EDGAR 10-K Filing

Company CIK: 8146
Filing Year: 2021
Filename: 8146_10-K_2021_0001193125-21-114283.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 around the world through our own sales force, authorized dealers, and through 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 and test and measurement data acquisition systems sold under the AstroNova ®
brand name. Refer to Note 17, “Nature of Operations, Segment Reporting and Geographical Information,” in our audited consolidated financial statements elsewhere in this report for financial information regarding our segments.
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 23 through 28 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 on a global basis.
Product Identification 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, high-volume presses and specialty 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. In the T&M segment, we have a long history of using our technologies to provide networking systems and high-resolution light-weight 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 and stored and presented in various visual output formats.
Product Identification
Our PI segment includes three brands: QuickLabel, TrojanLabel, and GetLabels. 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 chemical, cosmetics, food and beverage, medical products, nutraceutical, pharmaceutical, 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, while also being 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. The high-speed QL-120X
was built on our pioneering and successful Kiaro! platform. 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,
introduced in late 2019, 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 water-resistant and highly resistant to UV exposure. A professional 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 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.
The PI segment also 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. PI also provides worldwide training and support.
T&M
Products sold under our T&M segment are designed and manufactured for airborne printing 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 a variety of 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.
Airborne printers include our flagship ToughWriter®
series used in the flight decks and cabins of military, commercial and business aircraft to print hard copies of data required for the safe and efficient operation of aircraft. Examples of printed data include navigation maps, arrival and departure information, flight itineraries, weather maps, 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 airborne printers for many aircraft made by Airbus, Boeing, Bombardier, Lockheed, Gulfstream and others. In addition to the ToughWriter products, we manufacture other flight deck printers, 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 world-wide 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 will replace the PTA-45B
printers with ToughWriter products because they have numerous technical features and functional advantages and significant weight savings.
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 facility maintenance and field testing; and the Everest®
EV-5000
digital strip chart recording system used mainly in telemetry 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, monitor or electronic storage media and (4) analyzing the data. To service data visualization, we maintain technological core competencies and trade 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.
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 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 purchase certain components, assembled products and supplies used to manufacture our products from a single source or limited supplier sources. 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, such design 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 advance 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 expanding network of manufacturing, sales and support facilities, we now do business in over 150 countries.
We believe we are a market leader in tabletop digital color label printing technology in the specialty printing field, a 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 Product Identification products are sold by direct field salespersons as well as independent dealers and representatives, while our Test & Measurement 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 Product Identification 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 200 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 backlog varies regularly. It consists of a blend of orders for end-user
customers, as well as original equipment manufacturer customers. Manufacturing production is designed to meet forecasted demands and built-to-order
customer requirements. Accordingly, the amount of order backlog may not indicate future sales trends. Backlog at January 31, 2021 and 2020 was $22.5 million and $25.2 million, respectively.
Employees
As of January 31, 2021, we employed 327 people full-time employees. Of our full-time employees, 230 were in the United States, 78 in Europe, 10 in Canada, seven 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 collective bargaining agreements are generally required by local regulations.
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 have ingrained a strong and definable company culture that shapes the way 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, including: Customer First, One Global Team, Innovation, Continuous Improvement and Building Shareholder Value.
•
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.
•
A commitment to operating with integrity and compliance to ensure business is conducted in an honest, legal, and environmentally responsible manner.
•
A passionate commitment to quality that drives our goal to achieve zero defects and understand the changing needs and expectations of our customers.
Our core values guide our employees’ behavior and dictate the way our business is conducted. 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 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.
Other Information
Our business is not seasonal in nature. However, our revenue is impacted by the size of certain individual transactions, which can cause fluctuations in revenue from quarter to quarter.
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 furnishes it to, the Securities and Exchange Commission (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 ongoing COVID-19
pandemic has adversely affected and will likely continue to adversely affect our revenues, results of operations and financial condition.
Our business has been and will likely continue to be materially adversely affected by the global COVID-19
pandemic. We operate in several regions of the world, with the largest concentration of team members in North America and Europe, and a small presence in Asia. We, and many other businesses and other organizations with which we do business directly or which otherwise impact us, have taken and are continuing to take steps to avoid or reduce infection, including limiting business travel and staying home from work when recommended by the public health authorities. These measures have disrupted and continue to disrupt our normal business operations both inside and outside of affected areas and have had significant negative impacts on our business, the businesses of our suppliers and customers, and on businesses and financial markets worldwide. Until vaccine availability and inoculation rates reach the point where public health authorities determine that the quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures that national, state and local governments have implemented as a result of the pandemic are no longer necessary, we expect our business to be negatively impacted.
In response to the COVID-19
pandemic, we have established new procedures to monitor government recommendations and regulations and made good faith efforts to comply with those regulations and the best practices recommendations issued by a variety of governmental health authorities and manufacturing industry organizations to which we belong. In addition, we have made significant modifications to our normal operations because of the COVID-19
pandemic, including requiring most non-production
related team members to work remotely, at least part-time. At this time, we expect that these measures will continue to remain in place for the near term, and we do not know when or if it will become practical to relax or eliminate these measures altogether. Since the start of the pandemic, we have maintained most of manufacturing operational capacity at our facilities located in West Warwick, Rhode Island, as well as our manufacturing facilities in Canada and Germany. However, there were periods when a number of team members were unable to keep work schedules due to the effects of the pandemic, which resulted in reduced production capacity that led to longer order fulfillment lead times and as a result, reduced revenues. The extent to which the COVID-19 pandemic continues to negatively impact our manufacturing production will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and any associated variants, the efficacy and timing of distribution of vaccines, and the actions to contain COVID-19 or
treat its impact, among others. We also do not yet know to what extent our operations will be impacted permanently by remote work, increased safety protocols and the other adaptations undertaken during the pandemic.
During the COVID-19
pandemic, we have experienced some difficulties in obtaining raw materials and components for our products. We have been able to recover from these difficulties, but we have had to incur some additional costs in expedited and express shipping fees. These difficulties have impacted our efficiency and our ability to satisfy customer requirements, but we do not believe that they have materially impacted our financial results or our relationships with our customers. We are currently monitoring the world-wide delays in transit time, as freight carriers are now experiencing significant delays in overseas shipments. We are addressing these issues through long range planning and supplementing inventories as needed. We are also monitoring the extended lead times on active electronic components and utilizing several strategies, including blanket orders,
vendor-bonded inventories, and extended commitments to our supply base. Additionally, we have taken actions to maintain regular contact with our important vendors and have increased our forecasting horizon for our products to help us better manage our supply chain. Our strategies to counteract the impact of the pandemic have tended to increase the amount of inventory we maintain, but because of the complexity of our supply chain and update our mitigation strategies as we determine to be appropriate. We will continue to monitor our supply chain a priority going forward. We are not able to predict what the full impact of the current supply chain difficulties, as it depends on how the course of the COVID-19
pandemic continues and its impacts on the economy evolve.
The aerospace industry, which we serve through our aerospace product line, has also been significantly disrupted by the COVID-19
pandemic, both inside and outside of the United States. The decline in air travel has had and will continue to have a material adverse impact on our financial results, the ultimate scope of which we cannot estimate at this time. Should one or more of our airplane OEM manufacturing customers or a significant number of airline customers fail to continue business as a going concern, declare bankruptcy, or otherwise permanently reduce the demand for our products as a result of the impact of the COVID-19
pandemic, it would have a material adverse impact on our business operations and financial results.
While it is not possible at this time to estimate the full scope of the impact that COVID-19
will have on our business, customers, suppliers or other business partners, in the long run we expect that the lasting presence of COVID-19,
will continue to adversely impact our operational capacity and the efficiency of our team members and will continue to negatively affect our results of operations and financial condition for the near term.
