments, but the Elk Grove facility and leased locations are primarily used by the PI segment. We believe our facilities are well maintained, in good operating condition and generally adequate to meet our needs for the foreseeable future.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
We are party to various legal proceedings arising from normal business activities. Management believes that the ultimate resolution of these matters will not have a material adverse effect on our financial position, results of operations or cash flows. Additionally, because of the nature of our business, we may be subject in the future to lawsuits or other claims, including those pertaining to product liability, patent infringement, commercial, employment, employee benefits, environmental and stockholder matters and an unfavorable resolution of any of these matters could materially affect our future results of operations, cash flows or financial position.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for the Registrant ’ s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on the NASDAQ Global Market under the symbol “ALOT.”
We had approximately 390 shareholders of record as of April 10, 2023, which does not reflect shareholders with beneficial ownership in shares held in nominee name.
Stock Repurchases
During the fourth quarter of fiscal 2023, we made the following repurchases of our common stock:
Total Number
of Shares
Repurchased
Average
Price paid
Per Share ($)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares That
May Be Purchased
Under the Plans
or Programs
November 1 - November 30
-
-
-
-
December 1 - December 31
(a)(b)
11.70 (a)(b)
-
-
January 1 - January 31
-
-
-
-
(a) An executive of the company delivered 442 shares of our common stock toward the satisfaction of taxes due in connection with the vesting of restricted shares. The shares delivered were valued at a market value of $11.67 per share and are included with treasury stock in the consolidated balance sheet.
(b) An executive of the company delivered 236 shares of our common stock toward the satisfaction of taxes due in connection with the vesting of restricted shares. The shares delivered were valued at a market value of $11.75 per share and are included with treasury stock in the consolidated balance sheet.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis are meant to provide material information relevant to an assessment of the financial condition and results of operations of our company, including an evaluation of the amounts of cash flows from operations and outside resources, liquidity and certain other factors that may affect future results so as to allow investors to better view our company from management’s perspective. The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and other financial information included elsewhere in this annual report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on Form 10-K, including information with respect to our plans and strategy for our business and financing, includes forward-looking statements that involve risks and uncertainties. Carefully review the “Forward-Looking Statements” and “Risk Factors” sections of this annual report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a multi-national enterprise that leverages its proprietary data visualization technologies to design, develop, manufacture, distribute and service a broad range of products that acquire, store, analyze and present data in multiple formats. We organize our structure around a core set of competencies, including research and
development, manufacturing, service, marketing and distribution. We market and sell our products and services through the following two segments:
•
Product Identification (“PI”) - offers color and monochromatic digital label printers, over-printers and custom OEM printers. PI also provides software to design, manage and print labeling and packaging images locally and across networked printing systems, as well as all related printing supplies such as pressure-sensitive labels, tags, inks, toners and thermal transfer ribbons used by digital printers. PI also provides on-site and remote service, spare parts and various service contracts.
•
Test and Measurement (“T&M”) - offers a suite of products and 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 used to print hard copies of data required for the safe and efficient operation of aircraft, including navigation maps, clearances, arrival and departure procedures, NOTAMS, flight itineraries, weather maps, performance data, passenger data, and various air traffic control data. Aerospace products also include aircraft networking systems for high-speed onboard data transfer. T&M also provides repairs, service and spare parts.
On August 4, 2022, we completed the acquisition of Astro Machine, an Illinois-based manufacturer of printing equipment, including label printers, tabbers, conveyors, and envelope feeders, for aggregate consideration of $17.1 million. Astro Machine is reported as part of our PI segment beginning with the third quarter of fiscal 2023. Refer to Note 2, “Acquisition,” in our consolidated financial statements included elsewhere in this report for further details.
We market and sell our products and services globally through a diverse distribution structure of direct sales personnel, manufacturers’ representatives and authorized dealers that deliver a full complement of branded products and services to customers in our respective markets. Our growth strategy centers on organic growth through product innovation made possible by research and development initiatives, as well as strategic acquisitions that fit into or complement existing core businesses. In fiscal 2023, 2022, and 2021, revenue from customers in various geographic areas outside the United States, primarily in Western Europe, Canada and Asia, amounted to $50.6 million, $49.3 million, and $45.1 million, respectively.
We maintain an active program of product research and development. We spent approximately $6.8 million in both fiscal 2023 and 2022, and $6.2 million in fiscal 2021 on Company-sponsored product development. We are committed to continuous product development as essential to our organic growth and expect to continue our focus on research and development efforts in fiscal 2024 and beyond.
We also continue to invest in sales and marketing initiatives by expanding and improving the existing sales force and using various marketing campaigns to achieve our goals of sales growth and increased profitability.
COVID-19 Update
All of our global operations were materially adversely affected by the worldwide COVID-19 pandemic and the related supply-chain disruptions. In the aftermath of the immediate severe impacts of COVID-19 on our operations and financial performance the changes in our customers’ purchasing behavior, the post-pandemic impact of inflation from macroeconomic factors, and the continued and lingering structural impacts on our global supply chain, particularly with respect to the availability and costs of electronic components, have made planning for customer demand and manufacturing production more difficult. Also, it has led to a rise in the cost of a number of classes of acquired goods for both the T&M and PI segments. We will continue to evaluate the impact of COVID-19 and its aftermath effects on our business, results of operations and cash flows throughout fiscal 2024, including the potential impacts on various estimates and assumptions inherent in the preparation of the consolidated financial statements.
