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(1) Overview
Headquartered in West Warwick, Rhode Island, Astro-Med Inc. designs, develops, manufactures and distributes a broad range of specialty printers and data acquisition and analysis systems. Our products are distributed through our own sales force and authorized dealers in the United States. We also sell to customers outside of the United States primarily by using authorized dealers and international sales representatives, who are managed from our foreign branch offices. Astro-Med, Inc. products are sold under the brand names Astro-Med ® Test & Measurement, Grass ® Technologies and QuickLabel ® Systems and are employed around the world in a wide range of aerospace, automotive, communications, chemical, food and beverage, medical, military, industrial, and packaging applications.
Unless otherwise indicated, references to “Astro-Med,” the “Company,” “we,” “our,” and “us” in this Quarterly Report on Form 10-Q refer to Astro-Med, Inc. and its consolidated subsidiaries.
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(2) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by Astro-Med pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods included herein. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with footnotes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2012.
Results of operations for the interim periods presented herein are not necessarily indicative of the results that may be expected for the full year.
The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Some of the more significant estimates relate to the allowances for doubtful accounts and credits, inventory valuation, impairment of long-lived assets and goodwill, income taxes, share-based compensation and warranty reserves. Management’s estimates are based on the facts and circumstances available at the time estimates are made, past historical experience, risk of loss, general economic conditions and trends, and management’s assessments of the probable future outcome of these matters. Consequently, actual results could differ from those estimates.
Certain amounts in prior year’s financial statements have been reclassified to conform to the current year’s presentation.
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(3) Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
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(6) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and manufacturing overhead. The components of inventories are as follows:
July 28, 2012 | January 31, 2012 | |||||||
Materials and Supplies |
$ | 8,708,767 | $ | 9,204,853 | ||||
Work-In-Process |
1,247,758 | 1,274,397 | ||||||
Finished Goods |
3,989,529 | 3,649,349 | ||||||
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$ | 13,946,054 | $ | 14,128,599 | |||||
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(7) Income Taxes
The Company’s effective tax rates for the periods, which are based on the projected effective tax rate for the full year, are as follows:
Three Months Ended | Six Months Ended | |||||||
Fiscal 2013 |
37.9 | % | 25.9 | % | ||||
Fiscal 2012 |
31.2 | % | 33.7 | % |
During fiscal 2013, the Company recognized an income tax expense of approximately $638,000 which included an expense of $907,000 on the six month’s pretax income and a benefit $269,000 primarily related to the favorable resolution of a previously uncertain tax positions.
As of July 28, 2012, the Company’s cumulative unrecognized tax benefits totaled $570,354 compared to $779,543 as of January 31, 2012. There were no developments affecting unrecognized tax benefits during the quarter ended July 28, 2012.
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(8) Line of Credit and Note Receivable
On January 30, 2012, we completed the sale of our label manufacturing operations in Asheboro, North Carolina to Label Line Ltd. The net sales price of $1,000,000 was received in the form of a promissory note issued by Label Line Ltd. and is fully secured by a first lien on various collateral, including the Asheboro plant and plant assets. The note bears interest at a rate equal to the lesser of (i) the United States prime rate as of January 30, 2013 plus 50 basis points or (ii) six percent per annum and is payable in sixteen quarterly installments of principal and interest commencing on January 30, 2013. The Note Receivable is disclosed at its present value on the accompanying condensed consolidated balance sheet for the periods ended July 28, 2012 and January 31, 2012. The current portion of the Note Receivable of $62,500 is included in prepaid and other current assets on the accompanying condensed consolidated balance sheet for the period ended July 28, 2012.
The terms of the Asheboro sale also included an agreement for Astro-Med to provide Label Line Ltd. with additional financing in the form of a revolving line of credit in the amount of $600,000. This line of credit is fully secured by first lien on various collateral of Label Line Ltd., including the Asheboro plant and plant assets and bears interest at a rate equal to the United States prime rate plus an additional margin of two percent of the outstanding credit balance. The line of credit has an initial term of one-year from the date of the sale which may be extended for consecutive one-year terms on mutual agreement of both parties. There were no outstanding borrowings due as of January 31, 2012. As of July 28, 2012, Astro-Med has extended $300,000 on this revolving line of credit.
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(9) Segment Information
The Company reports three segments consistent with its sales product groups: Test & Measurement (T&M); QuickLabel Systems (QuickLabel) and Grass Technologies (Grass). The Company evaluates segment performance based on the segment profit before corporate expenses.