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 in 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 has reduced demand for our airborne printers that are installed on that aircraft, as well as the related repairs and supplies, which has negatively affected our results of operations. In addition, the current worldwide COVID-19
pandemic has negatively impacted the airline industry as a whole, which could result in a reduction in orders by the airlines for new planes and reduce demand for retrofitting airplanes already in service and, therefore, a further reduction in demand for our airborne printer products. The effect of the COVID-19
pandemic and any future action relating to the 737 MAX on our business is currently unknown, but we expect any resulting reductions in production schedules will likely have an adverse effect on our business, which could be material. Some of our customers may be reluctant to make capital equipment purchases or may defer certain of these purchases to future quarters. Some of our customers may also limit consumable product purchases to quantities necessary to satisfy immediate needs with no provisions to stock supplies for future use. Also, if our customers’ markets decline enough to impact their financial capacity, we may not be able to collect on outstanding amounts due to us. Such declines could harm our results of operations, financial position and cash flows and could limit our ability to continue to remain profitable.
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 acquisition and data 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 as a result of the COVID-19
pandemic;
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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; and
•
Reduced control over delivery schedules, manufacturing yields, quality and costs.
If one of our significant subcontractors becomes unable or unwilling to continue to manufacture or provide these products in required volumes or fails to meet our quality standards, we will have to identify qualified alternate subcontractors or take over the manufacturing ourselves. 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, due to the continued global COVID-19
pandemic, there has been and likely will continue to be 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 are 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 these
components, assembled products or supplies in required volumes, 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. 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 which provides a reasonable return to our shareholders. Depending on competitive market factors, future prices we obtain for our products and services may decline from previous levels. In addition, pricing actions to offset the effect of currency devaluations may not prove sufficient to offset further devaluations or 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 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. If we are unable to maintain process and systems changes resulting from cost reduction and prior restructuring actions, 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 lose 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 taken as a whole. 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. Although we have provided an allowance for slow-moving and obsolete inventory, any significant unanticipated changes in future product demand or market conditions, including obsolescence or the uncertainty in the global market, as well as continued reduced demand for our products if the COVID-19
pandemic is further prolonged, 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 incur additional liabilities as a result of installed 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 substantial damage to our reputation. We could be subject to material claims by customers and may incur substantial expenses to correct any product defects.
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 have not been subjected to the same level of product development, testing and quality control processes we employ, 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 employ information technology systems to support our business. Any security breaches or other disruptions to our information technology infrastructure could interfere with operations, compromise our information and that of our customers and suppliers, and expose us to liability which could adversely impact our business and reputation. In the ordinary course of business, we rely on information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic proprietary or confidential information regarding our customers, employees, suppliers and others including personally identifiable information, credit card data, and other confidential information. While we continually work to safeguard our systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyber-attacks or security breaches. As a result, our information technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attack by hackers or breaches, employee error, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters, catastrophic events or other unforeseen events and 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. Any 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, which could adversely affect our business, operating results and financial condition.
We could experience disruptions related to the implementation of our new global enterprise resource planning system.
We are currently engaged in a multi-year process of conforming all our operations to one global enterprise resource planning (“ERP”) system. The ERP system is designed to improve the efficiency of our supply chain and financial transaction processes, improve the efficiency of how we accurately maintain our books and records and enhance the speed and quality of information provided to our management team for use in the operation and management of our business. The implementation of the ERP system will continue to require significant
investment of human and financial resources. As a result of the COVID-19
pandemic, we have and will continue to experience delays and increased costs as a result of factors such as limited on-site
availability of Company personnel and outside consultants due to travel restrictions and remote work conditions. The significant disruption in the implementation and transition to the new ERP system as a result of the COVID-19
pandemic could delay or otherwise negatively impact our ability to obtain the benefits that the new ERP system is intended to provide. Additionally, while we have taken steps to ensure that we prevent adverse developments, any significant disruption or deficiency in the design, implementation and transition to the new ERP system could negatively impact our ability to:
•
record and process orders,
•
manufacture and ship our products in a timely manner, and
•
process data and electronic communications among our business locations,
any of which could have a material adverse effect on our business, consolidated financial condition or results of operations.
We also face the challenge of supporting our older systems while we implement the new ERP system. Although we have invested significant resources in planning and project management, significant unforeseen implementation issues may arise that could impact our normal business operations and have a material adverse impact on our operating results and cash flow.
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 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, 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.
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, in evaluating the potential for impairment of goodwill, we make assumptions regarding estimated revenue projections, growth rates, cash flows and discount rates. We 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:
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 40% of our total revenue for fiscal year 2021, 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:
•
Interruption to transportation flows for delivery of parts to us and finished goods to our customers;
•
Customer and vendor financial stability;
•
Fluctuations in foreign currency exchange rates;
•
Changes in a specific country’s or region’s environment including political, economic, monetary, regulatory or other conditions;
•
Trade protection measures and import or export licensing requirements;
•
Negative consequences from changes in tax laws;
•
Difficulty in managing and overseeing operations that are distant and remote from corporate headquarters;
•
Difficulty in obtaining and maintaining adequate staffing;
•
Differing labor regulations;
•
Differing protection of intellectual property;
•
Unexpected changes in regulatory requirements;
•
Uncertainty surrounding the implementation and effects of the United Kingdom’s withdrawal from the EU, commonly known as “Brexit”; and
•
Geopolitical turmoil, including terrorism, war and public health disruptions, such as that caused by the current COVID-19
pandemic.
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, including the 2017 U.S. Tax Cuts and Jobs Act (the “Tax Act”). Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations.
The Tax Act significantly revised the U.S. federal corporate income tax law and included a broad range of tax reform measures affecting business including among other things, the reduction of the corporate income tax rate from 35% to 21%, the loss of certain business deductions, the acceleration of first-year expensing of certain capital expenditures and a one-time
tax imposed on unremitted cumulative non-U.S.
earnings of foreign subsidiaries. The Tax Act is complex and far-reaching,
and we continue to evaluate the actual impact of its enactment on the Company. Any material adverse impact resulting from the Tax Act that has not yet been identified could have an adverse effect on our business, results of operations, financial condition and cash flow.
Further changes in the tax laws of foreign jurisdictions could arise as a result of the base erosion and profit shifting (BEPS) project undertaken by the Organisation for Economic Co-operation
and Development (OECD), which represents a coalition of member countries. On October 5, 2015, the OECD issued a series of reports recommending changes to numerous long-standing tax principles. Many of these recommendations or similar concepts are being adopted by various countries in which we do business and may increase our taxes in these countries. Changes to these and other areas in relation to international tax reform, including future actions taken by foreign governments in response to the Tax Act, could increase uncertainty and may adversely affect our tax rate and cash flow in future years.
Changes to tax laws and regulations or changes to the interpretation thereof (including regulations and interpretations pertaining to the Tax Act), 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 significant 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 and a minimum consolidated fixed charge 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:
•
Incur future indebtedness;
•
Place liens on assets;
•
Pay dividends or distributions on our and our subsidiaries’ capital stock;
•
Repurchase or acquire our capital stock;
•
Conduct mergers or acquisitions;
•
Sell assets; and/or
•
Alter our or our subsidiaries’ capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness.
In addition, the agreement governing our credit facility permits us to elect to pay interest on our term loan and revolving line of credit based on LIBOR or an alternative rate as specified in the agreement. In July 2017, the Financial Conduct Authority, the authority that regulates LIBOR, announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee has proposed the Secured Overnight Financing Rate (“SOFR”) as the preferred alternative to U.S. Dollar LIBOR (“USD-LIBOR”).
