ASTRONOVA, INC. Business Overview This section should be read in conjunction with our condensed consolidated financial statements included elsewhere herein and our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2020 .AstroNova is a multinational enterprise that leverages its proprietary data visualization technologies to design, develop, manufacture, distribute and service a broad range of products that acquire, store, analyze and present data in multiple formats. We organize our structure around a core set of competencies, including research and development, manufacturing, service, marketing and distribution. We market and sell our products and services through the following two segments: • Product Identification ("PI") - offers color and monochromatic digital label printers, over-printers and custom OEM printers. PI also offers software to design, manage and print labeling and packaging images locally and across networked printing systems, as well as all related printing supplies such as pressure sensitive labels, tags, inks, toners and thermal transfer ribbons used by digital printers. PI also provides on-site and remote service, spare parts and various service contracts. • Test and Measurement ("T&M") - offers a suite of products and services
that acquire data from local and networked data streams and sensors as
well as wired and wireless networks. The T&M segment includes a line of
aerospace printers that are used to print hard copies of data requiredfor 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 2018, we entered into an Asset Purchase and License Agreement
("Honeywell Agreement") with Honeywell International, Inc. ("Honeywell")
pursuant to which, we acquired the exclusive perpetual world-wide license to
manufacture Honeywell's narrow format flight deck printers for the Boeing 737
and Airbus 320 aircraft. This added the two highest volume commercial aircraft
programs in regular production to our product portfolio.
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COVID-19
Update - Overview
Our business has been and will likely continue to be materially adversely
affected by the global
COVID-19
pandemic.
COVID-19
has spread throughout the United States and the rest of the world and has
impacted all major markets in which we, our customers, suppliers and other
business partners conduct business. Governments in affected regions have
implemented, and we expect that they will continue to implement and periodically
change policies in relation to safety precautions including quarantines, travel
restrictions, business closures, cancellations of public gatherings and other
measures as they deem necessary. Many organizations and individuals, including
us and our employees have taken and are taking additional steps to avoid or
reduce infection, including limiting travel and working from home when possible.
These measures are disrupting normal business operations including both inside
our operations and in our customer base, and as a result have had significant
negative impacts 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. As the
COVID-19
related economic impact has continued and since various governmental economic
support programs have ended, we have reduced our staffing levels and implemented
furloughs and work-share programs. As time progresses and the near and
longer-term business outlook becomes clearer, we may make additional adjustments
to employment levels.
Since March and through the most recent fiscal quarter, a large majority of our
non-production
related team members have worked remotely. When and to what degree our team
members will return to on premises work is still unknown. Some inefficiencies
related to remote work have occurred, but we believe overall effectiveness and
productivity have been satisfactorily maintained.
During this period we maintained sufficient capacity and employment levels in
our manufacturing facilities located in West Warwick, Rhode Island , as well as
in our manufacturing facilities in Canada and Germany to satisfy customer demand
and related contractual commitments. The heightened cleaning and sanitization
standards, as well as several new health and safety protocols, procedures and
workplace modifications we implemented to safeguard our team members will be
maintained as long as necessary. We believe that these health and safety
protocols, the scheduling innovations we implemented in our production
facilities, the relative effectiveness of public policies to control the
pandemic in Rhode Island , Germany and Canada where our production facilities are
located, and the efforts of our employees to adapt to altered schedules,
contributed to our ability to maintain normal order fulfillment lead times after
some initial periods of extended lead times because of temporary labor
shortages.
However, subsequent to the fiscal third quarter end, the rate of
COVID-19
infections in the areas where our manufacturing facilities are located, has
increased. The incidence of infection in our manufacturing workforce also has
increased, causing additional short-term absences and together with the impact
of quarantine and isolation protocols, has resulted in loss of some productive
capacity, leading to longer order fulfillment times and reduced revenue. We
believe this to be temporary and that we will be able to counteract this with
higher-cost overtime work, and we do not believe that we have yet lost any
orders as a result. However, we cannot predict the timing or extent of future
infections, or when they may abate, so the ultimate impact of these developments
on our business is unknown at this time.
In addition to the reductions in demand for many of our products and the
workforce impacts caused by the
COVID-19
pandemic, we have also experienced some limited and temporary difficulties in
obtaining raw materials and components for our products. These difficulties have
had no meaningful negative impact on our production efficiency or our ability to
satisfy customer requirements. However, more extensive and disruptive impacts
may be experienced in the future, depending on how the
COVID-19
pandemic and its impacts on the economy evolve.