Since the COVID-19 pandemic began we have experienced difficulties in obtaining raw materials and components for our products. Some of the structural dislocations in the global economy that were triggered by the pandemic are prolonging these difficulties. Particularly with respect to certain electronic components for legacy
products in our T&M segment, availability has been curtailed and may not recover, and as a result we have had to accelerate product redesign and as quickly transition customers to products with more viable long-term product configurations. We expect to incur substantial costs in doing so but are unable to accurately estimate the financial impact due to the rapidly changing environment. We also have had to incur additional costs, such as higher shipping fees (i.e., air rather than ocean freight) and though these have abated to a degree, they have not returned to pre-pandemic levels. These factors have negatively impacted our efficiency, have delayed shipments for each of the fiscal quarters of fiscal 2023, and have caused what we believe are product shortages. We are addressing these issues through long-range planning and procuring higher inventory levels for the affected items to help mitigate potential shortages whenever practicable. For our T&M segment, we are also monitoring and reacting to extended lead times on electronic components, and utilizing a variety of strategies, including blanket orders, vendor-bonded inventories, extended commitments to our supply base, and seeking alternative suppliers. Additionally, we have taken actions to increase regular contact with our essential vendors and increased our forecasting horizon for our products to help us better manage our supply chain. In some cases, we are working with our vendors to help them procure components. Similarly, in our PI segment, we are increasing our inventory levels to ensure the adequacy of the supplies we sell to customers who use the printers we have sold to them. Our strategies to counteract these supply chain dislocations have significantly increased the amount of inventory we maintain to support our product sales. We have also experienced several situations where component shortages and scarcity have required us to pay significantly higher costs to obtain those components, particularly electronic components and circuit board assemblies in the T&M segment and inks and printer machine parts in the PI segment. We will continue to monitor our supply chain going forward and update our mitigation strategies as we determine appropriate. We are not able to predict how current supply chain difficulties will develop in the future, and if the steps we are taking are not effective, it could have a material adverse impact on our business and results of operations.
Product Identification Update
The COVID-19 pandemic impacted our PI business by limiting our ability to meet with customers to demonstrate our products at trade shows and on-site in their facilities was curtailed. We partially countered this through a variety of virtual, on-line selling and digital marketing strategies, a number of which we continue to emphasize today. The degree to which post-pandemic selling practices will revert to traditional practices, and the ultimate mix of customer engagement methods of face-to-face selling versus digital selling methods are just starting to recover. For example, throughout fiscal 2023 we attended numerous trade shows, but demand generation through those selling methods has not fully recovered and digital marketing has, we believe, become a more permanent element of our go-to-market strategy. This has required us to shift resources to those technologies. Further, the reliability of timely delivery of acceptable quality printer components from one of our suppliers has deteriorated post-pandemic causing us to incur additional direct procurement costs to carry higher inventories to assure adequate supplies to satisfy customers, as well as causing us to incur additional warranty and technical service costs to offset those impacts and to invest considerable time and resources with that supplier to improve their performance.
Test & Measurement Update
The aerospace industry, which we serve through our aerospace product line, was significantly disrupted by the COVID-19 pandemic, because of the severe decline in the demand for air travel, demand for aircraft, and a general curtailment of aircraft production rates. This had a material adverse impact on our financial results. Although air travel demand and aircraft production demand have improved, the direct and secondary impacts of the demand decline have somewhat abated, they have not recovered completely. As a result, demand for our products has not fully recovered to pre-pandemic levels. We believe that it will be at least another two or more years before we reach full revenue recovery due to the lingering impacts of the pandemic era on the economic structure of the airline industry. General economic conditions could also still become a negative factor impacting demand for new aircraft, which could potentially stall or reverse current favorable trends. If this were to happen individually or in combination, these factors would be difficult to respond to, which could have a material adverse impact on our business operations and financial results.
Results of Operations
Fiscal 2023 compared to Fiscal 2022
The following table presents the revenue of each of our segments, as well as the percentage of total revenue and change from the prior year.
($ in thousands)
Revenue
As a % of
Total Revenue
% Change
Over Prior Year
Revenue
As a % of
Total Revenue
P I
$ 103,089
72.3 %
13.4 %
$ 90,915
77.4 %
T&M
39,438
27.7 %
48.5 %
26,565
22.6 %
Total
$ 142,527
100.0 %
21.3 %
$ 117,480
100.0 %
Net revenue in fiscal 2023 was $142.5 million, a 21.3% increase compared to net revenue of $117.5 million for fiscal 2022. Current year revenue through domestic channels was $91.8 million, an increase of 34.8% from prior year domestic revenue of $68.2 million. International revenue of $50.6 million for fiscal 2023 increased 2.7% compared to prior year international revenue of $49.3 million. Fiscal 2023 international revenue reflects an unfavorable foreign exchange rate impact of $3.5 million, compared to a favorable foreign exchange rate impact of $1.1 million in fiscal 2022.
Hardware revenue in fiscal 2023 was $42.4 million, an $11.0 million or 34.8% increase compared to fiscal 2022 hardware revenue of $31.5 million due to increased hardware sales in both the T&M and PI segments. T&M hardware sales increased 44.2% or $7.5 million compared to the prior year primarily due to increased sales in our aerospace printer product line. Current year hardware sales in the PI segment increased 23.9% or $3.5 million compared to the prior year, predominately as a result of the August 2022 acquisition of Astro Machine. The increase in PI hardware sales for the current year was slightly offset by a decline in sales of our TrojanLabel product line printers.