Additionally, it is uncertain if applicable tenors of LIBOR will cease to exist after calendar year 2021, or whether additional reforms to LIBOR may be enacted, or whether alternative reference rates will gain market acceptance as a replacement for LIBOR. At this time, it is not possible to predict whether SOFR will attain market traction as a LIBOR replacement. Our credit facility provides for the transition to a SOFR-based alternative benchmark at such time that LIBOR rates are no longer available. We will continue to monitor the situation and address the potential reference rate changes in future debt obligations that we may incur. Accordingly, the potential effect of the phase-out
or replacement of LIBOR on our cost of capital cannot yet be determined. Further, the use of an alternative base rate or a benchmark replacement rate as a basis for calculating interest with respect to any outstanding variable rate indebtedness could lead to an increase in the interest we pay and a corresponding increase in our costs of capital.
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. 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:
•
We will successfully integrate the operations of the acquired business with our own;
•
All the benefits expected from such integration will be realized;
•
Management’s attention will not be diverted or divided, to the detriment of current operations;
•
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;
•
Delays or unexpected costs related to the acquisition will not have a detrimental impact on our business, operating results and financial condition;
•
Customer dissatisfaction with, or performance problems at, an acquired company will not have an adverse impact on our reputation; and
•
Respective operations, management and personnel will be compatible.
In certain instances, as permitted by applicable law and NASDAQ rules, acquisitions 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:
•
Effectively transfer assets, liabilities, contracts, facilities and employees to the purchaser;
•
Identify and separate the intellectual property to be divested from the intellectual property that we wish to keep; and
•
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 expected benefits of our acquisitions, divestitures or strategic partnerships, our business, results of operations and financial condition could be adversely affected.
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 2021, we had approximately $11.4 million of cash and cash equivalents. Our cash and cash equivalents are held in a mix of money market funds, bank demand deposit accounts and foreign bank accounts. Disruptions in the financial markets such as those caused by the current COVID-19
pandemic 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 counter-parties 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 health care 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. 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 loss. 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. We believe that the liabilities we have recorded to date will be sufficient to provide for losses we may incur due to increased COVID-19
related employee health care insurance costs. However, the ultimate amount of these costs cannot be estimated at this time, and a prolonged period of spread of the disease could further increase our costs and liabilities, the impact of which may be material.
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.
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. We have used and continue to use various substances in our products and manufacturing operations, and have generated and continue to generate wastes, which have been or may be deemed to be hazardous or dangerous. As such, our business is subject to and may be materially
and adversely affected by compliance obligations and other liabilities under environmental, health and safety laws and regulations. These laws and regulations affect ongoing operations and require capital costs and operating expenditures in order to achieve and maintain compliance.
As the result of the COVID-19
pandemic crisis, we have been required by U.S. federal and state governmental authorities and governmental authorities in non-U.S.
jurisdictions, as well as our own desire to adhere to best health and safety practices, to implement a number of policies and procedures that have increased our costs and added complexity and inefficiency to our manufacturing operations and all administrative and office-based functions.
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. 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 of 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, leases, and litigation, 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.

---

ITEM 2. PROPERTIES
Item 2.
Properties
The following table sets forth information regarding our principal owned property. This 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
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
Schaumburg, Illinois, United States
3,428
Sales)
Irvine, California, United States
3,100
Sales
Shah Alam, Selangor, Malaysia
2,067
Sales
Maidenhead, England
1,021
Sales and service
Shanghai, China
Sales
Mexico City, Mexico
Sales
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 not a party to any pending, material legal proceedings. However, 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.

---

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 270 shareholders of record as of April 9, 2021, which does not reflect shareholders with beneficial ownership in shares held in nominee name.
Stock Repurchases
During the fourth quarter of fiscal 2021, 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
-
-
-
-
January 1 - January 31
1,870 (a)
10.53 (a)
-
-
(a) An executive of the company delivered 1,870 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 $10.53 per share and are included with treasury stock in the consolidated balance sheet.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6.
Selected Financial Data
Historical Financial Summary
Income Statement Data
(In thousands, except per share data)
For the Fiscal Years Ended January 31,
Revenue
$ 116,033
$ 133,446
$ 136,657
$ 113,401
$ 98,448
Gross Profit
41,360
48,758
53,999
44,002
39,489
Operating Income
2,433
2,433
8,720
5,412
6,281
Income before Taxes
2,179
1,370
7,308
5,157
6,605
Net Income
$ 1,284
$ 1,759
$ 5,730
$ 3,286
$ 4,228
Net Income per Common Share-Basic
$ 0.18
$ 0.25
$ 0.83
$ 0.48
$ 0.57
Net income per Common Share-Diluted
$ 0.18
$ 0.24
$ 0.81
$ 0.47
$ 0.56
Dividends Declared per Common Share
$ 0.07
$ 0.28
$ 0.28
$ 0.28
$ 0.28
Balance Sheet Data
(In thousands)
As of January 31,
Cash and Marketable Securities
$ 11,439
$ 4,249
$ 7,534
$ 11,688
$ 24,821
Current Assets
60,721
60,151
62,608
62,948
61,423
Total Assets
115,473
116,664
118,983
122,313
83,665
Revolving Credit Facility
-
6,500
1,500
-
-
Current Liabilities
20,968
26,767
24,665
25,912
11,985
Debt, including short term portion
12,576
13,034
18,242
23,372
-
Shareholders’ Equity
$ 74,683
$ 71,375
$ 69,775
$ 63,647
$ 70,537

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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
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, 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.
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 2021, 2020 and 2019, revenue from customers in various geographic areas outside the United States, primarily in Western Europe, Canada and Asia, amounted to $45.1 million, $49.8 million and $53.0 million, respectively.
We maintain an active program of product research and development. During fiscal 2021, 2020 and 2019, we spent $6.2 million, $8.1 million and $7.8 million, respectively, on Company-sponsored product development. We are committed to continuous product development as essential to our organic growth and expect to continue our focus on research and development efforts in fiscal 2021 and beyond.
We also continue to invest in sales and marketing initiatives by expanding the existing sales force and using various marketing campaigns to achieve our goals of sales growth and increased profitability notwithstanding the challenging economic environment.
In fiscal 2018, we entered into an Asset Purchase and License Agreement (“Honeywell Agreement”) with Honeywell International, Inc. (“Honeywell”) pursuant to which, we acquired the exclusive perpetual world-wide license to manufacture Honeywell’s narrow format flight deck printers for the Boeing 737 and Airbus 320 aircraft.
COVID-19
Update-Overview
Our business has been materially adversely affected by the global COVID-19
pandemic, and will likely continue to be negatively impacted until the vaccine availability and inoculation rates reach the point where public health authorities conclude that the quarantines, travel restrictions, business closures, cancellations of public gatherings and other similar measures are no longer necessary. We operate in several regions of the world, with the largest concentration of team members in North America and Europe, and a small presence in Asia. Due to the COVID-19
pandemic, we and many other businesses and organizations with which we do business directly or which otherwise impact us have taken and are continuing to take steps to avoid or reduce infection, including limiting business travel and working from home as advised by the public health authorities. These measures have been and continue to be disrupting normal business operations both inside and outside of affected areas and have had significant negative impacts on our business, the businesses of our suppliers and customers, and on businesses and financial markets worldwide.
Since the COVID-19
pandemic began to impact us in early March 2020, we have closely monitored the government and health authority recommendations applicable to us and have made modifications to our operations based on that guidance and on our growing experience and knowledge of the situation. We responded by reducing our staffing levels and reducing other costs.
In response to the pandemic, we have established new procedures to monitor government recommendations and regulations and made good faith efforts to comply with both those regulations and the best practices recommendations issued by a variety of governmental health authorities and manufacturing industry organizations to which we belong. In addition, we have made significant modifications to our normal operations, including requiring most non-production
related team members to work remotely, for at least part-time. At this time, we expect that these measures will continue to remain in place for the near term, and we do not know when or if it will become practical to relax or eliminate them altogether. Since the start of the pandemic, we have maintained most of manufacturing operational capacity at our facilities located in West Warwick, Rhode Island, as well as our manufacturing facilities in Canada and Germany. However, there have been periods when a number of team members were unable to keep work schedules due to the effect of the COVID -19
pandemic, resulting in reduced production capacity and longer order fulfillment lead times and as a result, reduced revenues. The extent to which COVID-19 impacts our manufacturing production in the future will depend on future
COVID-19
developments, which are uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and any associated variants, the efficacy and distribution of vaccines, and the actions to contain COVID-19 or
treat its impact, among others. We also do not yet know to what extent our operations will be impacted permanently by remote work, increased safety protocols and the other temporary adaptations undertaken during the pandemic.