Product Identification Update
The global
COVID-19
pandemic has also had an adverse impact on the sales of our Product
Identification hardware products primarily due to travel restrictions, as most
customers have preferred
in-person
demonstrations of these printers at their production sites prior to placing
orders with us and those visits have been severely limited. Additionally, the
widespread cancellation of trade shows, which traditionally provided an
effective forum for customers to consider our products, has also had an adverse
impact on traditional methods of sales lead generation. However, we have been
able to offset 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 the level of hardware sales will be mitigated
by altering our
go-to-market
strategies until it is possible for our direct sales force and distributors to
travel to visit customers and attend and present products at trade shows is
unknown.
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Immediately after the
COVID-19
crisis began, we experienced a greater demand for ink, toner, media and parts
supplies that are used in the digital label printers we sell to our customers.
While those initial increases have abated modestly in certain markets in the
most recent two quarters, underlying overall demand remained strong through this
period. Increased demand for supplies from our food & beverage and other
consumer goods product customers, and from customers selling products that have
experienced higher demand as a result of the
COVID-19
crisis, such as certain medical, janitorial and sanitation related products,
have contributed favorably to our overall operating results.
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 narrow-body Boeing 737 aircraft has 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 . 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 in early 2021. Before any individual 737 MAX
aircraft can return to commercial service all agency certification requirements
must be met. As these requirements vary by agency, and can be quite extensive,
the exact timing of the recertification and return to service of the 737 MAX
fleet is unclear at this time and will depend on the ability of Boeing and each
airline to complete the required steps.
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.
Further, due to the
COVID-19
pandemic, global air travel demand has precipitously declined, and the number of
flights scheduled by airlines has declined sharply. As a result, order demand
from airlines for new deliveries of most aircraft models has declined and 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 is likely to 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, which in turn is driven by the demand for air travel. Although we do not
know what the timing and rate of recovery will be, we do expect that the
industry, and hence the demand for our products, will begin to recover when
effective vaccines and treatments for
COVID-19
become both widely available and accepted, and 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 slightly during the second and third
quarters 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. The timing and pace of industry recovery remains
uncertain.
While we have and plan to continue to reduce our costs as much as we can, our
strategy and operational plans are to maintain sufficient capabilities and
staffing to fully support our customers and to be able to rapidly increase
production as demand returns.
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Results of Operations
Three Months Ended October 31, 2020 vs. Three Months Ended November 2, 2019
Revenue by segment and current quarter percentage change over the prior year for
the three months ended October 31, 2020 and November 2, 2019 were:
% Change
As a As a Compared
October 31, % of November 2, % of to
(Dollars in thousands) 2020 Revenue 2019 Revenue Prior Year
Product Identification $ 22,898 81.7 % $ 21,749 65.3 % 5.3 %
T&M 5,119 18.3 % 11,569 34.7 % (55.8 )%
Total $ 28,017 100.0 % $ 33,318 100.0 % (15.9 )%
Revenue for the third quarter of the current year was $28.0 million ,
representing a 15.9% decrease compared to the previous year third quarter
revenue of $33.3 million . Revenue through domestic channels for the third
quarter of the current year was $16.8 million , a decrease of 23.1% from the
prior year's third quarter. International revenue for the third quarter of the
current year was $11.2 million , representing 40.1% of our third quarter revenue
and reflecting a 2.2% decrease from the previous year third quarter. Current
year third quarter international revenue includes a favorable foreign exchange
rate impact of $0.4 million .
Hardware revenue in the current quarter was $7.6 million , a 36.9% decrease
compared to the prior year's third quarter revenue of $12.2 million . The
decrease is primarily attributable to the T&M segment, as hardware revenue for
that segment decreased 56.2% compared to the third quarter of the prior year.
The decrease in T&M segment hardware sales primarily resulted from decreased
aerospace printer product line sales, as well as a decline in sales of certain
data recorders in the T&M product group. The decline in current quarter hardware
sales was slightly offset by an overall 4.8% increase in hardware sales in the
PI segment, led by the increase in current quarter sales related to the product
launch of the new
T3-OPX
in the TrojanLabel product group.
Supplies revenue in the current quarter was $18.0 million , a 1.9% increase
compared to the prior year's third quarter supplies revenue of $17.6 million .
The increase is primarily attributable to ink jet and electrophotographic
supplies revenue in both the QuickLabel and TrojanLabel product groups within
the PI segment. The overall increase in supplies revenue was partially offset by
a decline supplies revenue in the T&M segment primarily related to declines in
sales of printer supply products in the aerospace product group.
