Business Overview This section should be read in conjunction with our condensed consolidated financial statements included elsewhere herein and our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 . We are a multinational enterprise that leverages our 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,
direct-to-package
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 that are used to print hard copies of data required
for the safe and efficient operation of aircraft including navigation
maps, clearances, arrival and departure procedures, flight itineraries,
weather maps, performance data, passenger data, and various air traffic control data. Aerospace products also include aircraft networking systems for high-speed onboard data transfer. 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. 2 1 -------------------------------------------------------------------------------- Table of Contents COVID-19 Update-Overview Our business has been and likely will 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 inNorth America andEurope , and a smaller presence inAsia . Since the COVID-19 pandemic began, we have monitored government recommendations and regulations in the areas where we operate and have made good faith efforts to comply with regulations, the best practices and recommendations issued by a variety of governmental health authorities and manufacturing industry organizations to which we belong. Throughout the pandemic we, and many other businesses and organizations with which we do business directly or which otherwise impact us, have taken steps to avoid or reduce infection as recommended by the public health authorities, including enabling teammates to work remotely from home and by limiting business travel and gatherings of people. Although vaccine availability has expanded dramatically in the market economies where the majority of our revenues are derived, this has not been true throughout the world, and even in our major market areas inoculation rates have not been sufficient to prevent another surge of infections as more virulent strains of COVID-19 have recently emerged. Recommendations against gatherings of people and travel restrictions between regions had loosened to varying degrees in some locations, but many have remained in place or have been reinstated, especially inEurope . It is impossible to determine the precise impact that the future course of the pandemic will have on our business. For example, some of the health practices that were instituted at the height of the pandemic are again being recommended, and in some cases re-imposed. At this point it is still unclear how the future course of the pandemic will evolve and how the public health authorities inthe United States ,Europe andAsia will respond. Accordingly, we cannot determine exactly how our own business practices and those of with whom we do business will respond as a result. We 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. As the result of declining infection rates in early 2021, and in response to guidance from local and national health authorities we relaxed some of our health-related workplace restrictions and practices. We do not know when, or if, it will become practical to further relax or eliminate the remaining restrictions, altogether, or whether the emergence of more virulent strains of COVID-19 will cause us to impose additional restrictions. Since the start of the pandemic, we have maintained most of the manufacturing operational capacity at our facilities located inWest Warwick, Rhode Island , as well as our manufacturing facilities inCanada andGermany . In theWest Warwick and Canadian operations there were periods when a number of team members were unable to maintain their work schedules due to the effects of the pandemic, which resulted in reduced production capacity, longer order fulfillment lead times, and as a result, reduced revenues. While those issues have abated to some degree, they are still impacting our operations. 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 variants, the continued efficacy of vaccinations and the willingness of our employees and others to become vaccinated, among others. We expect that our operations and modalities of on-site and remote work will be impacted permanently, as will our increased safety protocols and the other adaptations undertaken during the pandemic, but we are still developing our plans and cannot predict the result yet. Since the COVID-19 pandemic began we have experienced some difficulties in obtaining raw materials and components for our products. Some of the structural dislocations in the global economy caused by the pandemic are prolonging these difficulties. Thus far we have been able to successfully respond to these difficulties, but we have had to incur additional costs to do so, including, for example, incurring expedited and express shipping fees. These difficulties have impacted our efficiency, but we do not believe that they have materially impacted 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 we are supplementing inventories as needed. We are also monitoring and reacting to extended lead times on active electronic components and utilizing several strategies, including blanket orders, vendor-bonded inventories, extended commitments to our supply base, and seeking alternative suppliers. Additionally, we have taken actions to maintain regular contact with our essential 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 and the supply chain dislocations that have developed have tended to increase the amount of inventory we maintain, but because of the complexity of our manufacturing processes and diverse supply sources, it