During the COVID-19
pandemic, we have experienced some difficulties in obtaining raw materials and components for our products. We have been able to recover from these difficulties, but we have had to incur some additional costs in expedited and express shipping fees. These difficulties have impacted our efficiency and our ability to satisfy customer requirements, but we have been able to keep these impacts to a minimum. We are currently monitoring the world-wide delays in transit time, as freight carriers are now experiencing significant delays in overseas shipments. We are addressing these issues through long range planning and supplementing inventories as needed. We are also monitoring the extended lead times on active electronic components and utilizing several strategies, including blanket orders, vendor bonded inventories, and extended commitments to our supply base. Additionally, we have taken actions to maintain regular contact with our important vendors and have increased our forecasting horizon for our products to help us better manage our supply chain. Our strategies to counteract the impact of the pandemic have tended to increase the amount of inventory we have had to maintain, but because of the complexity of our supply chain it is impossible to isolate the exact impact. We will continue to monitor our supply chain.
While it is not possible at this time to estimate the full scope of the impact that COVID-19
will have on our business, customers, suppliers or other business partners in the long run, we expect that the lasting presence of COVID-19
will continue to adversely impact our operational capacity and the efficiency of our team members and will continue to negatively affect our results of operations and financial condition for the near term.
Product Identification Update
The global COVID-19
pandemic has also negatively impacted sales of our Product Identification hardware products primarily as a result of the impact of travel restrictions on our sales efforts, as most customers historically have preferred in-person
demonstrations of these printers at their production sites prior to placing orders with us and those visits have been severely limited. Additionally, the widespread cancellation of trade shows, which traditionally provided an effective forum for customers to consider our products, has also had an adverse impact on traditional methods of sales lead generation. However, we believe we have been able to ameliorate these negative impacts by placing a greater reliance on various forms of digital advertising and internet-based marketing techniques, including remote video demonstrations and support, which has proven effective in obtaining sales. Despite favorable market reception to our recently refreshed and expanded product lines, the degree to which we will be able to maintain or grow the level of hardware revenues through the changes we have made to our go-to-market
strategies remains unclear. When the COVID-19
pandemic abates, and it is possible again for our direct sales force and distributors to travel to visit customers and attend and present products at trade shows (if they are even offered) it is likely that some reversion to those historical sales methods will occur, but some of the COVID-19
induced adaptations are also likely to become permanent. We do not know how that mix of sales strategies will evolve and how they will impact the results of operations for this segment.
Despite the pandemic, underlying overall demand remained strong through this period and in general, we believe that the diversified nature of our end markets and the relative concentration of business in consumer non-durable
market related applications impart a greater degree of near- and longer-term stability to our Product Identification segment.
Test & Measurement Update
Our sales of flight deck printers for Boeing 737 aircraft have been severely impacted by the chain of events that occurred after two 737 MAX aircraft crashed. In March 2019, all major civil aviation authorities worldwide grounded the Boeing 737 MAX aircraft for safety reasons. In April 2019, Boeing reduced the number of 737
MAX aircraft produced per month from 52 to 42, and in January 2020, Boeing ceased production of the 737 MAX completely. On May 27, 2020, in anticipation of an eventual certification, Boeing announced that it would re-start
production at low initial rates and gradually increase production in the future.
On August 3, 2020, the United States Federal Aviation Administration (the “FAA”) issued a notice of proposed rulemaking for a Boeing 737 MAX airworthiness directive, and on November 18, 2020 the FAA certified the model for return to service in the United States. On January 27, 2021, the European Union Aviation Safety Agency (EASA) approved the return to service of the Boeing 737 MAX in Europe. The exact timing of re-certification
by other worldwide civil aviation authorities is unknown but we expect that most will permit a return to service later in 2021. Before any individual 737 MAX aircraft can return to commercial service, all civilian aviation authority agency certification requirements relevant to each carrier must be met. As these requirements vary, and can be quite extensive, the exact timing of the recertification and return to service of the 737 MAX fleet in each geographical area is unclear at this time and will depend on the ability of Boeing and each airline to complete the required steps.
Aircraft manufacturing rather than aircraft deliveries drives demand for our airborne printer products. We have experienced very low levels of 737 MAX new printer orders and shipments since the production halt, as Boeing is now producing a small number of new aircraft per month. The majority of our future 737 MAX printer sales volume will be tied to the pace of Boeing’s manufacturing dates and delivery schedules, and the recovery is expected to be prolonged. We believe that Boeing has already installed our printers in most of the airplanes that it has completed and that require our printers to be installed prior to delivery. Further, due to the COVID-19
pandemic, global air travel demand precipitously declined, and the number of flights scheduled by airlines declined sharply. As a result, order demand from airlines for new deliveries of most aircraft models has declined. The demand for air travel and the demand for new airplanes from the airlines is expected to remain lower for an unknown period due to the unpredictable course of the pandemic and the perceived infection risk of air travel. Aircraft manufacturers have reduced their projected production rates across most or all of their product lines. As the COVID-19
pandemic impact on the air travel industry continues, the financial health of the airlines and airframe manufacturers may become further stressed, and the ultimate impact on the structure of the industry and the individual companies that comprise it is unknown. Because we are the primary source for aircraft cabin printers to the airframe manufacturers for a majority of aircraft models produced in the world, the longer-term demand for our products is defined less by the impact of COVID-19
on particular airlines within the industry than the health of the industry as a whole. Although we do not know what the timing and rate of recovery will be, we do expect that the industry, and hence the demand for our products, will continue to recover slowly after effective vaccines and treatments for COVID-19
become both widely available and accepted, and as demand for air travel recovers.
Demand for aerospace spare products, paper, parts and repairs has also been significantly impacted by the decline in air travel, as requirements for these products and services are based primarily upon aircraft usage. Although we have experienced modest increases in demand for spare products, paper, parts and repairs as flight hours have increased since the second quarter of fiscal 2021, it is unknown whether this will continue or increase, or at what pace.
The decline in demand for our aerospace products has had a material adverse impact on our revenues and results of operations, which we expect will continue until demand recovers.
While we have reduced and plan to continue to reduce our costs as much as we are prudently able to, our strategy and operational plans are to maintain sufficient capabilities and staffing to fully support our customers and meet the stringent quality requirements the market requires, and to be able to rapidly increase production as demand returns, the decline in revenue has adversely impacted our profitability.
Results of Operations
Fiscal 2021 compared to Fiscal 2020
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
Product Identification
$ 90,268
77.8 %
2.4 %
$ 88,116
66.0 %
T&M
25,765
22.2 %
(43.2 )%
45,330
34.0 %
Total
$ 116,033
100.0 %
(13.0 )%
$ 133,446
100.0 %
Net revenue in fiscal 2021 was $116.0 million, a 13.0% decrease compared to net revenue of $133.4 million for fiscal 2020. Current year revenue through domestic channels was $70.9 million, a decline of 15.3% from prior year domestic revenue of $83.7 million. International revenue of $45.1 million for fiscal 2021 decreased 9.4% compared to prior year international revenue of $49.8 million. Fiscal 2021 international revenue reflects a favorable foreign exchange rate impact of $0.8 million, compared to an unfavorable impact of $1.4 million in fiscal 2020. International revenue declined primarily due to lower international sales of aerospace printers in Europe.