Service and other revenues of $2.4 million in the current quarter decreased
32.8% compared to third quarter revenue of $3.5 million in the prior year. The
decrease is due primarily to declines in repair revenue related to the aerospace
printer product line in the T&M segment, as well as smaller declines in parts
and repair revenue in the Product Identification segment.
Current year third quarter gross profit was $9.7 million , a 20.8% decrease
compared to the prior year's third quarter gross profit of $12.3 million . Our
current quarter gross profit margin of 34.7% reflects a 2.2 percentage point
decline from the prior year's third quarter gross profit margin of 36.9%. The
lower gross profit and related profit margin for the current quarter compared to
the prior year's third quarter is primarily attributable to decreased revenue
and less favorable product mix, which were slightly offset by current quarter
reductions in manufacturing and period costs.
Operating expenses for the current quarter were $9.3 million , a 21.4% decrease
compared to the prior year's third quarter operating expenses of $11.9 million .
Specifically, current quarter selling and marketing expenses were $5.6 million ,
a 20.0% decrease compared to the third quarter of the prior year. The decline
for the current quarter was primarily due to a decrease in travel and
entertainment expenses, employee wage and commission expenses, and advertising
and trade show expenditures. Current quarter general and administrative expenses
were $2.4 million , a 16.9% decrease compared to the third quarter of the prior
year. The decline for the current year was primarily due to a decrease in bad
debt expenses and employee expenses, which was partially offset by increases in
employee benefits. Research and development ("R&D") expenses were $1.4 million
in the current quarter, a 32.0% decrease compared to $2.1 million in the third
quarter of the prior year primarily due to decreases in employee wage and
benefits, supplies expenditures and travel and entertainment expenses. The R&D
spending as a percentage of revenue for the current quarter is 5.0% compared to
6.2% for the same period of the prior year.
Other expense in the third quarter of the current year was $0.4 million compared
to other expense of $0.2 million in the third quarter of the prior year. Current
quarter other expense includes interest expense on debt, the PPP loan and the
revolving line of credit of $0.3 million and $0.1 million of net foreign
exchange loss. Other expense for the third quarter of the prior year consisted
primarily of interest expense on our debt and revolving line of credit of
$0.2 million .
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We recognized a federal, state and foreign income tax benefit for the third
quarter of the current year of $32,000 , resulting in an effective tax rate of
160.0%. This rate was impacted by a significant decrease in forecasted operating
results for our fiscal 2021 as compared to operating results forecasted at the
end of our second quarter of fiscal 2021. This compares to the prior year's
third quarter income tax benefit of approximately $247,000 . The effective tax
rate in this period was directly impacted by 1) a reduction in forecasted
operating results for our fiscal 2020 as compared to operating results
forecasted at the end of our second quarter of fiscal 2020, 2) a $306,000 tax
benefit related to the reversal of previously uncertain tax positions due to the
finalization of an IRS audit and 3) an $18,000 tax benefit arising from windfall
tax benefits related to our stock.
We reported net income of $12,000 or $0.00 per diluted share for the third
quarter of the current year. On a comparable basis, net income for the prior
year's third quarter was $0.5 million or $0.06 per diluted share. Return on
revenue was 0.0% for the third quarter of fiscal 2021 compared to 1.4% for the
third quarter of fiscal 2020.
Nine Months Ended October 31, 2020 vs. Nine Months Ended November 2, 2019
Revenue by product group and current period percentage change over the prior
year for the nine months ended October 31, 2020 and November 2, 2019 were:
% Change
As a As a Compared
October 31, % of November 2, % of to
(Dollars in thousands) 2020 Revenue 2019 Revenue Prior Year
Product Identification $ 66,907 77.3 % $ 67,484 65.5 % (0.9 )%
T&M 19,688 22.7 % 35,483 34.5 % (44.5 )%
Total $ 86,595 100.0 % $ 102,967 100.0 % (15.9 )%
Revenue for the first nine months of the current year was $86.6 million ,
representing a 15.9% decrease compared to the previous year's first nine months
revenue of $103.0 million . Revenue through domestic channels for the first nine
months of the current year was $54.4 million , a decrease of 15.6% from prior
year domestic revenue of $64.5 million . International revenue for the first nine
months of the current year was $32.2 million , a 16.5% decrease from the previous
year international revenue of $38.5 million . The current year's first nine
months international revenue reflected a favorable foreign exchange rate impact
of $0.1 million .