is impossible to isolate the precise impact by product line. We will continue to monitor our supply chain going forward and update our mitigation strategies as we determine appropriate. We are not able to predict how current supply chain difficulties will develop in the future, and if the steps we are taking are not effective, it could have a material adverse impact on our results of operations. It is not possible at this time to estimate how the COVID-19 pandemic or the consequences of its aftermath will continue to impact our business, customers, suppliers or other business partners, and the degree it will adversely change our operational capacity and the efficiency of our team members or affect our results of operations and financial condition. Product Identification Update The global COVID-19 pandemic has negatively impacted sales of our Product Identification hardware products. This is primarily a result of the impact that travel restrictions have had 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 restricted. 22 -------------------------------------------------------------------------------- Table of Contents 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. While trade shows have begun to take place again, the future course of this trend is unclear as more virulent virus variants become more widespread. We believe we have been able to partially offset these negative impacts by relying more heavily on various forms of digital advertising and internet-based marketing techniques to obtain sales, including remote video demonstrations and support.,. 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 as it becomes possible for our direct sales force and distributors to travel to visit customers and attend and present products at trade shows, it is likely that some reversion to those historical sales methods will occur. However, it is also likely that some of the COVID-19 induced adaptations are also likely to become permanent. At this time, 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, 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. InMarch 2019 , all major civil aviation authorities worldwide grounded the Boeing 737 MAX aircraft for safety reasons. InApril 2019 , Boeing reduced the number of 737 MAX aircraft produced per month from 52 to 42, and inJanuary 2020 , Boeing ceased production of the 737 MAX aircraft completely. OnMay 27, 2020 , in anticipation of an eventual certification, Boeing announced that it would re-start production of 737 MAX aircrafts at low initial rates and gradually increase production in the future. OnAugust 3, 2020 , theUnited States Federal Aviation Administration (the "FAA") issued a notice of proposed rulemaking for a Boeing 737 MAX aircraft airworthiness directive, and onNovember 18, 2020 theFAA certified the model for return to service inthe United States . OnJanuary 27, 2021 , theEuropean Union Aviation Safety Agency (EASA) approved the return to service of the Boeing 737 MAX aircraft inEurope . 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 each 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 primarily drives demand for our airborne printer products. We experienced very low levels of 737 MAX aircraft new printer orders and shipments during the production halt, and now that Boeing is producing a small number of new aircrafts per month, our volume of 737 MAX aircraft printer orders and shipments has increased only modestly. 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 pace of the recovery in their production rates is uncertain and will likely 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. Though we have noted that some airlines are now ordering new 737 MAX aircraft again, and we have seen slight increases in orders for future delivery, the effect of the improving outlook and its timing remains unknown. The precipitous decline in global air travel demand and resultant reduction in the number of flights scheduled by airlines caused by the pandemic has begun to recover, but order demand from airlines for new deliveries of most aircraft models remains far below pre-pandemic levels. The course and timing of the recovery from the COVID-19 pandemic and its impact on the air travel industry remains unclear as virulent strains of the virus have emerged. The financial health of the airlines and airframe manufacturers is likely to remain stressed for some time, 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 and more by 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 the demand for our products, will continue to recover slowly as effective vaccines become both widely available and accepted globally, and demand for air travel increases. 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 minor increases in demand for spare products, paper, parts and repairs as flight hours have increased modestly since the middle of fiscal 2021, we do not know the degree to which this will continue or increase, or at what pace. While we have reduced 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, meet the stringent market quality requirements, and to be able to rapidly increase production as demand returns, the decline in revenue has adversely impacted our profitability. 