Hardware revenue in fiscal 2021 was $34.1 million, a $14.8 million, or 30.3%, decrease compared to fiscal 2020 hardware revenue of $49.0 million. The current year decrease in hardware revenue is primarily due to the decline in revenue in the T&M segment resulting from lower aerospace printer product lines sales as a result of the effects of the Boeing 737 MAX grounding and the impact of the sharp decline in air travel due to COVID-19.
T&M hardware revenue for the current year was also impacted by a decline in sales of data recorders. Also contributing to the overall decline in hardware revenue for the current year was a more modest the decline in sales in the PI segment of certain QuickLabel model printers which was entirely offset by sales related to printers in the TrojanLabel product group.
Revenue from supplies in fiscal 2021 was $71.8 million, which was consistent with the fiscal 2020 supplies revenue. The PI segment recognized an increase in current year supply revenue primarily due to increased demand for Trojan Label product supplies due to increased market penetration of these printers, offset somewhat by lower sales of QuickLabel supplies compared to a very strong prior year. This increase was offset to a large extent by a decline in sales supplies for the aerospace product group due to the declines in commercial aircraft flight hours within the T&M segment.
Service and other revenue in fiscal 2021 was $10.1 million, a 19.8% decrease compared to fiscal 2020 service and other revenue of $12.6 million. The current year decrease is due primarily to declines in repair and part revenue related to the aerospace printer product line in the T&M segment as the result of declines in commercial aircraft flight hours.
Gross profit was $41.4 million for fiscal 2021, reflecting a 15.2% decline compared to fiscal 2020 gross profit of $48.8 million. Our gross profit margin of 35.6% in fiscal 2021 reflects a decrease compared to fiscal 2020 gross profit margin of 36.5%. The lower gross profit for the current year compared to the prior year is primarily attributable to the adverse effects of the decline in revenue in the aerospace printer product line and related product mix, which were slightly offset by the favorable impact of reductions on our manufacturing and period costs.
Operating expenses for the current year were $38.9 million, representing a 16.0% decrease from the prior year’s operating expenses of $46.3 million. Specifically, selling and marketing expenses of $23.3 million in fiscal 2021 decreased 13.3% from the prior year amount of $26.9 million. The decrease in selling and marketing expenses for the current year is primarily due to decreased travel and entertainment, advertising trade shows and commission expenses. Selling and marketing expenses represent 20.1% of net revenue for both fiscal 2021 and
2020. Current year general and administrative (“G&A”) expenses of $9.4 million decreased by 17.1% from the prior year amount of $11.4 million, primarily as a result of decreased IT costs, a decline in employee fees and lower travel and entertainment expenses due to the impact of COVID-19.
G&A expenses represented 8.1% of net revenue for fiscal 2021, compared to 8.5% in fiscal 2020. The decline in G&A expenses in the current year is partially offset by an increase in expenses for outside services fees. Research & development (“R&D”) costs in fiscal 2021 of $6.2 million decreased 23.2% from $8.1 million in fiscal 2020, primarily due to a decrease in wages, benefits and outside services. The R&D spending level for fiscal 2021 represents 5.3% of net revenue, a decrease compared to the prior year level of 6.1%.
Other expense in fiscal 2021 was $0.3 million compared to $1.1 million in fiscal 2020. Current year other expense includes $1.0 million of interest expense on debt and revolving line of credit, offset by a net foreign exchange gain of $0.6 million and other income of $0.1 million. Other expense in fiscal 2020 includes interest expense on debt of $0.7 million and a foreign exchange loss of $0.5 million, which were partially offset by investment and other income of $0.1 million.
Net income for fiscal 2021 was $1.3 million, or $0.18 per diluted share, a decrease compared to $1.8 million, or $0.24 per diluted share in fiscal 2020. During fiscal 2021 we recognized a $0.9 million income tax expense, or a 41.1% effective tax rate compared to an income tax benefit of $0.4 million, or a 28.4% negative effective tax rate for fiscal 2020. The increase in the effective tax rate in 2021 from 2020 is primarily related to the change in mix of income between relevant jurisdictions in which we are subject to income taxes. Specific items increasing the fiscal 2021 effective tax rate include foreign rate differential, Denmark statutory audit adjustments, stock-based compensation, and Canada withholding taxes. This increase was offset by the foreign derived intangible income deduction, the release of a valuation allowance in China, and R&D tax credits expected to be utilized.
Fiscal 2020 compared to Fiscal 2019
For a comparison of our results of operations for the fiscal years ended January 31, 2020 and January 31, 2019, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K
for the fiscal year ended January 31, 2020, filed with the SEC on April 10, 2020.
Segment Analysis
We report two segments consistent with our product revenue groups: PI and T&M. Segment performance is evaluated based on the operating segment’s profit (loss) before corporate and financial administration expenses. The following table summarizes selected financial information by segment.
($ in thousands)
Revenue
Segment Operating Profit (Loss)
Segment Operating Profit
(Loss) as a % of Revenue
PI
$ 90,268
$ 88,116
$ 86,786
$ 12,885
$ 7,509
$ 7,910
14.3 %
8.5 %
9.1 %
T&M
25,765
45,330
49,871
(1,032 )
6,281
11,933
(4.0 )%
13.9 %
23.9 %
Total
$ 116,033
$ 133,446
$ 136,657
11,853
13,790
19,843
(10.2 )%
10.3 %
14.5 %
Corporate Expenses
9,420
11,357
11,123
Operating Income
2,433
2,433
8,720
Other Expense, Net
(254 )
(1,063 )
(1,412 )
Income Before Income Taxes
2,179
1,370
7,308
Income Tax Provision (Benefit)
(389 )
1,578
Net Income
$ 1,284
$ 1,759
$ 5,730
Product Identification
Revenue from the PI segment increased 2.4% in fiscal 2021, with revenue of $90.3 million compared to revenue of $88.1 million in the prior year. The current year increase is primarily attributable to growth in demand for ink jet and media supplies for the Trojan Label product line and to a lesser degree, the increase in current year sales of QuickLabel’s electrophotographic printer supplies. Also contributing to the increase in revenue for the current year was an increase in hardware sales in the Trojan Label product group, including contributions from the launch of new products such as the T3-OPX
label press. PI current year segment operating profit was $12.9 million with a profit margin of 14.3%, compared to the prior year segment operating profit of $7.5 million and related profit margin of 8.5%. The increase in current year segment operating profit and margin is primarily due to increased revenue and lower operating and period costs.
Test & Measurement
Revenue from the T&M product group was $25.8 million for fiscal 2021, a 43.2% decrease compared to revenue of $45.3 million in the prior year. The decrease in revenue for the current year is primarily attributable to the decline in the aerospace printer product lines impacted by the Boeing 737 MAX grounding and the dramatic drop in air travel due to the impact of COVID-19.
To a lesser degree, the decrease in the current year revenue was also impacted by the declines in certain T&M’s data acquisition hardware sales, as well as a decline in supplies, service and other revenue in the aerospace product lines, due to Covid-19
induced declines in commercial airline flights. T&M current year segment operating loss was $1.0 million resulting in a negative 4.0% profit margin compared to the
prior year segment operating profit of $6.3 million and related operating margin of 13.9%. Despite lower manufacturing and period costs, the segment operating loss and related margin for the current year is primarily due to the decline in current year revenue.
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. These sources have also funded a portion of our capital expenditures and contractual contingent consideration obligations. We have typically funded acquisitions by borrowing under bank term loan facilities.