Revenue from supplies in fiscal 2023 was $82.1 million, a 12.1% or $8.8 million increase compared to fiscal 2022 supplies revenue of $73.2 million. Supplies revenue increased in both the PI and T&M segment in the current year, with the increase primarily due to the contribution of $6.7 million of supply sales from the newly acquired Astro Machine in the PI segment. Also contributing to the increase in current year supply revenue was the increase in paper supply revenue for the aerospace printers in the T&M segment and the increased sales of supplies in our TrojanLabel product line in the PI segment.
Service and other revenue in fiscal 2023 was $18.0 million, a 41.3% increase compared to fiscal 2022 service and other revenue of $12.7 million. The increase is due primarily to significantly increased repair and parts revenue for aerospace printer products in the T&M segment due to the impact of increased flight hour usage and pricing increases. Also contributing to the current year increase was Astro Machine parts revenues included since the acquisition, offset by modest declines in aftermarket parts sales for Quick Label related products in the PI segment.
Gross profit was $48.2 million for fiscal 2023, reflecting a 10.1% increase compared to fiscal 2022 gross profit of $43.7 million. Our gross profit margin of 33.8% in fiscal 2023 reflects a 3.4 percentage point decrease compared to fiscal 2022 gross profit margin of 37.2%. The lower gross profit margin for the current year compared to the prior year is primarily attributable to the inclusion of Astro Machine for the six months since its acquisition, because of the impact of its lower gross margin business model, plus the impact of the employment retention tax credit (“ERC”) in the prior year, which reduced manufacturing payroll taxes, a component of cost of revenue, in the amount of $1.7 million in the second quarter of the prior year. Lastly, excess royalties (above the minimum guaranteed royalty amount), which are payable in connection with our license from Honeywell to produce aircraft cockpit printers for two narrow-body aircraft programs increased due to higher volumes of sales.
Operating expenses for the current year were $42.7 million, representing an 8.2% increase from the prior year’s operating expenses of $39.5 million. Specifically, selling and marketing expenses of $24.5 million in fiscal 2023 increased 5.5% from the prior year amount of $23.2 million. The increase in selling and marketing expenses for the current year is primarily due to a decrease in payroll taxes in the second quarter of the prior year related to the ERC, which reduced payroll taxes in the amount of $0.8 million, as well as the current year increase in employee wages and travel and entertainment expenses. The current year increase in selling and marketing expenses was partially offset by a decrease in commissions and advertising and trade show expenses. General and administrative expenses increased 19.7% to $11.4 million in the current year compared to $9.6 million in the prior year, primarily due to an increase in outside service fees and employee wages, and the impact of the ERC, which reduced manufacturing payroll taxes in the amount of $0.3 million in the third quarter of the prior year, partially offset by a decrease in bonus and advertising and trade show expenses. Research & development (“R&D”) costs in fiscal 2023 of $6.8 million remained relatively unchanged from fiscal 2022, as increases in wages and benefits were substantially offset by decreases in bonus and supplies and repair expenses. The R&D spending level for fiscal 2023 represents 4.8% of net revenue, compared to the prior year level of 5.7%.
Other expense in fiscal 2023 was $2.0 million compared to other income of $2.8 million in fiscal 2022. Current year expense includes $1.7 million of interest expense on our debt and revolving line of credit and $0.4 million of net foreign exchange loss, offset by net other income of $0.1 million. Prior year other income includes $4.5 million related to the forgiveness of the loan we received under the Paycheck Protection Program (the “PPP”), partially offset by $0.7 million related to the write-off of our Oracle EnterpriseOne ERP system and related prepaid service and maintenance contracts as a result of the full implementation of a new ERP system in our US-based operations in the fourth quarter of fiscal 2022, interest expense on debt of $0.7 million, and net foreign exchange loss of $0.3 million.
We recognized $0.7 million of income tax expense for the current fiscal year, resulting in an effective tax rate of 22.0% compared to 8.6% in fiscal 2022. The increase in the effective tax rate in fiscal 2023 from fiscal 2022 is primarily related to the absence of the impact of the PPP loan forgiveness, which is tax-exempt income that was a one-time item that reduced the rate in fiscal 2022. Specific items increasing the effective tax rate in fiscal 2023 include the change in reserves related to uncertain tax positions under ASC 740 and an increase in the valuation allowance recorded on our China net operating losses. This increase was offset by state taxes, return to provision adjustments, share-based compensation, R&D tax credits, and foreign derived intangible income (“FDII”) deduction. During fiscal 2022, we recognized $0.6 million of income tax expense for the prior fiscal year, resulting in an effective tax rate of 8.6%. Specific items decreasing the effective tax rate include PPP loan forgiveness tax-exempt income, R&D tax credits, foreign derived intangible income (“FDII”) deductions, and a change in reserves related to ASC 740 liabilities. This decrease was offset by state taxes, return to provision adjustments, and taxes on foreign earnings. The PPP loan forgiveness is excluded from taxable income.
Net income for fiscal 2023 was $2.7 million, or $0.36 per diluted share. Net income for fiscal 2022 was $6.4 million, or $0.88 per diluted share. The results for the current year were impacted by expenses of $0.7 million ($0.5 million net of tax, or $0.07 per diluted share) related to transaction costs of the Astro Machine acquisition. The results for the prior period were impacted by income of $4.5 million ($4.4 million net of tax, or $0.60 per diluted share) related to the forgiveness of our PPP loan, income of $2.1 million ($1.6 million net of tax, or $0.22 per diluted share) related to the net ERC and expense of $0.7 million ($0.5 million net of tax, or $0.07 per diluted share) related to the write-off of our Oracle EnterpriseOne ERP system and related prepaid service and maintenance contracts.