23 -------------------------------------------------------------------------------- Table of Contents PPP Loan Forgiveness OnMay 6, 2020 , we entered into a loan agreement with, and executed a promissory note in favor ofGreenwood Credit Union ("Greenwood") pursuant to which we borrowed$4.4 million (the "PPP Loan") from Greenwood pursuant to the Paycheck Protection Program ("PPP") administered by theUnited States Small Business Administration (the "SBA") and authorized by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), enacted onMarch 27, 2020 . The terms of the PPP Loan were subsequently revised in accordance with the provisions of the Paycheck Protection Flexibility Act of 2020 (the "PPP Flexibility Act") which was enacted onJune 5, 2020 . OnJune 15, 2021 , the SBA approved our application for forgiveness of the entire$4.4 million principal balance of our PPP Loan and all accrued interest thereon. As a result, we recorded a$4.5 million gain on extinguishment of debt in the accompanying condensed consolidated income statement for the three and six months endedJuly 31,2021 . Employee Retention Credits The CARES Act provides an employee retention credit ("ERC") that is a refundable tax credit against certain employer taxes. OnDecember 27, 2020 ,Congress enacted the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which amended and extended ERC availability under Section 2301 of the CARES Act. Before the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, we were ineligible for the ERC because we received the PPP Loan. Following enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, we and other businesses that received loans under that program became retroactively eligible for the ERC. In the second quarter of the current year, we determined that we qualified for the employee retention credit of$3.1 million for wages paid in calendar year 2020 and the first calendar quarter of 2021. We have recorded this amount as a receivable within the prepaid expenses and other current assets in the condensed consolidated balance sheet as ofJuly 31, 2021 . The$3.1 million of ERCs was recognized as a reduction in employer payroll taxes and allocated to the financial statement captions from which the employee's payroll taxes were originally incurred. As a result, we recorded a reduction in expenses of$1.7 million in cost of revenue,$0.8 million in selling and marketing,$0.3 million in research and development and$0.3 million in general and administrative in the accompanying condensed consolidated income statement for the three and six month periods endedJuly 31, 2021 . Results of Operations Three Months EndedJuly 31, 2021 vs.August 1, 2020 Revenue by segment and current quarter percentage change over the prior year for the three months endedJuly 31, 2021 andAugust 1, 2020 were: % Change As a As a Compared July 31, % of August 1, % of to (Dollars in thousands) 2021 Revenue 2020 Revenue Prior Year Product Identification$ 23,492 78.7 %$ 21,629 78.2 % 8.6 % T&M 6,353 21.3 % 6,029 21.8 % 5.4 % Total$ 29,845 100.0 %$ 27,658 100.0 % 7.9 % Revenue for the current quarter was$29.8 million , representing an 8.6% increase compared to the prior year second quarter revenue of$27.7 million . Revenue through domestic channels for the second quarter of the current year was$17.2 million , a decrease of 3.8% from the prior year's second quarter. International revenue for the second quarter of the current year was$12.7 million , representing 42.4% of our second quarter revenue and reflects a 29.3% increase from the previous year second quarter. Current year second quarter international revenue includes a favorable foreign exchange rate impact of$0.7 million . Hardware revenue in the current quarter was$7.9 million , a 6.6% decrease compared to the prior year's second quarter revenue of$8.4 million . The decrease is primarily attributable to the T&M segment, as hardware revenue for that segment decreased 18.6% compared to the second quarter of the prior year. The decrease in T&M segment hardware sales primarily resulted from decreased aerospace printer product line sales. The decline in current quarter hardware sales was partially offset by an overall 9.7% increase in hardware sales in the PI segment, as well as an increase in sales of certain data recorders in the T&M product group. 24 -------------------------------------------------------------------------------- Table of Contents Supplies revenue in the current quarter was$18.6 million , a 9.0% increase compared to the prior year's second quarter supplies revenue of$17.0 million . The increase is primarily attributable to the higher PI segment supply sales, as well as increases in revenue from paper supplies sales in the aerospace product group in the T&M segment. Service and other revenues of$3.3 million in the current quarter increased 58.2% compared to second quarter revenue of$2.1 million in the prior year. The increase is due primarily to increased repair revenue related to the aerospace printer and data recorder product lines in the T&M segment, as well as increases in parts revenue in the Product Identification segment. Current year second quarter gross profit was$12.7 million , a 29.9% increase compared to prior year second quarter gross profit of$9.8 million . Our current quarter gross profit margin of 42.6% reflects a 7.2 percentage point increase from the prior year's second quarter gross profit margin of 35.4%. The higher gross profit and related profit margin for the current quarter compared to the prior year's second quarter is primarily attributable to increased revenue and the impact of the employee retention credit ("ERC"), a refundable tax credit against certain employer taxes as provided under the CARES Act, which reduced manufacturing payroll taxes, a component of cost of revenue, by$1.7 million in the second quarter of the current year. Operating expenses for the current quarter were$9.3 million , a 3.3% decrease compared to the prior year second quarter operating expenses of$9.6 million . Specifically, current quarter selling and marketing expenses were$5.1 million , an 8.9% decrease compared to the second quarter of the prior year. The