The onset of the COVID-19
pandemic and the decline in revenues in the T&M segment due to the decline in aerospace printer sales, combined with the period of COVID-19
pandemic induced credit risk avoidance in the capital markets, led to a period of liquidity concerns for us through the second quarter of fiscal 2021 despite our efforts to reduce expenses as rapidly as possible and preserve liquidity. As a result of the availability of the PPP loan during our fiscal second quarter of 2021discussed below, we were able, despite a pending default on our credit facility, to secure an amendment at the end of the second quarter of fiscal 2021 that provided additional liquidity. Those two sources of capital allowed us the time necessary to retain employment levels and focus on continuing efforts to reduce costs, and as those cost reductions took hold, to improve operating profit and cash flow. Based on improved conditions in the credit market and in recognition of the substantial cost and working capital reductions we accomplished, we were able to reduce our debt, and, subsequent to the end of fiscal year 2021, renegotiate the amendment to the credit agreement we had signed in the second quarter of fiscal 2021, which, together with our improved performance, restored us to a solid liquidity position.
On May 6, 2020, we entered into a loan agreement (the “Loan Agreement”) with and executed a promissory note (the “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. We believe that our obtaining the PPP Loan and suspending the payment of dividends on our common stock were instrumental in our ability to successfully negotiate the A&R Credit Agreement, as defined below.
At the end of the first quarter of fiscal 2021, the deterioration of our financial condition and operating results due to the decline in 737 MAX-related
revenue and COVID-19
impacts caused us to violate the financial covenants in our Credit Agreement dated February 28, 2017 (the “Prior Credit Agreement”) with Bank of America, N.A. (the “Lender”). On June 22, 2020, we entered into a letter agreement with the Lender wherein it agreed to waive compliance with those financial covenants for the measurement period ended May 2, 2020.
On July 30, 2020, we entered into an Amended and Restated Credit Agreement (the “A&R Credit Agreement”) with the Lender, our wholly owned subsidiary ANI ApS, a Danish private limited liability company and ANI ApS’s wholly-owned subsidiary TrojanLabel ApS, a Danish private limited liability company (“TrojanLabel”). The A&R Credit Agreement amended and restated the Prior Credit Agreement. In connection with our entry into the A&R Credit Agreement, we entered into an Amended and Restated Security and Pledge Agreement and a mortgage in favor of the Lender with respect to our owned real property in West Warwick, Rhode Island. Under the A&R Credit Agreement, AstroNova, Inc. is the sole borrower, and, prior to the effectiveness of the Amendment (as defined below), its obligations were guaranteed by ANI ApS and TrojanLabel.
Immediately prior to the closing of the A&R Credit Agreement, we repaid $1.5 million in principal amount of term loans outstanding under the Prior Credit Agreement.
The A&R Credit Agreement provided for (i) a term loan in the principal amount of $15.2 million, which we used to refinance the outstanding term loans borrowed by us and ANI ApS under the Prior Credit Agreement and a portion of the outstanding revolving loans borrowed by us under the Prior Credit Agreement, and (ii) a $10.0 million revolving credit facility available to us for general corporate purposes. Revolving credit loans may be borrowed, at our option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Kroner.
At January 31, 2021, our cash and cash equivalents were $11.4 million. There was no outstanding balance on our revolving line of credit at January 31, 2021 and we had $10.0 million available for borrowing under the A&R Credit Agreement.
On March 24, 2021, subsequent to year end, we entered into a First Amendment to Credit Agreement (the “Amendment”) to our A&R Credit Agreement (the “A&R Credit Agreement amended by the Amendment, the “Amended Credit Agreement”) with the Lender, ANI ApS and TrojanLabel. Immediately prior to the closing of the Amendment, we repaid $ 2.6 million in principal amount of the term loan outstanding under the A&R Credit Agreement, resulting in an outstanding balance of the term loan of $10.0 million and no amount drawn and outstanding under the revolving credit facility under the Amended Credit Agreement.
The Amended Credit Agreement expires on September 30, 2025, a significant extension of tenor. It also eliminated a minimum adjusted EBITDA covenant, an asset coverage covenant and a minimum liquidity covenant, and, subject to ongoing covenant compliance, significantly reduced limitations on restricted payments such as dividends, eliminated restrictions on capital expenditures and increased operating flexibility with respect to funding our global operations.
The Amended Credit Agreement provides for (i) a term loan in the principal amount of $10.0 million, and (ii) a $22.5 million revolving credit facility available for general corporate purposes. At the closing of the Amended Credit Agreement, we borrowed the entire $10.0 million term loan which was used to refinance in full the outstanding term loan under the A&R Credit Agreement. Under the Amended Credit Agreement, revolving credit loans may continue to be borrowed, at our option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Kroner.
While we expected that as a result of the impact of the COVID-19
pandemic, some of our customers would experience liquidity pressure and be unable to pay us for products on a timely basis, in general our recent receivables collection experience has been consistent with our historical experience and a significant deterioration in receivables collection has not occurred through the end of fiscal year. We believe that this favorable result in T&M was due in part to the terms of the contractual relationships with our customers, and in part due to the critical nature of the nature of repairs and supplies relationships. In Product Identification it was due to the critical nature of our relationships with our customers and the general resilience of the markets we generally serve. For both segments, we have experienced improved collections efforts. During the first quarter of fiscal 2021, we experienced a limited number of cases in which certain of our aerospace customers failed to pay us on a timely basis and we increased our reserves for potential losses on those accounts. In the second quarter of fiscal 2021, two small airlines with whom we had small receivable balances for which we had previously fully reserved, entered bankruptcy, but in general, in the following quarters, the aerospace customer problems abated such that we did not increase our reserves. If the impact of the COVID-19
pandemic continues for a prolonged period or worsens, we may experience further adverse impacts of delayed aerospace receivable collections.
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.
We currently have $22.5 million available for borrowing under our Amended Credit Agreement and we believe that our available cash and credit facilities combined with our cash generated from operations will be sufficient to support our operating requirements, so long as the impact of COVID-19
does not worsen.
Indebtedness
Term Loan
The Amended Credit Agreement requires that the term loan be paid as follows: the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2021 through January 31, 2022 is $187,500; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2022 through January 31, 2023 is $250,000; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2023 through January 31, 2025 is $312,500; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters ending on or about April 30, 2025 and July 31, 2025 is $500,000; and the entire remaining principal balance of the term loan is required to be paid on September 30, 2025. We may voluntarily prepay the term loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later than September 30, 2025, at which time any outstanding revolving loans will be due and payable in full, and the revolving credit facility will terminate. We may reduce or terminate the revolving line of credit at any time, subject to certain thresholds and conditions, without premium or penalty.
The Amended Credit Agreement includes an uncommitted accordion provision under which the term loan and/or revolving credit facility commitments may be increased in an aggregate principal amount not exceeding $10,000,000, subject to obtaining the agreement of the Lender and the satisfaction of certain other conditions.
As under the A&R Credit Agreement, the loans under the Amended Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from (a) net cash proceeds from certain dispositions of property, (b) net cash proceeds from certain issuances of equity, (c) net cash proceeds from certain issuances of additional debt and (d) net cash proceeds from certain extraordinary receipts.
Amounts repaid under the revolving credit facility may be reborrowed, subject to continued compliance with the Amended Credit Agreement. No amount of the term loan that is repaid may be reborrowed.
The interest rates under the A&R Credit Agreement were modified in the Amended Credit Agreement as follows: the term loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the LIBOR Rate as defined in the A&R Credit Agreement (or in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.60% to 2.30% based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate, (iii) the LIBOR Rate plus 1.00% or (iv) 0.50%, plus a margin that varies within a range of 0.60% to 1.30% based on our consolidated leverage ratio. In addition to certain other fees and expenses that we are required to pay to the Lender, we are required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.15% and 0.30% based on our consolidated leverage ratio.
We must comply with various customary financial and non-financial
covenants under the Amended Credit Agreement. The financial covenants under the Amended Credit Agreement consist of a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. The minimum EBITDA, minimum consolidated asset coverage ratio, minimum liquidity and maximum capital expenditures covenants with which we were required to comply under the A&R Credit Agreement were eliminated by the Amendment. The primary non-financial
covenants limit our and our subsidiaries’ ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on their capital stock, to repurchase or acquire their capital stock, to conduct mergers or acquisitions, to sell assets, to alter their capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the Amended Credit Agreement, certain of which provisions were modified by the Amendment.