Fiscal 2022 compared to Fiscal 2021
For a comparison of our results of operations for the fiscal years ended January 31, 2022, and January 31, 2021, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended January 31, 2022, filed with the SEC on April 18, 2022.
Segment Analysis
We report two segments consistent with our product revenue groups: PI and T&M. Segment performance is evaluated based on the operating segment’s profit (loss) before corporate and financial administration expenses. The following table summarizes selected financial information by segment.
($ in thousands)
Revenue
Segment Operating Profit
(Loss)
Segment Operating Profit (Loss)
as a % of Revenue
P I
$ 103,089
$ 90,915
$ 90,268
$ 7,889
$ 10,411
$ 12,885
7.7 %
11.5 %
14.3 %
T&M
39,438
26,565
25,765
8,989
3,398
(1,032 )
22.8 %
12.8 %
(4.0 )%
Total
$ 142,527
$ 117,480
$ 116,033
16,878
13,809
11,853
11.8 %
11.8 %
10.2 %
Corporate Expenses
11,435
9,553
9,420
Operating Income
5,443
4,256
2,433
Other Income (Expense), Net
(2,033 )
2,778
(254 )
Income Before Income Taxes
3,410
7,034
2,179
Income Tax Provision
Net Income
$ 2,661
$ 6,429
$ 1,284
Product Identification
Revenue from the PI segment increased 13.4% in fiscal 2023, with revenue of $103.1 million compared to revenue of $90.9 million in the prior year. The current year increase is attributable to the contribution of the newly acquired Astro Machine, which provided revenue of $12.5 million for the current year. Trojan Label related product supply revenue also grew in fiscal 2023 compared to the prior year due to the larger installed base of these printers. The current year increase in PI revenue was slightly offset by declines in the sales of Trojan label hardware products resulting from the market reaction to quality problems caused by quality and reliability issues we faced from one supplier. Quick Label revenues were essentially flat as compared to the prior year. At the current time, we expect PI revenue to increase in fiscal 2024 due to the impact of a full year of Astro Machine revenue and recovery in both hardware and supplies in the other product lines, partly as the result of new product introductions. PI current year segment operating profit was $7.9 million with a profit margin of 7.7%, compared to the prior year segment operating profit of $10.4 million and related profit margin of 11.5%. Despite the inclusion of $1.6 million in operating profit contribution from Astro Machine, the primary reason for the decline in operating profit and margin was the inclusion in fiscal 2022 of $1.4 million of net benefit from the ERC, which reduced payroll taxes in the segment. The decrease in current year segment operating profit and margin, was also due to the result of a higher relative mix of lower gross profit product sales, higher travel and trade show expense, and increased warranty expenses.
Test & Measurement
Revenue from the T&M product group was $39.4 million for fiscal 2023, a 48.5% increase compared to revenue of $26.6 million in the prior year. The current year increase in T&M revenue is primarily due to a 44.2% or $7.5 million increase in hardware sales resulting primarily from increased aerospace printer product unit volume. Demand for printers, especially for narrow body aircraft, has increased due to the post-pandemic recovery in air travel demand and new orders of airplanes and the corresponding increase in production rates. The sales of printers for wide-body aircraft have increased but at much slower rates compared with narrow body demand. Sales of ToughSwitch ethernet products also recovered to levels consistent with the fiscal 2019 through
fiscal 2021 period after a large decline in fiscal 2022, and we currently expect comparable revenue from those products in fiscal 2024. Our current expectation is that printers narrow-body aircraft will continue to recover to pre-pandemic levels over the next two years, although at a slower rate than the recovery in fiscal 2023. We believe any recovery in shipments for larger wide-body aircraft will take longer. The increase in fiscal 2023 hardware revenue in the T&M segment was also impacted by $1.1 million in revenue recognized in the fourth as the result of successful claims for component cost increases for printer shipments to one customer throughout most of fiscal 2023 as described in Note 3, “Revenue Recognition,” in our consolidated financial statements included elsewhere in this report. In the fourth quarter, we recognized revenue of $0.8 million in connection with a new Asset Purchase and License Agreement with Honeywell Inc. (“New HW Agreement”) as described in Note 12, “Royalty Obligation,” in our consolidated financial statements included elsewhere in this report.
The current year increase in T&M revenue was additionally favorably impacted by increased repair, parts and paper supply revenue related to aerospace printers, as flight hours and product utilization increased. At this time, we believe the outlook for T&M supplies, service and other revenue is favorable as the expected higher flight hours in commercial aviation should correlate favorably to higher aerospace printer supplies, parts and repair revenue. T&M current year segment operating profit was $9.0 million resulting in a 22.8% profit margin compared to the prior year segment operating profit of $3.4 million and related operating margin of 12.8%. The increased profit and margins were primarily attributable to the robust turnaround in revenue, particularly in repair, parts and supplies revenues at high margins, and were offset by the impact of higher components costs, as well as the fact that prior year’s operating profit included the impact of $0.8 million in net employee retention tax credits that reduced manufacturing and operating costs. Also contributing to the increase was the favorable impact in the fourth quarter of the receipt of improved pricing on certain contracts that related to the entire year and the impact of the New HW Agreement. Selling, marketing and administrative expense grew in total by $0.6 million in support of the revenue growth, which was a significantly lower rate than revenue growth, demonstrating favorable operating leverage.