Hardware revenue in the first nine months of the current year was $25.0 million ,
a 33.3% decrease compared to the prior year's first nine months revenue of
$37.5 million . The decrease in hardware revenue is primarily due to a 44.3%
decline in the T&M segment resulting from lower aerospace printer product line
sales. The PI segment also contributed to the overall decline in hardware sales
for the first nine months of the current year, as hardware sales decreased 7.3%
on declines in sales of most hardware products in the PI segment other than
sales related to the TrojanLabel launch of the new
T3-OPX
which provided a significant contribution to revenue for the first nine months
of fiscal 2021.
Supplies revenue in the first nine months of the current year was $54.3 million ,
representing a 2.2% decrease from the prior year's first nine months revenue of
$55.5 million . The decrease in the current year supplies revenue is primarily
attributable to the decrease in sales of supplies in the aerospace product group
in the T&M segment.
Service and other revenues were $7.3 million in the first nine months of the
current year, a 26.7% decrease compared to the prior year's first nine months
service and other revenues of $10.0 million . The current year decrease is
primarily due to a decline in repair and parts revenue related to the aerospace
printer product line, as well as sales declines in parts and repair revenue in
the Product Identification segment.
Current year first nine months gross profit was $30.4 million , a 21.1% decrease
from prior year's first nine months gross profit of $38.5 million . Our gross
profit margin of 35.1% in the current year reflects a decrease from the prior
year's first nine months gross profit margin of 37.4%. The lower gross profit
and related profit margin for the current quarter compared to the prior year's
third quarter is primarily attributable to decreased revenue and less favorable
product mix, which were slightly offset by current year reductions in
manufacturing and period costs.
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Operating expenses for the first nine months of the current fiscal year were
$29.1 million , a 15.5% decrease compared to prior year's first nine months
operating expenses of $34.4 million . Selling and marketing expenses for the
current year of $17.0 million decreased by 15.4% compared to the previous year's
first nine months primarily due to decreases in travel and entertainment
expenses, advertising and trade show expenditures and wages, employee benefits
and commission expenditures. General and Administrative expenses decreased 14.6%
to $7.2 million in the first nine months of the current year compared to
$8.4 million in the first nine months of the prior year, primarily due to a
decrease in outside service fees, as well as lower travel costs and professional
service fees, partially offset by an increase in employee benefit expense. R&D
spending in the first nine months of the current year was $4.8 million , a 17.4%
decrease compared to the prior year's first nine months spending of $5.9 million
due primarily to lower wages, employee benefits and travel and entertainment
expenses. Current year spending on R&D represents 5.6% of revenue compared to
the prior year's first nine months level of 5.7%.
Other expense during the first nine months of the current year was $0.5 million
compared to $0.8 million in the first nine months of the previous year. Current
year other expense includes $0.8 million of interest expense on our debt, PPP
loan and revolving credit line, $0.1 million of loss related to the termination
of the cross-currency interest rate swap and other expense of $0.1 , offset by a
$0.4 million gain on the translation of Eurodollar and Danish Kroner receivable
balances at significantly higher exchange rates for those currencies as compared
to the US Dollar and investment income of $0.1 million . Other expense during the
first nine months of fiscal 2020 primarily included interest expense on our debt
and revolving line of credit of $0.6 million and net foreign exchange loss of
$0.3 million , which was partially offset by investment and other income of
$0.1 million .
We recognized $379,000 of income tax expense for the first nine months of the
current fiscal year, which reflects 1) a significant decrease in forecasted
operating results for our fiscal 2021 as compared to operating results
forecasted at the end of our second quarter of fiscal 2021, 2) a $118,000
expense arising from a shortfall tax expense related to our stock, 3) a $79,000
expense related to return to provision adjustments from several foreign tax
returns filed in the current year and 4) a $78,000 tax benefit related to the
expiration of the statute of limitations on previously uncertain tax positions
resulting in a 45.9% effective tax rate. During the nine months ended
November 2, 2019 , we recognized an income tax expense of approximately $182,000 .
The effective tax rate in this period was directly impacted by 1) a $359,000 tax
benefit related to the reversal of previously uncertain tax positions due to the
finalization of an IRS audit and the expiration of the statute of limitations on
previously uncertain tax positions and 2) a $251,000 tax benefit arising from
windfall tax benefits related to our stock.