decline for the current quarter in selling and marketing expenses was primarily due to a decrease in payroll taxes in the second quarter of the current year related to the ERC, as well as a decrease in amortization expense as a result of changes in the remaining useful lives and amortization methods for certain of our customer relationship intangibles. The current quarter decline in selling and marketing expenses was partially offset by an increase in employee wages and bonuses. Current quarter general and administrative expenses were$2.7 million , a 5.1% increase compared to the second quarter of the prior year. The increase in general and administrative expenses for the current quarter was primarily due to an increase in wages and employee bonuses. This increase was partially offset by a decrease in payroll taxes in the second quarter of the current year related to the ERC, as well as a decrease in legal and professional fees. Research and development ("R&D") expenses were$1.5 million in the current quarter, a 5.1% increase compared to the second quarter of the prior year primarily due to increases in wages and employee bonuses, partially offset by a decrease in payroll taxes related to the ERC. The R&D spending as a percentage of revenue for the current quarter is 5.2% compared to 5.4% for the same period of the prior year. Other income in the second quarter of the current year was$4.3 million compared to$0.3 million in the second quarter of the prior year. Current quarter other income includes$4.5 million related to forgiveness of our PPP Loan and a net foreign exchange gain of$0.1 million . Other income in the current quarter is partially offset by interest expense on debt of$0.2 million and other expense of$0.1 million . Other income for the second quarter of the prior year included$0.6 million of gain on the translation of Eurodollar andDanish Kroner receivable balances at significantly higher exchange rates for those currencies as compared to the US Dollar, which were partially offset by interest expense on debt and the revolving line of credit of$0.2 million and$0.1 million related to the termination of the cross-currency interest rate swap. The provision for federal, state and foreign income taxes for the second quarter of the current year is$0.7 million , resulting in an effective tax rate of 9.1%. This rate was impacted by a$1.1 million tax benefit from the forgiveness of the PPP loan, a$0.1 million tax benefit arising from a windfall related to our stock and a$32,000 tax benefit related to return to provision adjustments from foreign tax returns filed in the quarter. The PPP Loan forgiveness recognized during the three months endedJuly 31, 2021 is excluded from taxable income under Section 1106(i) of the CARES Act. This compares to the prior year's second quarter tax provision of$0.5 million , resulting in an effective tax rate of 99.4%. This rate was impacted by a significant increase in forecasted operating results for our fiscal 2021 as compared to operating results forecasted at the end of our first quarter of fiscal year 2021, a$122,000 expense arising from a windfall shortfall tax expense related to the vesting of stock grants to directors and officers and a$79,000 expense related to return to provision adjustments from foreign tax returns filed in the quarter. We reported net income of$7.0 million or$0.96 per diluted share for the second quarter of the current year. The results for current quarter were impacted by income of$4.5 million ($4.4 million net of tax or$0.60 per diluted share) related to the gain on extinguishment of debt for the PPP Loan forgiveness and income of$3.1 million ($2.4 million net of tax or$0.32 per diluted share) related to the ERC. Net income for the prior year's second quarter was$3,000 or$0.00 per diluted share. Return on revenue was 23.5% for the current quarter of fiscal 2022 compared to 0.0% for the prior year second quarter of fiscal 2021. 25 -------------------------------------------------------------------------------- Table of Contents Six Months EndedJuly 31, 2021 vs. Six Months EndedAugust 1, 2020 Revenue by segment and current period percentage change over the prior year for the six months endedJuly 31, 2021 andAugust 1, 2020 were: % Change As a As a Compared July 31, % of August 1, % of to
(Dollars in thousands) 2021 Revenue 2020 Revenue
Prior Year Product Identification$ 46,590 79.1 %$ 44,009 75.1 % 5.9 % T&M 12,333 20.9 % 14,569 24.9 % (15.3 )% Total$ 58,923 100.0 %$ 58,578 100.0 % 0.6 % Revenue for the first six months of the current year was$58.9 million , representing a slight increase compared to the previous year's first six months revenue. Revenue through domestic channels for the first half of the current year was$33.9 million , a decrease of 10.0% from prior year domestic revenue of$37.7 million . International revenue for the first six months of the current year was$25.0 million , a 19.7% increase from the previous year international revenue of$20.9 million . The current year's first six months international revenue reflected a favorable foreign exchange rate impact of$1.5 million . Hardware revenue in the first six months of the current year was$15.5 million , a 10.5% decrease compared to the prior year's first six months hardware revenue of$17.4 million . The decrease in hardware revenue is primarily due to a 30.1% decline in hardware sales in the T&M segment resulting from lower aerospace printer product line and data recorder sales. The decline in the first six months revenue was partially offset by increased hardware sales for the first six months of the current year in the PI segment. Supplies revenue in the first half of the current year