The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Amended Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries’ significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or a change of control.
Our obligations under the Amended Credit Agreement continue to be secured by substantially all of our personal property assets (including a pledge of the equity interests held by us in ANI ApS, in our wholly-owned German subsidiary AstroNova GmbH, and in our wholly-owned French subsidiary AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property in West Warwick, Rhode Island. Pursuant to the Amendment, the guarantees of our obligations under the A&R Credit Agreement that were previously provided by ANI ApS and TrojanLabel were released.
PPP Loan
The PPP Loan, which will mature on May 6, 2022, is unsecured and bears interest at a rate of 1.0% per annum, accruing from the loan date and is payable monthly. No payments are due on the PPP Loan at this time, but interest accrues during the deferral period. Interest accrued in the amount of $33,000 is included in other expense for the period ended January 31, 2021.
The PPP Loan may be prepaid at any time without penalty. The Loan Agreement and Promissory Note include customary provisions for a loan of this type, including prohibitions on our payment of dividends or repurchase of shares of our stock while the PPP Loan remains outstanding and events of default relating to, among other things, payment defaults, breaches of the provisions of the Loan Agreement or the Promissory Note and cross-defaults on other loans.
Subject to the limitations and conditions set forth in the CARES Act, the PPP Flexibility Act and the regulations and guidance provided by the SBA with respect to the PPP, a portion of the PPP Loan may be forgiven in an amount up to the amount of the PPP Loan proceeds we spent on payroll, rent, utilities and interest on certain debt during the twenty-four week period following incurrence of the PPP Loan; interest accrued on the forgiven portion of the principal amount of the PPP Loan is also forgiven. The amount of the PPP Loan to be forgiven in respect of rent, utilities and interest on certain debt will be capped at 40% of the forgiven amount, with the remaining forgiven amount allocated to payroll costs. We fully utilized the PPP Loan proceeds for qualifying expenses and have applied for forgiveness of the PPP Loan (including all associated accrued interest) subsequent to year end. Whether our application for forgiveness will be granted and in what amount is subject to an application to, and approval by, the SBA and may also be subject to further requirements in any regulations and guidelines the SBA may adopt.
Cash Flow
The statements of cash flows for the years ended January 31, 2021, 2020 and 2019 are included on page 53 of this Form 10-K.
Net cash provided by operating activities was $15.5 million in fiscal 2021 compared to net cash provided by operating activities of $3.2 million in the previous year. The increase in net cash provided by operations for the current year is primarily due to an increase in cash provided by working capital of $12.4 million from fiscal 2020. The changes in accounts receivable, inventory, income taxes, accounts payable and accrued expenses for the current year increased cash by $7.4 million in fiscal 2021 compared to a decrease to cash of $5.0 million in the prior year.
The accounts receivable balance decreased to $17.4 million at January 31, 2021, compared to $19.8 at January 31, 2020. The $2.4 million decrease in the accounts receivable balance is directly related to lower full year revenues in fiscal 2021 compared to the prior year. The days sales outstanding dropped to 51 days at year end compared to 55 days at the end of fiscal 2020 contributing to the lower receivables balance at January 31, 2021. The days sales outstanding decrease in the current year is due to customer mix, as aerospace receivables typically take longer to collect, and these revenues were down significantly in fiscal 2021.
The year-end
inventory balance decreased to $30.1 million at January 31, 2021 versus $33.9 million at January 31, 2020 and the days inventory on hand decreased to 147 days at the end of fiscal 2021 as compared to 151 days at the end of the fiscal 2020. The current period decrease in inventory is due to lower production demand, particularly in the Test & Measurement segment and the related days on hand decline is a reflection of improved procurement strategies and production scheduling.
Net cash used by investing activities for fiscal 2021 was $2.6 million for capital expenditures, consisting of $0.1 million for land and building improvements; $2.4 million for information technology; and $0.1 million for tools and dies.
Net cash used by financing activities for fiscal 2021 was $5.1 million, consisting primarily of $6.5 million net cash decrease on the revolving line of credit, $4.0 million of principal payments of long-term debt, $2.0 million payment on the guaranteed royalty obligation payment, and $0.5 million of dividends, offset by $4.4 million of proceeds received from the PPP loan and a net of $3.5 million of proceeds received in the second quarter of fiscal 2021 related to the refinance of long-term debt..
Fiscal 2020 compared to Fiscal 2019
For a comparison of our cash flow for the fiscal years ended January 31, 2020 and January 31, 2019, 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, 2020, filed with the SEC on April 10, 2020.
Contractual Obligations, Commitments and Contingencies
At January 31, 2021, our contractual obligations with initial remaining terms in excess of one year were as follows:
(In thousands)
Total
Less than
1 Year
1-3
Years
3-5
Years
More than
5 Years
Purchase Commitments (1)
$ 15,250
$ 14,959
$
$ -
$ -
Debt (2)
12,576
5,326
7,250
-
-
Interest on Debt (3)
-
-
Royalty Obligation (4)
8,161
1,300
3,652
1,959
1,250
Excess Royalty Obligation (5)
-
-
-
Operating Lease Obligations
1,599
$ 38,411
$ 22,630
$ 11,955
$ 2,306
$ 1,520
(1) Purchase obligations include undiscounted amounts committed under legally enforceable contracts or purchase orders for goods and services with defined terms as to price, quantity and delivery dates.
(2) Based on the term loan balance outstanding under the A&R Credit Agreement as of January 31, 2021.
(3) Interest rate on variable rate debt is based on the LIBOR Rate, plus a margin that varies within a range of 2.15% to 3.65% based on our consolidated leverage ratio for the outstanding loan under the A&R Credit Agreement as of January 31, 2021.
(4) We are subject to a guaranteed minimum royalty payment obligation over the next seven years pursuant to the Honeywell Asset Purchase and License Agreement. Refer to Note 11, “Royalty Obligation” in the audited consolidated financial statements included elsewhere in this report for further details.
(5) We are subject to excess royalty payments beyond the guaranteed minimum royalty obligation pursuant to the Honeywell Asset Purchase & License Agreement. Refer to Note 11, “Royalty Obligation,” in the audited consolidated financial statements included elsewhere in this report for further details.
We are also subject to contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, such as: contract and employment claims; workers compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided, or covered by insurance, will not have a material adverse effect on our consolidated financial position or results of operations. It is possible, however, that results of operations for any future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of our control.
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. 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 Update (ASU) 2014-9, Revenue
from Contracts with Customers (also referred to as Topic 606). Under Topic 606, based on the nature of our contracts and consistent with prior practice, we recognize most of our revenue upon shipment, which is when the performance obligation has been satisfied.
Our accounting policies relating to the recognition of revenue under Topic 606 require management to make estimates, determinations and judgments based on historical experience and on various other assumptions, which include (i) the existence of a contract with the customer, (ii) the identification of the performance obligations in the contract, (iii) the value of any variable consideration in the contract, (iv) the stand alone selling price of multiple obligations in the contract, for the purpose of allocating the consideration in the contract, and (v) determining when a performance obligation has been met. Recognition of revenue based on incorrect judgments, including the identification of performance obligation arrangements as well as the pattern of delivery for those services, could result in inappropriate recognition of revenue, or incorrect timing of revenue recognition, which could have a material effect on our financial condition and results of operations.
We recognize revenue for non-recurring
engineering (NRE) fees, as necessary, for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue.
Infrequently, we receive requests from customers to hold product being purchased from us for the customers’ convenience. We recognize revenue for such bill and hold arrangements in accordance with the guidance provided by Topic 606, which requires the transaction to meet the following criteria in order to determine that the customer has obtained control: (a) the reason for the bill and hold is substantive, (b) the product has separately been identified as belonging to the customer, (c) the product is currently ready for physical transfer to the customer, and (d) we do not have the ability to use the product or direct it to another customer.