We reported net income of $0.4 million , or $0.06 per diluted share, for the
first nine months of the current year. On a comparable basis, net income for the
first nine months of the prior year was $3.1 million , or $0.43 per diluted
share. Return on revenue was 0.5% for the first nine months of fiscal 2021
compared to 3.0% for the first nine months of fiscal 2020.
Segment Analysis
We report two segments: Product Identification and Test & Measurement and
evaluate segment performance based on the segment profit before corporate and
financial administration expenses. Summarized below are the Revenue and Segment
Operating Profit (Loss) for each reporting segment:
Three Months Ended Nine Months Ended
Segment Operating Profit Segment Operating Profit
Revenue (Loss) Revenue (Loss)
October 31, November 2, October 31, November 2, October 31, November 2, October 31, November 2,
(In thousands) 2020 2019 2020 2019 2020 2019 2020 2019
Product Identification $ 22,898 $ 21,749 $ 3,521 $ 1,880 $ 66,907 $ 67,484 $ 9,813 $ 6,990
T&M 5,119 11,569 (751 ) 1,397 19,688 35,483 (1,314 ) 5,533
Total $ 28,017 $ 33,318 2,770 3,277 $ 86,595 $ 102,967 8,499 12,523
Corporate Expenses 2,353 2,830 7,214 8,445
Operating Income 417 447 1,285 4,078
Other Expense, Net (437 ) (238 ) (459 ) (788 )
Income Before Income Taxes (20 ) 209 826 3,290
Income Tax (Benefit) Provision (32 ) (247 ) 379 182
Net Income $ 12 $ 456 $ 447 $ 3,108
26-------------------------------------------------------------------------------- Table of Contents Product Identification Revenue from the Product Identification segment increased 5.3% in the third quarter of the current year, with revenue of$22.9 million compared to$21.7 million in the same period of the prior year. The current quarter increase in revenue is primarily attributable to increases in the supplies on both the TrojanLabel and QuickLabel product groups. An overall increase in hardware sales also contributed to the current quarter growth boosted by a significant contribution from the new product launch of TrojanLabel's T3-OPX product. Product Identification's current quarter segment operating profit was$3.5 million , reflecting a profit margin of 15.4%. This compares to the prior year's third quarter segment profit of$1.9 million and related profit margin of 8.6%. The increase in Product Identification current year third quarter segment operating profit and margin is primarily due to increased sales and lower operating costs. Revenues from the Product Identification segment decreased 0.9% to$66.9 million in the first nine months of the current year from$67.5 million in the same period of the prior year. The current period decrease in revenue is primarily attributable to the decline in revenue from QuickLabel product group ink jet and thermal paper supplies, hardware and parts and repairs. The overall revenue decrease in PI was slightly tempered by an increase in sales of supplies in the TrojanLabel product group, as well as the significant contribution to current year revenue as a result of the new product launch of TrojanLabel's T3-OPX product. Product Identification current year segment operating profit was$9.8 million with a profit margin of 14.7%, compared to the prior year segment operating profit of$7.0 million and related profit margin of 10.4 %. The increase in current year segment operating profit and margin is primarily due to lower period and operating costs. Test & Measurement-T&M Revenue from the T&M segment was$5.1 million for the third quarter of the current fiscal year, representing a 55.8% decrease compared to revenue of$11.6 million for the same period in the prior year. The decrease in revenue for the current quarter is primarily attributable to the decline in sales of our aerospace product lines as a result of the Boeing 737 MAX grounding and the dramatic drop in air travel due to the impact of COVID-19. To a lesser degree, the decrease in current quarter revenue was also impacted by a decline in certain T&M's data acquisition hardware sales, as well as a decline in supplies and service and other revenue in the aerospace product lines. T&M's third quarter segment operating loss was$0.8 million , reflecting a negative profit margin of 14.7%, a decrease compared to the prior year segment operating profit of$1.4 million and related operating margin of 12.1%. The decrease in segment operating profit and related margin were due to lower sales revenue in the current quarter. Revenue from the T&M segment was$19.7 million for the first nine months of the current fiscal year, a 44.5% decrease compared to sales of$35.5 million for the same period in the prior year. The decrease in revenue for the current year is primarily attributable to the decline in sales of our aerospace product lines as a result of the Boeing 737 MAX grounding and the dramatic drop in air travel due to the impact of COVID-19. The decrease in current period revenue was also driven to a lesser degree by a decline in certain data recorder hardware sales, as well as a decline in supplies and service and other revenue in the aerospace product lines. The segment's first nine months operating loss of$1.3 million resulted in a negative 6.7% profit margin compared to the prior year segment operating profit of$5.5 million and related operating margin of 15.6%. The lower segment operating profit and related margin for the current year is due to lower sales revenue in the current year. Financial Condition and Liquidity Overview Historically, our primary sources of short-term liquidity have been cash generated from operating activities and borrowings under our revolving credit facility. These sources have also funded a portion of our capital expenditures and contractual contingent consideration obligations. We have funded acquisitions by borrowing under bank term loan facilities. At the end of 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 datedFebruary 28, 2017 (the "Existing Credit Agreement") withBank of America, N.A . (the "Lender"). OnJune 22, 2020 , we entered into a letter agreement with the Lender wherein it agreed to waive compliance with those financial covenants for the measurement period endedMay 2, 2020 . 