Liquidity and Capital Resources
Overview
Historically, our primary sources of short-term liquidity have been cash generated from operating activities and borrowings under our revolving credit facility. In fiscal 2023, we used our credit facilities, as further described below, to acquire Astro Machine. We also used our credit facilities and operating cash flow to fund increases in inventories. Substantial increases in inventories were the result of the need to support higher levels of shipments in the aerospace product lines within our T&M segment, and the buildup of inventory buffers to respond to supply chain risks. In the fourth quarter of fiscal 2023, we were able to reduce our outstanding line of credit balance by $4.0 million. Capital spending was very low in fiscal 2023 compared to our historical levels of spending.
We believe that in the coming year, cash flow generation from operations and available unused credit capacity under our credit facility will support our anticipated needs. In fiscal 2024 (after required debt amortization and payment of minimum guaranteed royalty payments to Honeywell), we will be focused on inventory reduction and reduction of debt outstanding under our revolving credit facility, to the degree possible as constrained by supply chain management challenges. We also anticipate that we will have the capacity to spend $1.5 million to $2.0 million in capital to upgrade production machinery to support planned revenue growth and cost reduction objectives. Finally, if further acquisition opportunities develop that would require additional cash above our current available capacity, based on regular communication with our lender, we believe that our current operating performance and the reduction in leverage ratios as measured by the covenants within our credit facilities since the acquisition of Astro Machine would permit us to obtain sufficient additional debt financing, barring any unforeseen changes in the credit and capital markets.
.
In connection with our purchase of Astro Machine on August 4, 2022, we entered into a Second Amendment to Amended and Restated Credit Agreement (the “Second Amendment”) with Bank of America, N.A., as lender (the “Lender”). The Second Amendment amended the Amended and Restated Credit Agreement dated as of July 30, 2020, as amended by the First Amendment to Amended and Restated Credit Agreement, dated as of March 24, 2021, and the LIBOR Transition Amendment, dated as of December 24, 2021 (the “Existing Credit Agreement,” and the Existing Credit Agreement as amended by the Second Amendment, the “Amended Credit Agreement”), between the Company and the Lender.
The Amended Credit Agreement provides for (i) a new term loan in the principal amount of $6.0 million, which term loan was in addition to the existing term loan outstanding under the Existing Credit Agreement in the principal amount of $9.0 million as of the effective date of the Second Amendment, and (ii) an increase in the aggregate principal amount of the revolving credit facility available thereunder from $22.5 million to $25.0 million. Under the Amended Credit Agreement, revolving credit loans may continue to be borrowed, at our option, 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, 2023, our cash and cash equivalents were $3.9 million. During fiscal 2023, we borrowed a net of $15.9 million on our revolving line of credit, and at January 31, 2023, we had $9.1 million available for borrowing under that facility.
Indebtedness
Term Loan
The Amended Credit Agreement requires that the term loan be paid in quarterly installments on the last day of each of our fiscal quarters over the term of the Amended Credit Agreement on the following repayment schedule: the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about October 31, 2022 through July 31, 2023 is $375,000; and the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about October 31, 2023 through April 30, 2027 is $675,000. The entire remaining principal balance of the term loan is required to be paid on August 4, 2027. We may voluntarily prepay the term loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later than August 4, 2027, and any outstanding revolving loans thereunder will be due and payable in full, and the revolving credit facility will terminate, on such date. We may reduce or terminate the revolving line of credit at any time, subject to certain thresholds and conditions, without premium or penalty.
The loans under the Amended Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from (a) net cash proceeds from certain dispositions of property, (b) net cash proceeds from certain issuances of equity, (c) net cash proceeds from certain issuances of additional debt and (d) net cash proceeds from certain extraordinary receipts.
Amounts repaid under the revolving credit facility may be reborrowed, subject to our continued compliance with the Amended Credit Agreement. No amount of the term loan that is repaid may be reborrowed.
The interest rates under the Amended Credit Agreement are as follows: the term loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the BSBY Rate as defined in the Amended Credit Agreement (or, in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.60% to 2.50% based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate, (iii) the BSBY Rate plus 1.00%, or (iv) 0.50%, plus a margin that varies within a range of 0.60% to 1.50% based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15% and 0.35% based on our consolidated leverage ratio.
We must comply with various customary financial and non-financial covenants under the Amended Credit Agreement. The financial covenants under the Amended Credit Agreement consist of a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio and a minimum consolidated asset coverage ratio. The primary non-financial covenants limit our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on our or our subsidiaries’ capital stock, to repurchase or acquire our or our subsidiaries’ capital stock, to conduct mergers or acquisitions, to sell assets, to alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of our or our subsidiaries’ business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the Amended Credit Agreement, certain of which provisions were modified by the Second Amendment. As of January 31, 2023, we believe we are in compliance with all of the covenants in the Credit Agreement.
The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Amended Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or a change of control.
Our obligations under the Amended Credit Agreement continue to be secured by substantially all of our personal property assets (including a pledge of the equity interests we hold in ANI ApS, AstroNova GmbH and AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property in West Warwick, Rhode Island, and are guaranteed by, and secured by substantially all of the personal property assets of Astro Machine.
PPP Loan
On 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 (the “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.
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.