was$36.9 million , representing a 1.7% increase over prior year's first six months supplies revenue of$36.3 million . The increase in the current year supplies revenue is primarily attributable to the increase in sales of ink and media supplies in the PI segment as well as paper supplies in the aerospace product group in the T&M segment. . Service and other revenues were$6.5 million in the first six months of the current year, a 31.1% increase compared to the prior year's first six months service and other revenues of$4.9 million . The increase is due primarily to overall increased repair and parts revenue in both the T&M and PI segments. Current year first six months gross profit was$23.6 million , a 14.3% increase from prior year's first six months gross profit of$20.6 million . Our gross profit margin of 40.1% in the current year reflects an increase from the prior year's first six months gross profit margin of 35.2%. The higher gross profit and related profit margin for the current year compared to the prior year is primarily attributable to increased revenue, lower manufacturing period costs and the impact of the ERC, which reduced manufacturing payroll taxes in the amount of$1.7 million in the second quarter of the current year. Operating expenses for the first six months of the current fiscal year were$19.4 million , a 1.8% decrease compared to prior year's first six months operating expenses of$19.8 million . Selling and marketing expenses for the current year of$11.2 million decreased by 2.8% compared to the previous year's first six months primarily due to a decrease in payroll taxes in the second quarter of the current year related to the ERC, as well as a decrease in amortization expense related to a change in the remaining useful lives and amortization methods for certain of our customer relationship intangibles. The current year decline in selling and marketing expenses was partially offset by an increase in employee wages and bonuses as well as increased travel and entertainment expenses. General and administrative expenses increased 3.0% to$5.0 million in the first six months of the current year compared to$4.9 million in the first six months of the prior year, primarily due to an increase in employee wages bonuses, partially offset by a decrease in payroll taxes related to the ERC, as well as a decrease in outside service expenses. R&D spending in the first six months of the current year was$3.3 million , a 5.2% decrease compared to the prior year's first six months spending of$3.4 million primarily due to a decrease in payroll taxes related to the ERC, partially offset by increases in employee wages and bonuses . Current year spending on R&D represents 5.5% of revenue compared to the prior year's first six months level of 5.9%. Other income during the first six months of the current year was$3.9 million compared to$23,000 of other expense in the first six months of the previous year. Current year other income includes$4.5 million related to the forgiveness of our PPP Loan, partially offset by interest expense on debt of$0.4 million , and net foreign exchange loss of$0.1 million . Other expense during the first six months of the prior year of$23,000 primarily included interest expense of$0.5 million on our debt and revolving credit line and$0.1 million related to the termination of the cross-currency interest rate swap offset by a$0.5 million gain on the translation of Eurodollar andDanish Kroner receivable balances at significantly higher exchange rates for those currencies as compared to the US Dollar and investment income of$0.1 million . 26 -------------------------------------------------------------------------------- Table of Contents We recognized$0.5 million of income tax expense for the first six months of the current fiscal year, which reflects a$1.1 million tax benefit from the forgiveness of our PPP Loan, a$0.1 million tax benefit arising from windfall tax expense related to our stock, a$32,000 tax benefit related to return to provision adjustments from foreign tax returns filed in the year and a$0.3 million tax benefit related to the expiration of the statute of limitations on previously uncertain tax positions and results in a 5.8% effective tax rate. The PPP loan forgiveness recognized during the six months endedJuly 31, 2021 is excluded from taxable income under Section 1106(i) of the CARES Act. We recognized$0.4 million of income tax expense for the first six months of the prior fiscal year, which reflected a significant increase in forecasted operating results for our fiscal 2021 as compared to operating results forecasted at the end of our first quarter of fiscal 2021, a$118,000 expense arising from a shortfall tax expense related to our stock, a$79,000 expense related to return to provision adjustments from several foreign tax returns filed in the current year and a$78,000 tax benefit related to the expiration of the statute of limitations on previously uncertain tax positions resulting in a 48.6% effective tax rate. We reported net income of$7.6 million , or$1.04 per diluted share, for the first six months of the current year. The results for the current period were impacted by income of$4.5 million ($4.4 million net of tax or$0.61 per diluted share) related forgiveness of our PPP Loan and income of$3.1 million ($2.4 million net of tax or$0.33 per diluted share) related to the ERC. On a comparable basis, net income for the prior year's first six months was$0.4 million or$0.06 per diluted share. Return on revenue was 12.9% for the first six months of fiscal 2022 compared to 0.7% for the first six months of fiscal 2021. Segment Analysis We report two segments: Product Identification and Test & Measurement and evaluate segment performance based on the segment profit before corporate and financial administration expenses. Summarized below are the Revenue and Segment Operating Profit (Loss) for each reporting segment: Three Months Ended Six Months Ended Segment Operating Profit Segment Operating Profit Revenue (Loss) Revenue (Loss) July 31, August 1, July 31, August 1, July 31, August 1, July 31, August 1, (In thousands) 2021 2020 2021 2020 2021 2020 2021 2020 Product Identification$ 23,492 $ 21,629 $