Allowance for Doubtful Accounts:
Accounts receivable consists primarily of receivables from our customers arising from the sale of our products. We actively monitor our exposure to credit risk through the use of credit approvals and credit limits. Accounts receivable is presented net of reserves for doubtful accounts.
We estimate the collectability of our receivables and establish allowances for accounts receivable that we estimate to be uncollectible. We base these allowances on our historical collection experience, the length of time our accounts receivable are outstanding and the financial condition of individual customers. In situations where we are aware of a specific customer’s inability to meet its financial obligation, such as in the case of a bankruptcy filing, we assess the need for a specific reserve for bad debts. We believe that our procedure for estimating such amounts is reasonable and historically have not resulted in material adjustments in subsequent periods. Bad debt expense was less than 1% of net sales in each of fiscal 2021 and 2020.
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 cost (first-in,
first-out)
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, 2021, we had provided valuation allowances for future tax benefits resulting from certain domestic R&D tax credits and foreign tax credit carryforwards, both of which could expire unused.
The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. Although guidance on the accounting for uncertain income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what we have estimated, our income tax expense could be materially impacted.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (“Tax Act”) was enacted into law in the U.S. and the new legislation contains several key tax provisions that affected us, including a one-time
mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. All accounting under SAB 118 was finalized during the quarter ending January 31, 2019 with no material changes from the provisional amounts previously recorded.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The legislation had sweeping effects including various types of economic relief for impacted businesses and industries. One such relief provision was the Paycheck Protection Program, which provided short-term cash flow assistance to finance employee payroll and qualified expenses. On May 6, 2020, we entered into a loan agreement with, and executed a promissory note in favor of Greenwood Credit Union (“Greenwood”) pursuant to which we borrowed $4.4 million (the “PPP Loan”). On December 27, 2020 the Consolidated Appropriations Act, 2021, H.R. 133 was signed into law. The legislation permits the deductibility of expenses to the extent that the payment of such expenses results (or is expected to result) in the forgiveness of a loan (covered loan) guaranteed under the Paycheck Protection Program. We have fully utilized the PPP Loan proceeds for qualifying expenses and subsequent to year end have applied for forgiveness of the PPP Loan (including all associated accrued interest) in accordance with the terms of the CARES Act, as amended by the PPP Flexibility Act. Consistent with the legislation, we expect to deduct the full $4.4 million of qualified expenses on our 2020 federal tax return.
Intangible and Long-Lived Assets:
Long-lived assets, such as definite-lived intangible assets and property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, which is determined by the discounting of future cash flows.
Goodwill:
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. 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.
Due to the consideration of the impact of the decline in the global economy due to the global COVID-19
pandemic, coupled with the grounding of the 737 MAX in March, 2019 and the 737 MAX production halt in January, 2020 which negatively impacted revenues and margins in fiscal 2020 and 2021, we elected to forgo the qualitative assessment and perform a quantitative goodwill impairment test to determine whether the carrying values of the reporting units are greater than the fair values. We utilized a blended income and market approach. The income approach was based upon a discounted cash flow model which we believe provides a fair values estimate of the reporting unit’s expected long-term operating performance. The market approach compares the reporting units to similar publicly traded companies. Based on our quantitative impairment assessment as of January 31, 2021, we determined that the fair value of the reporting units were in excess of their carrying values and therefore, no goodwill impairment has occurred.
Self-Insurance Liability Accrual:
We maintain self-insured group medical and dental programs for qualifying employees in the United States and maintain stop-loss coverage from a third party which limits our exposure to large claims. We record a liability associated with these benefits that includes an estimate of both claims filed and losses incurred but not yet reported based on historical claims experience. In estimating this accrual, we utilize an independent third-party broker to estimate a range of expected losses, which are based on analyses of historical data. Our assumptions are closely monitored and adjusted when warranted by changing circumstances. Should claims occur or medical costs increase in greater amounts than we have expected, accruals may not be sufficient, and we may record additional expenses.
Share-Based Compensation:
Share-based compensation expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires several complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and our dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted-average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of the option grants, we have observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grants and assessed the expected risk tolerance of different option groups. The risk-free interest rate used in the model is based on the actual
U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) is also based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of our common stock on the date of grant. Reductions in compensation expense associated with forfeited awards are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture experience.
Recent Accounting Pronouncements
Reference is made to Note 1 of our audited consolidated financial statements included elsewhere in this report.

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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 consists 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 $0.3 million for the year ended January 31, 2021.
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 gains resulting from transactional exposure were $0.6 million for the year ended January 31, 2021.
Interest Rate Risk
At January 31, 2021, our total indebtedness included $12.6 million of term loan variable-rate debt. At January 31, 2021, the term loan under the A&R Credit Agreement bears interest at the LIBOR rate plus a margin that varies within a range of 2.15% to 3.65% based on our consolidated leverage ratio. The impact on our results of operations of a 100basis point change in the interest rate on the outstanding balance of our variable-rate debt at January 31, 2021, would be approximately $0.1 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 Chief Executive Officer and Chief 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 (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at January 31, 2021 to ensure that the information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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, 2021. 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”). Based on this assessment, the principal executive officer and principal financial officer believe that as of January 31, 2021, our internal control over financial reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated Framework.”
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.
PART III

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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 2021 Annual Meeting of Shareholders.
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
Chief Technology Officer and Vice President of Strategic Technical Alliances
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.

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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 definitive Proxy Statement to be filed for our 2021 Annual Meeting of Shareholders.
The information set forth under the heading “Compensation Committee Report” in our definitive 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 definitive Proxy Statement to be filed for our 2021 Annual Meeting of Shareholders.
Equity Compensation Plan Information
The following table sets forth information about our equity compensation plans as of January 31, 2021:
Plan Category
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
Weighted-
Average Exercise
Price of
Outstanding
Options,
Warrants and
Rights
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
Equity Compensation Plans Approved by Shareholders
771,496 (1)
$ 14.63 (2)
538,853 (3)
Equity Compensation Plans Not Approved by Shareholders
-
-
-
Total
771,496 (1)
$ 14.63 (2)
538,853 (3)
(1) Includes 337,958 shares issuable upon exercise of outstanding options granted under our 2007 Equity Incentive Plan; 148,625 shares issuable upon exercise of outstanding options granted and 10,833 restricted stock units outstanding under our 2015 Equity Incentive Plan; and 135,500 shares issuable upon exercise of outstanding options granted and 138,580 restricted stock units outstanding under our 2018 Equity Incentive Plan. This balance does not include 48,000 of unvested restricted stock which are subject to forfeiture.
(2) Does not include restricted stock units.
(3) Represents 528,479 shares available for grant under the AstroNova, Inc. 2018 Equity Incentive Plan and 10,374 shares available for purchase under the Employee Stock Purchase Plan.
Additional information regarding these equity compensation plans is contained in Note 15, “Share-Based Compensation,” in our Consolidated Financial Statements included in Item 15 hereto.

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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 definitive Proxy Statement for our 2021 Annual Meeting of Shareholders.

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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 definitive Proxy Statement for our 2021 Annual Meeting of Shareholders.
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
Report of Independent Registered Public Accounting Firm
47-48
Consolidated Balance Sheets as of January 31, 2021 and 2020
Consolidated Statements of Income-Years Ended January 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Income-Years Ended January 31, 2021, 2020 and 2019
Consolidated Statements of Changes in Shareholders’ Equity-Years Ended January 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows-Years Ended January 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
54-81
(a)(2) Financial Statement Schedule:
Schedule II-Valuation and Qualifying Accounts and Reserves-Years Ended January 31, 2021, 2020 and 2019
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.