Summarized below are the Net Sales and Segment Operating Profit for each reporting segment:
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
Net Sales | Segment Operating Profit | Net Sales | Segment Operating Profit | |||||||||||||||||||||||||||||
(In thousands) |
July 28, 2012 |
July 30, 2011 |
July 28, 2012 |
July 30, 2011 |
July 28, 2012 |
July 30, 2011 |
July 28, 2012 |
July 30, 2011 |
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T&M |
$ | 3,856 | $ | 4,477 | $ | 569 | $ | 861 | $ | 7,829 | $ | 8,226 | $ | 1,112 | $ | 873 | ||||||||||||||||
QuickLabel |
10,807 | 11,238 | 1,073 | 627 | 21,171 | 22,012 | 1,976 | 1,408 | ||||||||||||||||||||||||
Grass |
4,909 | 4,621 | 1,098 | 745 | 8,997 | 8,958 | 1,546 | 1,410 | ||||||||||||||||||||||||
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Total |
$ | 19,572 | $ | 20,336 | 2,740 | 2,233 | $ | 37,997 | $ | 39,196 | 4,634 | 3,691 | ||||||||||||||||||||
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Corporate Expenses |
1,062 | 1,010 | 2,069 | 1,911 | ||||||||||||||||||||||||||||
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Operating Income |
1,678 | 1,223 | 2,565 | 1,780 | ||||||||||||||||||||||||||||
Other Income (Expense) — Net |
(89 | ) | 297 | (103 | ) | 448 | ||||||||||||||||||||||||||
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Income Before Income Taxes |
1,589 | 1,520 | 2,462 | 2,228 | ||||||||||||||||||||||||||||
Income Tax Provision |
602 | 474 | 638 | 751 | ||||||||||||||||||||||||||||
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Net Income |
$ | 987 | $ | 1,046 | $ | 1,824 | $ | 1,477 | ||||||||||||||||||||||||
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(10) Recent Accounting Pronouncements
Comprehensive Income
In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which requires entities to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. While ASU 2011-05 changes the presentation of comprehensive income, it does not change the components that are recognized in net income or comprehensive income under current accounting guidance. ASU 2011-05 also requires entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standard Update No. 2011-05,” which indefinitely defers the guidance related to the presentation of reclassification adjustments. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011, and must be applied retrospectively. We adopted this guidance in the first quarter of fiscal 2013 and have provided the disclosures required for the three and six months ended July 28, 2012 and July 30, 2011, in the accompanying Condensed Consolidated Statements of Comprehensive Income.
Fair Value Measurements
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. ASU 2011-04 does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or IFRSs. ASU 2011-04 changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU 2011-04 clarifies the FASB’s intent about the application of existing fair value measurement. We adopted ASU 2011-04 effective February 1, 2012. The provisions of this guidance did not have a material effect on our consolidated financial position or results of operations.
Except for the ASU’s discussed above, all other ASUs issued by the FASB as of the filing date of this Quarterly Report on Form 10-Q are not expected to have a material effect on our consolidated financial statements.
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(11) Securities Available for Sale
Pursuant to our investment policy, securities available for sale include state and municipal securities with various contractual or anticipated maturity dates ranging from one to 17 months. Securities available for sale are carried at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity until realized. Realized gains and losses from the sale of available for sale securities, if any, are determined on a specific identification basis. A decline in the fair value of any available for sale security below cost that is determined to be other than temporary will result in a write-down of its carrying amount to fair value. No such impairment charges were recorded for any period presented. All short-term investment securities have original maturities greater than 90 days. The fair value, amortized cost and gross unrealized gains and losses of the securities are as follows:
July 28, 2012 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
State and Municipal Obligations |
$ | 11,353,847 | $ | 13,262 | $ | (721 | ) | $ | 11,366,388 | |||||||
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January 31, 2012 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
State and Municipal Obligations |
$ | 11,313,013 | $ | 22,933 | $ | (22 | ) | $ | 11,335,924 | |||||||
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(12) Fair Value
We measure our financial assets at fair value on a recurring basis in accordance with the guidance provided in ASC 820, “Fair Value Measurement and Disclosures” which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In addition, ASC 820 establishes a three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect management’s belief about the assumptions market participants would use in pricing a financial instrument based on the best information available in the circumstances.
The fair value hierarchy is summarized as follows:
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Level 1—Quoted prices in active markets for identical assets or liabilities; |
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Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
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Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Cash and cash equivalents; accounts receivables; line of credit receivable; accounts payable, accrued compensation and other expenses; and income tax payable are reflected in the condensed consolidated balance sheet at carrying value, which approximates fair value due to the short term nature of the these instruments.