4,406$ 3,146 $ 46,590 $ 44,009 $ 7,134 $ 6,292 T&M 6,353 6,029 1,710 (407 ) 12,333 14,569 2,060 (563 ) Total$ 29,845 $ 27,658 6,116 2,739$ 58,923 $ 58,578 9,194 5,729 Corporate Expenses 2,664 2,535 5,008 4,861 Operating Income 3,452 204 4,186 868 Other Income (Expense), Net 4,266 328 3,897 (23 ) Income Before Income Taxes 7,718 532 8,083 845 Income Tax Provision 699 529 471 411 Net Income$ 7,019 $ 3$ 7,612 $ 434 Product Identification Revenue from the Product Identification segment increased 8.6% in the second quarter of the current year, with revenue of$23.5 million compared to$21.6 million in the same period of the prior year. The current quarter increase is primarily due to overall increased supplies sales in both the QuickLabel and Trojan Label product lines. Also contributing to the increase is a net overall increase in hardware revenue, aided by strong sales of the new TrojanLabel T3-OPX printer, as well as increased current quarter revenue from parts sales. Product Identification's current quarter segment operating profit was$4.4 million , reflecting a profit margin of 18.8% and compares to the prior year's second quarter segment profit of$3.1 million and related profit margin of 14.5%. The increase in Product Identification current year second quarter segment operating profit and margin is primarily due to increased revenue and the impact of the ERC which reduced manufacturing and operating payroll taxes attributable to the PI segment by$1.9 million in the second quarter of the current year. 27 -------------------------------------------------------------------------------- Table of Contents Revenue from the Product Identification segment increased 5.9% to$46.6 million in the first six months of the current year from$44.0 million in the same period of the prior year. The current year increase is primarily due to increased supplies. Also contributing to the increase is a net increase in overall hardware revenue, aided by strong sales of the new TrojanLabel T3-OPX printer, as well as increased current year revenue for parts and repairs in both the QuickLabel and Trojan Label product lines. Product Identification current year segment operating profit was$7.1 million with a profit margin of 15.3%, compared to the prior year segment operating profit of$6.3 million and related profit margin of 14.3 %. The increase in current year segment operating profit and margin is primarily due to increased revenue and the impact of the ERC which reduced manufacturing and operating payroll taxes attributable to the PI segment by$1.9 million in the second quarter of the current year. Test & Measurement-T&M Revenue from the T&M segment was$6.4 million for the second quarter of the current fiscal year, representing a 5.4% increase compared to revenue of$6.0 million for the same period in the prior year. The increase in revenue for the current quarter is primarily attributable to the increase in repairs and parts revenue in our aerospace product group, as well as increased supplies sales in the aerospace product group. Also contributing to the second quarter growth was the increase in sales of TMX hardware sales in the T&M product group. The increase for the second quarter is partially offset by the decline in current quarter hardware sales as a result of the Boeing 737 MAX aircraft grounding and the dramatic drop in air travel due to the impact of COVID-19. T&M's second quarter segment operating profit was$1.7 million , reflecting a profit margin of 26.9%, an increase compared to the prior year segment operating loss of$0.4 million and related negative operating margin of 6.8%. The increase in segment operating profit and related margin were due to increased revenue and the impact of the ERC which reduced manufacturing and operating payroll taxes attributable to the T&M segment by$1.1 million in the second quarter of the current year. Revenue from the T&M segment was$12.3 million for the first six months of the current fiscal year, a 15.3% decrease compared to sales of$14.6 million for the same period in the prior year. The decrease in revenue for the current year is primarily attributable to the decline in hardware sales of our aerospace product group as a result of the Boeing 737 MAX grounding and the dramatic drop in air travel due to the impact of the COVID-19 pandemic. The decrease in current period revenue was also driven to a lesser degree by a decline in data recorder hardware sales in the T&M product group. The decline in revenue was partially offset by increased parts and repairs revenue in the aerospace product group, as well as increased sales of TMX hardware sales in the T&M product group. The segment's first six months operating profit of$2.1 million resulted in a 16.7% profit margin compared to the prior year segment operating loss of$0.6 million and related negative operating margin of 3.9%. The increase in segment operating profit and related margin for the current year is primarily due the impact of the employee retention credit which reduced manufacturing and operating payroll taxes attributable to the T&M segment by$1.1 million in the second quarter of the current year. Financial Condition and