On June 15, 2021, Greenwood notified us that the SBA approved our application for forgiveness of the entire $4.4 million principal balance of our PPP Loan and all accrued interest thereon. As a result, we recorded a $4.5 million gain on the extinguishment of debt in Other Income (Expense) in our condensed consolidated income statement for the year ended January 31, 2022.
Cash Flow
The statements of cash flows for the years ended January 31, 2023, 2022, and 2021 are included on page of this Form 10-K. Net cash used by operating activities was $2.9 million in fiscal 2023 compared to net cash provided by operating activities of $1.4 million in the previous year. The increase in net cash used by operations for the current year is primarily due to an $11.5 million increase in cash used for working capital. The changes in accounts receivable, inventory, income taxes, accounts payable and accrued expenses for the current year decreased cash by $14.3 million in fiscal 2023 compared to $2.8 million in the prior year. The increase in cash used for operations for fiscal 2023 was partially offset by the $3.1 million of ERC receivable received in the first quarter of the current year. Cash from operations for fiscal 2022 was also impacted by the $3.1 million ERC receivable and the $4.5 million gain on the forgiveness of the PPP Loan.
The accounts receivable balance increased to $21.6 million at January 31, 2023, compared to $17.1 million at January 31, 2022. The increase in the accounts receivable balance is related to sales product mix in fiscal 2023 compared to the prior year, as well as the addition of Astro Machine. The days sales outstanding increased to 49 days at year end compared to 45 days at the end of fiscal 2022 contributing to the higher receivables balance at January 31, 2023. The days sales outstanding increase in the current year is due to customer mix, as aerospace receivables typically take longer to collect.
The year-end inventory balance increased to $51.3 million at January 31, 2023 versus $34.6 million at January 31, 2022, a $16.7 million increase from the prior year end. The increase in our inventory balance is primarily due to difficulty in the supply chain environment, including increased pricing and long lead times to obtain components and supplies, which has required us to increase our component and supply buffer stock to support the demands of our customers in our PI segment. We have also experienced increased inventory levels related to our T&M products to maintain our targeted inventory levels as a result of increased sales in that segment and parts shortage issues. In addition, the acquisition of Astro Machine resulted in increased levels of inventory to support their operations. Inventory days on hand increased to 176 days at the end of the current quarter from 156 days at the prior year end. This increase in working capital has been funded in part by borrowings under our credit facilities and has increased our interest expense.
Net cash used by investing activities for fiscal 2023 was $17.2 million, which includes $17.0 million related to the acquisition of Astro Machine and $0.2 million for capital expenditures.
Net cash provided by financing activities for fiscal 2023 was $18.8 million. Cash provided from financing activities for fiscal 2023 includes $15.9 million for borrowings under the revolving line of credit and $6.0 million of proceeds from long term borrowings. Cash outflows for financing activities for fiscal 2022 include principal payments on long-term debt and the guaranteed royalty obligation of $1.0 million and $2.0 million, respectively.
Fiscal 2022 compared to Fiscal 2021
For a comparison of our cash flow for the fiscal years ended January 31, 2022 and January 31, 2021, see “Part II, Item 7. Management’s Discussion and Analysis of Liquidity and Capital Resources” in our annual report on Form 10-K for the fiscal year ended January 31, 2022, filed with the SEC on April 18, 2022.
Contractual Obligations, Commitments and Contingencies
As of January 31, 2023, we had contractual obligations related to lease arrangements, debt and royalty obligation arrangements and purchase commitments.
The lease arrangements are for certain of our facilities at various locations worldwide. As of January 31, 2023, we had fixed lease payment obligations of $0.8 million, with $0.3 million due within 12 months. Refer to Note 13, “Leases,” in our audited consolidated financial statements included in this Annual Report on Form 10-K for further details.
Debt arrangements under our Amended Credit Agreement with Bank of America, N.A., consist of the balance due of $14.3 million at January 31, 2023, with $2.1 million due within 12 months. For additional details regarding our long-term debt obligations, see Note 8, “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 five years pursuant to the Honeywell Agreements, which, at January 31, 2023 included a balance due of $5.1 million, with $1.7 million due within 12 months. Refer to Note 2 “Acquisitions” and Note 12, “Royalty Obligation,” in our audited consolidated financial statements included in this Annual Report on Form 10-K for further details.
In order to meet our manufacturing demands and, in some cases, lock in particular pricing structures for specific goods used in manufacturing, we enter into purchase commitments with our suppliers. At January 31, 2023 our purchase commitments totaled $25.8 million, with $22.8 million due within 12 months, some of which are non-cancelable.
We are also subject to contingencies, including legal proceedings and claims arising out of our business that cover a wide range of matters, such as: contract and employment claims; workers’ compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided, or covered by insurance, will not have a material adverse effect on our consolidated financial position or results of operations. It is possible, however, that our results of operations for any future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted 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 the following critical accounting policies require significant judgments and estimates in the preparation of our consolidated financial statements:
Revenue Recognition: We recognize revenue in accordance with Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers.” Under ASC 606, based on the nature of our contracts, we recognize most of our revenue upon shipment, which is when the performance obligation has been satisfied.
Our accounting policies relating to the recognition of revenue under ASC 606 require management to make estimates, determinations and judgments based on historical experience and on various other assumptions, which
include (i) the existence of a contract with the customer, (ii) the identification of the performance obligations in the contract, (iii) the value of any variable consideration in the contract, (iv) the standalone selling price of multiple obligations in the contract, for the purpose of allocating the consideration in the contract, and (v) determining when a performance obligation has been met. Recognition of revenue based on incorrect judgments, including the identification of performance obligation arrangements as well as the pattern of delivery for those services, could result in inappropriate recognition of revenue, or incorrect timing of revenue recognition, which could have a material effect on our financial condition and results of operations.