27 -------------------------------------------------------------------------------- Table of Contents OnJuly 30, 2020 , we entered into an Amended and Restated Credit Agreement (the "A&R Credit Agreement") with the Lender, our wholly owned subsidiaryANI ApS , a Danish private limited liability company andANI ApS's wholly-owned subsidiaryTrojanLabel ApS , a Danish private limited liability company ("TrojanLabel"). The A&R Credit Agreement amended and restated the Existing Credit Agreement. In connection with our entry into the A&R Credit Agreement, we entered into an Amended and Restated Security and Pledge Agreement and a mortgage in favor of the Lender with respect to our owned real property inWest Warwick, Rhode Island . Under the A&R Credit Agreement,AstroNova, Inc. is the sole borrower, and its obligations are guaranteed byANI ApS and TrojanLabel. Immediately prior to the closing of the A&R Credit Agreement, we repaid$1.5 million in principal amount of term loans outstanding under the Existing Credit Agreement. The A&R Credit Agreement provides for (i) a term loan in the principal amount of$15.2 million , which we used to refinance the outstanding term loans borrowed by us andANI ApS under the Existing Credit Agreement and a portion of the outstanding revolving loans borrowed by us under the Existing Credit Agreement, and (ii) a$10.0 million revolving credit facility available to us for general corporate purposes. Revolving credit loans may be borrowed, at our option, inU.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars orDanish Kroner . OnMay 6, 2020 , we entered into a Loan Agreement with and executed a promissory note in favor ofGreenwood Credit Union ("Greenwood") pursuant to which we borrowed$4.4 million (the "PPP Loan") from Greenwood pursuant to the Paycheck Protection Program (the "PPP") administered by theUnited States Small Business Administration (the "SBA") and authorized by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), enacted onMarch 27, 2020 . The terms of the PPP Loan were subsequently revised in accordance with the provisions of the Paycheck Protection Flexibility Act of 2020 (the "PPP Flexibility Act"), which was enacted onJune 5, 2020 . We believe that our obtaining the PPP Loan and suspending the payment of dividends on our common stock were instrumental in our ability to successfully negotiate the A&R Credit Agreement. 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. During the first quarter we experienced a limited number of cases in which certain of our aerospace customers failed to pay us on a timely basis and we increased our reserves for potential losses on those accounts. In the second quarter, two small airlines with whom we had small receivables balances for which we had previously fully reserved, entered bankruptcy, but in general, during both the second and third quarters, the aerospace customer problems abated such that we did not increase our reserves. If the impact of the COVID-19 crisis 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. OnApril 27, 2020 , our board of directors suspended our quarterly cash dividend beginning with the second quarter of our fiscal year 2021. AtOctober 31, 2020 , our cash and cash equivalents were$9.6 million . There was no outstanding balance on our revolving line of credit atOctober 31, 2020 and we have$10.0 million available for borrowing under that facility. Despite disruptions in the capital markets as a result of the impact of the COVID-19 outbreak, we successfully renegotiated the terms of our credit facilities withBank of America during the second quarter of fiscal 2021, and we believe that this, together with our internal cash generation from operations during the third quarter and the receipt of the PPP loan, have resulted in a significant improvement in our liquidity profile. 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 Under the A&R Credit Agreement, the term loan repayments are as follows: the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters endingJuly 31, 2020 andOctober 31, 2020 is$0.8 million ; the principal amount of the quarterly installment required to be paid on the last day of our fiscal quarter endingJanuary 31, 2021 is$1.1 million ; the principal amount of the quarterly installment required to be paid on the last day of our fiscal quarter endingApril 30, 2021 is$1.1 million ; the principal amount of each quarterly installment required to be paid on the last day of each of our fiscal quarters endingJuly 31, 2021 ,October 31, 2021 ,January 31, 2022 andApril 30, 2022 is$1.4 million ; the entire remaining principal balance of the term loan is required to be paid onJune 15, 2022 . We may voluntarily prepay the term loan, in whole or in part, from time to time without premium or penalty (other than customary breakage costs, if applicable). We may repay borrowings under the revolving credit facility at any time without premium or penalty (other than customary breakage costs, if applicable), but in any event no later thanJune 15, 2022 , and any outstanding revolving loans thereunder will be due and payable in full, and the revolving credit facility will terminate, on such date. We may reduce or terminate the revolving line of credit at any time, subject to certain thresholds and conditions, without premium or penalty. 