Liquidity Overview Historically, our primary sources of short-term liquidity have been cash generated from operating activities and borrowings under our revolving credit facility. These sources have also usually funded the majority of our capital expenditures and contractual contingent consideration obligations. We have funded acquisitions by borrowing under bank term loan facilities. OnJuly 30, 2020 , we entered into an Amended and Restated Credit Agreement (the "A&R Credit Agreement") with theBank of America, N.A . (the "Lender"), our wholly owned subsidiaryANI ApS , a Danish private limited liability company andANI ApS's wholly-owned subsidiaryTrojanLabel ApS , a Danish private limited liability company ("TrojanLabel"). The A&R Credit Agreement amended and restated the Credit Agreement dated as ofFebruary 28, 2017 by and among us,ANI ApS , TrojanLabel and the Lender. In connection with our entry into the A&R Credit Agreement, we entered into an Amended and Restated Security and Pledge Agreement and a mortgage in favor of the Lender with respect to our owned real property inWest Warwick, Rhode Island . Under the A&R Credit Agreement,AstroNova, Inc. is the sole borrower, and its obligations are guaranteed byANI ApS and TrojanLabel. OnMarch 24, 2021 , we entered into a First Amendment to Credit Agreement (the "Amendment") to our A&R Credit Agreement (the "A&R Credit Agreement amended by the Amendment, the "Amended Credit Agreement") with the Lender,ANI ApS and TrojanLabel. Immediately prior to the closing of the Amendment, we repaid$ 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 onSeptember 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. 28 -------------------------------------------------------------------------------- Table of Contents 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, inU.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars orDanish Kroner . While we have expected that as a result of the impact of the COVID-19 pandemic, some of our customers would experience liquidity pressure and be unable to pay us for products on a timely basis, in general our recent receivables collection experience has been consistent with our historical experience and a significant deterioration in receivables collection has not occurred. In response to the COVID-19 pandemic and related economic dislocation, we have implemented and will continue to implement a variety of expense reduction and cash preservation initiatives. OnApril 27, 2020 , our board of directors suspended our quarterly cash dividend beginning with the second quarter of our fiscal year 2021. AtJuly 31, 2021 , our cash and cash equivalents were$11.4 million . There was no outstanding balance on our revolving line of credit atJuly 31, 2021 and we have$22.5 million available for borrowing under that facility. We believe that our available cash and credit facilities combined with our cash generated from operations will be sufficient to support our operating requirements, 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 aboutApril 30, 2021 throughJanuary 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 aboutApril 30, 2022 throughJanuary 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 aboutApril 30, 2023 throughJanuary 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 aboutApril 30, 2025 andJuly 31, 2025 is$500,000 ; and the entire remaining principal balance of the term loan is required to be paid onSeptember 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 thanSeptember 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 thanU.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. 29 -------------------------------------------------------------------------------- Table of Contents 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 inANI ApS , in our wholly-owned German subsidiaryAstroNova GmbH , and in our wholly-owned French subsidiary AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property inWest Warwick, Rhode Island . Pursuant to the Amendment, the guarantees of our obligations under the A&R Credit Agreement that were previously provided byANI ApS and TrojanLabel were released. PPP Loan OnMay 6, 2020 , we entered into a Loan Agreement with and executed a promissory note in favor ofGreenwood Credit Union ("Greenwood") pursuant to which we borrowed$4.4 million (the "PPP Loan") from Greenwood pursuant to the Paycheck Protection Program (the "PPP") administered by theUnited States Small Business Administration (the "SBA") and authorized by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), enacted onMarch 27, 2020 . The terms of the PPP Loan were subsequently revised in accordance with the provisions of the Paycheck Protection Flexibility Act of 2020 (the "PPP Flexibility Act"), which was enacted onJune 5, 2020 . We believe that our obtaining the PPP Loan and suspending the payment of dividends on our common stock were instrumental in our ability to successfully negotiate the A&R Credit Agreement. The PPP Loan, which would have matured onMay 6, 2022 , is unsecured and bore interest at a rate of 1.0% per annum, accruing from the loan date. No payments were due on the PPP Loan until the date on which the lender determines the amount of the PPP Loan that is eligible for forgiveness. 