Assets measured at fair value on a recurring basis are summarized below:
July 28, 2012 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Money Market Funds (included in Cash and Cash Equivalents) |
$ | 5,901,983 | $ | — | $ | — | $ | 5,901,983 | ||||||||
State and Municipal Obligations (included in Securities Available for Sale) |
11,366,388 | — | — | 11,366,388 | ||||||||||||
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Total |
$ | 17,268,371 | $ | — | $ | — | $ | 17,268,371 | ||||||||
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January 31, 2012 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Money Market Funds (included in Cash and Cash Equivalents) |
$ | 5,922,179 | $ | — | $ | — | $ | 5,922,179 | ||||||||
State and Municipal Obligations (included in Securities Available for Sale) |
11,335,924 | 11,335,924 | ||||||||||||||
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Total |
$ | 17,258,103 | $ | — | $ | — | $ | 17,258,103 | ||||||||
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For our money market funds and state and municipal obligations, we utilize the market approach to measure fair value. The market approach is based on using quoted market prices for identical assets.
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(13) Life Insurance Proceeds
During the second quarter of fiscal 2012, we recognized income on key-man life insurance proceeds of $300,000. This income is included in other income in the accompanying consolidated statement of operations for the six month period ended July 30, 2011.
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July 28, 2012 | January 31, 2012 | |||||||
Materials and Supplies |
$ | 8,708,767 | $ | 9,204,853 | ||||
Work-In-Process |
1,247,758 | 1,274,397 | ||||||
Finished Goods |
3,989,529 | 3,649,349 | ||||||
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$ | 13,946,054 | $ | 14,128,599 | |||||
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Three Months Ended | Six Months Ended | |||||||
Fiscal 2013 |
37.9 | % | 25.9 | % | ||||
Fiscal 2012 |
31.2 | % | 33.7 | % |
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Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
Net Sales | Segment Operating Profit | Net Sales | Segment Operating Profit | |||||||||||||||||||||||||||||
(In thousands) |
July 28, 2012 |
July 30, 2011 |
July 28, 2012 |
July 30, 2011 |
July 28, 2012 |
July 30, 2011 |
July 28, 2012 |
July 30, 2011 |
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T&M |
$ | 3,856 | $ | 4,477 | $ | 569 | $ | 861 | $ | 7,829 | $ | 8,226 | $ | 1,112 | $ | 873 | ||||||||||||||||
QuickLabel |
10,807 | 11,238 | 1,073 | 627 | 21,171 | 22,012 | 1,976 | 1,408 | ||||||||||||||||||||||||
Grass |
4,909 | 4,621 | 1,098 | 745 | 8,997 | 8,958 | 1,546 | 1,410 | ||||||||||||||||||||||||
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Total |
$ | 19,572 | $ | 20,336 | 2,740 | 2,233 | $ | 37,997 | $ | 39,196 | 4,634 | 3,691 | ||||||||||||||||||||
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Corporate Expenses |
1,062 | 1,010 | 2,069 | 1,911 | ||||||||||||||||||||||||||||
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Operating Income |
1,678 | 1,223 | 2,565 | 1,780 | ||||||||||||||||||||||||||||
Other Income (Expense) — Net |
(89 | ) | 297 | (103 | ) | 448 | ||||||||||||||||||||||||||
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Income Before Income Taxes |
1,589 | 1,520 | 2,462 | 2,228 | ||||||||||||||||||||||||||||
Income Tax Provision |
602 | 474 | 638 | 751 | ||||||||||||||||||||||||||||
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Net Income |
$ | 987 | $ | 1,046 | $ | 1,824 | $ | 1,477 | ||||||||||||||||||||||||
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July 28, 2012 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
State and Municipal Obligations |
$ | 11,353,847 | $ | 13,262 | $ | (721 | ) | $ | 11,366,388 | |||||||
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January 31, 2012 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
State and Municipal Obligations |
$ | 11,313,013 | $ | 22,933 | $ | (22 | ) | $ | 11,335,924 | |||||||
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July 28, 2012 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Money Market Funds (included in Cash and Cash Equivalents) |
$ | 5,901,983 | $ | — | $ | — | $ | 5,901,983 | ||||||||
State and Municipal Obligations (included in Securities Available for Sale) |
11,366,388 | — | — | 11,366,388 | ||||||||||||
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Total |
$ | 17,268,371 | $ | — | $ | — | $ | 17,268,371 | ||||||||
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January 31, 2012 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Money Market Funds (included in Cash and Cash Equivalents) |
$ | 5,922,179 | $ | — | $ | — | $ | 5,922,179 | ||||||||
State and Municipal Obligations (included in Securities Available for Sale) |
11,335,924 | 11,335,924 | ||||||||||||||
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Total |
$ | 17,258,103 | $ | — | $ | — | $ | 17,258,103 | ||||||||
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