28 -------------------------------------------------------------------------------- Table of Contents The loans under the A&R Credit Agreement are subject to certain mandatory prepayments, subject to various exceptions, from (a) net cash proceeds from certain dispositions of property, (b) net cash proceeds from certain issuances of equity, (c) net cash proceeds from certain issuances of additional debt and (d) net cash proceeds from certain extraordinary receipts. Amounts repaid under the revolving credit facility may be reborrowed, subject to continued compliance with the A&R Credit Agreement. No amount of the term loan that is repaid may be reborrowed. The interest rates under the A&R Credit Agreement are as follows: The term loan and revolving credit loans bear interest at a rate per annum equal to, at our option, either (a) the applicable LIBOR rate (or in the case of revolving credit loans denominated in a currency other thanU.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 2.15% to 3.65% based on our consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal fund rate plus 0.50%, (ii)Bank of America's publicly announced prime rate, (iii) the applicable LIBOR rate plus 1.00% or (iv) 1.00%, plus a margin that varies within a range of 1.15% to 2.65% based on our consolidated leverage ratio. We are also required to pay a commitment fee on the undrawn portion of the revolving credit facility that varies within a range of 0.25% and 0.675% based on our consolidated leverage ratio. Under the A&R Credit Agreement, we must comply with various customary financial and non-financial covenants including a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, a minimum level of EBITDA, a consolidated asset coverage ratio and a minimum level of liquidity. The primary non-financial covenants limit our and our subsidiaries' ability to incur future indebtedness, to place liens on assets, to pay dividends or distributions on capital stock, to repurchase or acquire capital stock, to conduct mergers or acquisitions, to sell assets, to alter their capital structure, to make investments and loans, to change the nature of their business, and to prepay subordinated indebtedness, in each case subject to certain exceptions and thresholds as set forth in the A&R Credit Agreement. The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the A&R Credit Agreement upon the occurrence of any of various customary events of default, which include, among other events, the following (which are subject, in some cases, to certain grace periods): failure to pay when due any principal, interest or other amounts in respect of the loans, breach of any of our covenants or representations under the loan documents, default under any other of our or our subsidiaries' significant indebtedness agreements, a bankruptcy, insolvency or similar event with respect to us or any of our subsidiaries, a significant unsatisfied judgment against us or any of our subsidiaries, or our undergoing a change of control. In addition to the guarantees byANI ApS and TrojanLabel, our obligations under the A&R Credit Agreement are also secured by substantially all ofAstroNova, Inc.'s personal property assets (including a pledge of the equity interests it holds inANI ApS , in our wholly-owned German subsidiaryAstroNova GmbH , and in our wholly-owned French subsidiary AstroNova SAS), subject to certain exceptions, and by a mortgage on our owned real property inWest Warwick, Rhode Island . In connection with our entry into the A&R Credit Agreement, and as a condition of the Lender's entry into the A&R Credit Agreement, we terminated our interest rate swap and cross-currency interest rate swap (the "Swaps") that we previously used to manage the interest rate and foreign currency exchange risks associated with borrowings under the Existing Credit Agreement. We paid$0.7 million in connection with the termination of the Swaps. The PPP Loan, which will mature onMay 6, 2022 , is unsecured and bears interest at a rate of 1.0% per annum, accruing from the loan date and is payable monthly. No payments are due on the PPP Loan at this time, but interest accrues during the deferral period. Interest accrued in the amount of$22,000 is included in other expense for the nine month period endedOctober 31, 2020 . The PPP Loan may be prepaid at any time without penalty. The Loan Agreement and Promissory Note include customary provisions for a loan of this type, including prohibitions on our payment of dividends or repurchase of shares of our stock while the PPP Loan remains outstanding and events of default relating to, among other things, payment defaults, breaches of the provisions of the Loan Agreement or the Promissory Note and cross-defaults on other loans. Subject to the limitations and conditions set forth in the CARES Act, the PPP Flexibility Act and the regulations and guidance provided by the SBA with respect to the PPP, a portion of the PPP Loan 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 have fully utilized the PPP Loan proceeds for qualifying expenses and intend to apply for forgiveness of the PPP Loan (including all associated accrued interest) during the fourth quarter of the current fiscal year. Whether our application for forgiveness will be granted and in what amount is subject to an application to, and approval by, the SBA and may also be subject to further requirements in any regulations and guidelines the SBA may adopt. 