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 that 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 have fully utilized the PPP Loan proceeds for qualifying expenses during fiscal year 2021. The PPP Loan was classified as long-term debt in the condensed consolidated balance sheet until the forgiveness determination was made by the SBA. OnJune 15, 2021 , Greenwood notified us that the SBA approved our application for forgiveness of the entire$4.4 million principal balance of our PPP Loan and all accrued interest thereon. As a result, we recorded a$4.5 million gain on extinguishment of debt in Other Income (Expense) in our condensed consolidated income statement for the three and six months endedJuly 31,2021 . Cash Flow Our statements of cash flows for the six months endedJuly 31, 2021 andAugust 1, 2020 are included on page 7 of this report. Net cash provided by operating activities was$5.5 million for the first six months of fiscal 2022 compared to$9.2 million for the same period of the previous year. The decrease in net cash provided by operations for the first six months of the current year is primarily due to the decrease in cash provided by working capital. The combination of changes in accounts receivable, inventory, income taxes payable, accounts payable and accrued expenses increased cash by$2.7 million for the first six months of fiscal 2022, compared to an increase of$5.7 million for the same period in fiscal 2021. The decrease in cash from operations for the first six months of fiscal 2022 was also impacted by the$3.1 million ERC receivable due atJuly 31, 2021 . Our accounts receivable balance decreased to$15.6 million at the end of the second quarter compared to$17.4 million at year end. The$1.8 million decrease in the accounts receivable balance from year end is related to the sales product mix for the second quarter of the current year as compared to fourth quarter sales in fiscal 2021. Days sales outstanding for the six months of fiscal 2022 is 45 compared to 51 days at prior year end. 30 -------------------------------------------------------------------------------- Table of Contents The inventory balance was$29.1 million at the end of the second quarter of fiscal 2022, a small decline compared to$30.1 million at year end. Inventory days on hand increased to 153 days at the end of the current quarter from 147 days at the prior year end. The net cash position atJuly 31, 2021 remained consistent with the year end balance at$11.4 million . Cash was primarily provided from the working capital accounts, as discussed above. Cash outflows during the first six months of fiscal 2022 included the refinancing of debt, which resulted in a net outflow of cash of$2.6 million , cash used to acquire property, plant and equipment of$1.2 million and principal payments on the new long-term debt and the guaranteed royalty obligation of$0.4 million and$1.0 million , respectively. Contractual Obligations, Commitments and Contingencies There have been no material changes to our contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 other than those occurring in the ordinary course of business. Critical Accounting Policies, Commitments and Certain Other Matters The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate. While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. There have been no material changes to the application of critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 . Forward-Looking Statements This Quarterly Report on Form 10-Q may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect our current expectations concerning future events and results. We generally use the words "believes," "expects," "intends," "plans," "anticipates," "likely," "continues," "may," "will," and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors which could cause actual results to differ materially from those anticipated include, but are not limited to (a) general economic, financial and business conditions; (b) the impact of the ongoing COVID-19 pandemic on us, our customers, our suppliers and the global economy; (c) declining demand in the test and measurement markets, especially defense and aerospace; (d) our ability to develop and introduce new products and achieve market acceptance of these products; (e) difficulties encountered in connection with the certification of the 737 MAX for return to service; (f) our dependance on contract manufactures and/or single or limited source suppliers; (g) competition in the specialty printer or data acquisition industries; (h) our ability to obtain adequate pricing for our products and control our cost structure; (i) our ability to adequately enforce and protect our intellectual property, defend against assertions of infringement or loss of certain licenses; (j) the risk of a material security breach of our information technology system or cybersecurity attack impacting our business and our relationship with customers; (k) any technology disruption or delay in implementing new technology or our new global ERP system; (l) our ability to attract, develop and retain key employees; (m) economic, political and other risks associated with international sales and operations and the impact of changes in 31
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Table of Contents foreign currency exchange rates on the results of operations; (n) changes in tax rates or exposure to additional income tax liabilities; (o) our ability to comply with our current credit agreement or secure alternative financing and to otherwise manage our indebtedness; (p) our ability to successfully integrate acquisitions and realize benefits from divestitures; (q) our ability to maintain adequate self-insurance accruals or insurance coverage for employee health care benefits; (r) our compliance with customer or regulators certifications and our compliance with certain governmental laws and regulations; and (s) other risks included under "Item 1A-Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 . We assume no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
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