We recognize revenue for non-recurring engineering (NRE) fees, as necessary, for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue.
Infrequently, we receive requests from customers to hold product being purchased from us for the customers’ convenience. We recognize revenue for such bill and hold arrangements in accordance with the guidance provided by ASC 606, which requires the transaction to meet the following criteria in order to determine that the customer has obtained control: (a) the reason for the bill and hold is substantive, (b) the product has separately been identified as belonging to the customer, (c) the product is currently ready for physical transfer to the customer, and (d) we do not have the ability to use the product or direct it to another customer.
Allowance for Doubtful Accounts: Accounts receivable consists primarily of receivables from our customers arising from the sale of our products. We actively monitor our exposure to credit risk through the use of credit approvals and credit limits. Accounts receivable is presented net of reserves for doubtful accounts.
We estimate the collectability of our receivables and establish allowances for accounts receivable that we estimate to be uncollectible. We base these allowances on our historical collection experience, the length of time our accounts receivable are outstanding and the financial condition of individual customers. In situations where we are aware of a specific customer’s inability to meet its financial obligation, such as in the case of a bankruptcy filing, we assess the need for a specific reserve for bad debts. We believe that our procedure for estimating such amounts is reasonable and historically has not resulted in material adjustments in subsequent periods. Bad debt expense was less than 1% of net sales in each of fiscal 2023 and 2022.
Warranty Claims: We offer warranties on some of our products. We establish a reserve for estimated costs of warranties at the time the product revenue is recognized. This reserve requires us to make estimates regarding the amounts necessary to settle future and existing claims using historical data on products sold as of the balance sheet date. The length of the warranty period, the product’s failure rates, and the customer’s usage affect estimated warranty cost. If actual warranty costs differ from our estimated amounts, future results of operations could be affected adversely. Warranty cost is recorded as cost of revenue, and the reserve balance recorded as an accrued expense. While we maintain product quality programs and processes, our warranty obligation is affected by product failure rates and the related corrective costs. If actual product failure rates and/or corrective costs differ from the estimates, we revise our estimated warranty liability accordingly.
Inventories: Inventories are stated at the lower of average and standard cost or net realizable value. The process for evaluating and recording obsolete and excess inventory provisions consists of analyzing the inventory supply on hand and estimating the net realizable value of the inventory based on historical experience, current business conditions and anticipated future revenue. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to actual experience.
Income Taxes: A valuation allowance is established when it is “more-likely-than-not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence must be
considered, including our performance, the market environment in which we operate, length of carryforward periods, existing revenue backlog and future revenue projections. If actual factors and conditions differ materially from the estimates made by management, the actual realization of the net deferred tax assets or liabilities could vary materially from the amounts previously recorded. At January 31, 2023, we had provided valuation allowances for future tax benefits resulting from certain domestic R&D tax credits, foreign tax credit carryforwards, and China net operating losses, all of which are expected to expire unused.
The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. Although guidance on the accounting for uncertain income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what we have estimated, our income tax expense could be materially impacted.
Business Combinations: We account for business acquisitions under the acquisition method of accounting in accordance with ASC 805, ‘‘Business Combinations,’’ where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates that, if known, would have affected the measurement of the amounts recognized as of the acquisition date. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, and selection of comparable companies. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. As a result, actual results may differ from these estimates. During the measurement period, we may record adjustments to acquired assets and assumed liabilities, with corresponding offsets to goodwill. Upon the conclusion of a measurement period, any subsequent adjustments are recorded to earnings.
Goodwill and Intangible Assets: We recognize goodwill in accordance with ASC 350, Intangibles-Goodwill and Other (“ASC 350”). Goodwill is the excess of cost of an acquired entity over the fair value amounts assigned to assets acquired and liabilities assumed in a business combination and is not amortized.
Goodwill is tested for impairment at the reporting unit. A reporting unit is an operating segment or a business unit one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. However, components within an operating segment are aggregated as a single reporting unit if they have similar economic characteristics. Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in revenue, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative assessment is required for the reporting unit. The quantitative assessment compares the fair value of the reporting unit with its carrying value. If a quantitative assessment is required, we estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. In addition, we use the market approach, which compares the reporting unit to publicly traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach
requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then we record an impairment charge based on that difference. No goodwill impairment was identified for the years ended January 31, 2023 or January 31, 2022.
We recognize intangibles assets in accordance with ASC 350. Acquired intangible assets subject to amortization are stated at fair value and are amortized using the straight-line method over the estimated useful lives of the assets. Intangible assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, which is determined by the discounting of future cash flows. No impairment of intangible assets was identified for the years ended January 31, 2023 or January 31, 2022.
Share-Based Compensation: Compensation expense for time-based restricted stock units is measured at the grant date and recognized ratably over the vesting period. We determine the fair value of time-based and performance-based restricted stock units based on the closing market price of our common stock on the grant date. The recognition of compensation expense associated with performance-based restricted stock units requires judgment in assessing the probability of meeting the performance goals, as well as defined criteria for assessing achievement of the performance-related goals. For purposes of measuring compensation expense, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. The performance shares begin vesting only upon the achievement of the performance criteria. The achievement of the performance goals can impact the valuation and associated expense of the restricted stock units. The assumptions used in accounting for the share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
Recent Accounting Pronouncements
Reference is made to Note 1 of our audited consolidated financial statements included elsewhere in this report.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our primary financial market risks consist of foreign currency exchange rates risk and the impact of changes in interest rates that fluctuate with the market on our variable rate credit borrowings under our existing credit agreement.