29 -------------------------------------------------------------------------------- Table of Contents Cash Flow Our statements of cash flows for the nine months endedOctober 31, 2020 andNovember 2, 2019 are included on page 7 of this report. Net cash provided by operating activities was$11.7 million for the first nine months of fiscal 2021 compared to$1.0 million for the same period of the previous year. The increase in net cash provided by operations for the first nine months of the current year is primarily due to the increase in cash provided by working capital. The combination of changes in accounts receivable, inventory, income taxes payable, accounts payable and accrued expenses increased cash by$6.1 million for the first nine months of fiscal 2021, compared to a decrease of$8.3 million for the same period in fiscal 2020. Our accounts receivable balance decreased to$15.7 million at the end of the third quarter compared to$19.8 million at year end. The$4.1 million decrease in the accounts receivable balance from year end is directly related to the decrease in sales for the third quarter of the current year as compared to fourth quarter sales in fiscal 2020 and a decline in days sales outstanding for the third quarter of the current year, which was 47 compared to 55 days at prior year end. The decline in days sales outstanding is largely due to the relative decline in sales of aerospace products, which tend to have longer collection cycles. The inventory balance was$30.9 million at the end of the third quarter of fiscal 2021, compared to$33.9 million at year end and inventory days on hand increased to 152 days at the end of the current quarter from 151 days at the prior year end. The current period decrease in inventory is due to sell through of supplies inventory in the Product Identification segment. Demand declines in the aerospace product group resulted in unconsumed assembly and finished goods inventories, offsetting some of the Product Identification inventory decreases. Inventory days on hand increased by virtue of the lower aerospace sell through. The net increased cash position atOctober 31, 2020 primarily resulted from cash provided by operations, as discussed above, as well as$4.4 million received from PPP loan proceeds and an additional net$3.5 million of proceeds received in the second quarter of fiscal 2021 related to the refinance of long-term debt , which were partially offset by a$6.5 million net cash decrease on the revolving line of credit, principal payments of long-term debt and the guaranteed royalty obligation of$2.9 million and$1.5 million , respectively; cash used to acquire property, plant and equipment of$2.1 million and dividends paid of$0.5 million . Contractual Obligations, Commitments and Contingencies There have been no material changes to our contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2020 other than those occurring in the ordinary course of business. Critical Accounting Policies, Commitments and Certain Other Matters The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate. While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. There have been no material changes to the application of critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2020 . 30
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Table of Contents Forward-Looking Statements This Quarterly Report on Form 10-Q may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect our current expectations concerning future events and results. We generally use the words "believes," "expects," "intends," "plans," "anticipates," "likely," "continues," "may," "will," and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors which could cause actual results to differ materially from those anticipated include, but are not limited to (a) the impact of the ongoing COVID-19 pandemic on us, our customers, our suppliers and the global economy; (b) general economic, financial and business conditions; (c) declining demand in the test and measurement markets, especially defense and aerospace; (d) competition in the specialty printer industry; (e) our ability to develop and introduce new products and achieve market acceptance of these products; (f) competition in the data acquisition industry; (g) the impact of changes in foreign currency exchange rates on the results of operations; (h) the ability to successfully integrate acquisitions and realize benefits from divestitures; (i) our ability to restructure the terms of our current credit facility and to otherwise manage our indebtedness; (j) our ability to obtain financing for working capital and capital expenditures; (k) the business abilities and judgment of personnel and changes in business strategy; (l) the efficacy of research and development investments to develop new products; (m) the launching of significant new products which could result in unanticipated expenses; (n) bankruptcy or other financial problems at major suppliers or customers that could cause disruptions in our supply chain or difficulty in collecting amounts owed by such customers; (o) any technology disruption or delay in implementing new technology; (p) a material security breach or cybersecurity attack impacting our business and our relationship with customers; (q) difficulties encountered in connection with the certification of the 737 MAX for return to service; and (r) other risks included under "Item 1A-Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2020 . We assume no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
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