Financial Exchange Risk
The functional currencies of our foreign subsidiaries and branches are the local currencies-the British Pound in the U.K., the Canadian Dollar in Canada, the Danish Kroner in Denmark, the Chinese Yuan in China, and the Euro in France and Germany. We are exposed to foreign currency exchange risk as the functional currency financial statements of foreign subsidiaries are translated to U.S. dollars. The assets and liabilities of our foreign subsidiaries having a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date, and at an average exchange rate for the reporting period for revenue and expense accounts. The cumulative foreign currency translation adjustment is recorded as a component of accumulated other comprehensive loss in shareholders’ equity. The reported results of our foreign
subsidiaries will be influenced by their translation into U.S. dollars by currency movements against the U.S. dollar. Our primary currency translation exposure is related to our subsidiaries that have functional currencies denominated in Danish Kroner and the Euro. A hypothetical 10% change in the rates used to translate the results of our foreign subsidiaries would result in an increase or decrease in our consolidated net income of approximately $0.2 million for the year ended January 31, 2023.
Transactional exposure arises where transactions occur in currencies other than the functional currency. Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. The resulting monetary assets and liabilities are translated into the appropriate functional currency at exchange rates prevailing at the balance sheet date and the resulting gains and losses are reported as foreign exchange gain (loss) in the consolidated statements of income. Foreign exchange losses resulting from transactional exposure were $0.5 million for the year ended January 31, 2023.
Interest Rate Risk
At January 31, 2023, our total indebtedness included $14.25 million of term loan variable-rate debt and $15.9 million outstanding balance on our revolving line of credit. At January 31, 2023, under the LIBOR Transition Amendment to the Amended Credit Agreement, the term loan bears interest at a BSBY (Bloomberg Short-Term Bank Yield) rate plus a margin that varies between 1.60% and 2.30% based on our consolidated leverage ratio. During fiscal 2023, the weighted average interest rate on our variable rate debt was 4.77% and the weighted average interest rate on our revolving line of credit was 6.71% The impact on our results of operations of a 100 basis point change in the interest rates on the outstanding balance of our variable-rate debt and revolving line of credit would be approximately $0.2 million annually.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements required under this item are submitted as a separate section of this report on the pages indicated at Item 15(a)(1).

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Principal Executive Officer and our Principal Financial Officer have concluded that our disclosure controls and procedures were not effective at January 31, 2023 because of the material weaknesses in our internal control over financial reporting described below.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate.
Management conducted its evaluation of the effectiveness of its internal control over financial reporting as of January 31, 2023. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The scope of management’s assessment of the effectiveness of its disclosure controls and procedures did not include the internal controls over financial reporting at Astro Machine, which was acquired effective August 4, 2022. Our consolidated total assets as of January 31, 2023 include $20.2 million from Astro Machine and our consolidated revenue for the year ended January 31, 2023 includes $12.5 million from Astro Machine. This exclusion is consistent with the SEC Staff’s guidance that an assessment of a recently acquired business may be omitted from the scope of management’s assessment of the effectiveness of disclosure controls and procedures that are also part of internal control over financial reporting in the year of acquisition. Based on this assessment, the principal executive officer and principal financial officer believe that as of January 31, 2023, our internal control over financial reporting was not effective based on criteria set forth by COSO in “Internal Control-Integrated Framework.”
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. We did not maintain effective controls to properly identify and assess significant non-routine transactions and management concluded that this material weakness continued to exist as of January 31, 2023.
Management is taking action to remediate this deficiency in its internal controls over financial reporting by augmenting personnel and resources in its finance and accounting organization. We anticipate that these actions and resulting improvements in controls will strengthen our internal control over financial reporting and will address the related material weakness.
The effectiveness of our internal control over financial reporting as of January 31, 2023 has been audited by Wolf & Company, P.C., an independent registered public accounting firm, as stated in their report, which is included herein.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed for our 2023 Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our fiscal year (our “Proxy Statement”). Certain other information relating to our executive officers appears in Part I of this Annual Report on Form 10-K under the heading “Information about our Executive Officers.”

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to our Proxy Statement.
The information set forth under the heading “Compensation Committee Report” in our Proxy Statement is furnished and shall not be deemed filed for purposes of Section 18 of the Exchange Act, nor be incorporated by reference in any filing under the Securities Act of 1933, as amended.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to our Proxy Statement.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships, Related Transactions and Director Independence
The information required by this item is incorporated herein by reference to our Proxy Statement.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to our Proxy Statement.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedule
(a)(1) Financial Statements:
The following documents are included as part of this Annual Report filed on Form 10-K:
Page
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of January 31, 2023 and 2022
Consolidated Statements of Income-Years Ended January 31, 2023, 2022, and 2021
Consolidated Statements of Comprehensive Income-Years Ended January 31, 2023, 2022, and 2021
Consolidated Statements of Changes in Shareholders’ Equity-Years Ended January 31, 2023, 2022, and 2021
Consolidated Statements of Cash Flows-Years Ended January 31, 2023, 2022, and 2021
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule:
Schedule II-Valuation and Qualifying Accounts and Reserves-Years Ended January 31, 2023, 2022, and 2021
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted.