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Note 1—Summary of Significant Accounting Policies
Basis of Presentation: The accompanying financial data have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and are presented in conformity with U.S. generally accepted accounting principles (U.S. GAAP). Our fiscal year end is January 31. Unless otherwise stated, all years and dates refer to our fiscal year.
Principles of Consolidation: The consolidated financial statements include the accounts of Astro-Med, Inc. and its subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.
Reclassification: Certain amounts in prior year’s financial statements have been reclassified to conform to the current year’s presentation.
Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect these financial statements and accompanying notes. Some of the more significant estimates relate to the allowances for doubtful accounts and credits, inventory valuation, valuation and estimated lives of intangible assets, impairment of long-lived assets, asset held for sale, 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.
Cash and Cash Equivalents: Highly liquid investments with an original maturity of 90 days or less are considered to be cash equivalents. Similar investments with original maturities beyond three months are classified as securities available for sale. Cash of $2,959,000 and $2,995,000 was held in foreign bank accounts at January 31, 2016 and 2015, respectively.
Securities Available for Sale: Securities available for sale are carried at fair value based on quoted market prices, where available. The difference between cost and fair value, net of related tax effects, is recorded as a component of accumulated other comprehensive loss in shareholders’ equity.
Inventories: Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and manufacturing overhead.
Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets (land improvements—10 to 20 years; buildings and improvements—10 to 45 years; machinery and equipment—3 to 10 years). Depreciation expense was $1,567,000 for fiscal 2016 and $1,361,000 for 2015.
Revenue Recognition: Astro-Med’s product sales are recognized when all of the following criteria have been met: persuasive evidence of an arrangement exists; price to the buyer is fixed or determinable; delivery has occurred and legal title and risk of loss have passed to the customer; and collectability is reasonably assured. Returns and customer credits are infrequent and are recorded as a reduction to sales. Rights of return are not included in sales arrangements. Revenue associated with products that contain specific customer acceptance criteria is not recognized before the customer acceptance criteria are satisfied. Discounts from list prices are recorded as a reduction to sales. Amounts billed to customers for shipping and handling fees are included in sales while related shipping and handling costs are included in cost of sales.
The majority of our equipment contains embedded operating systems and data management software which is included in the purchase price of the equipment. The software is deemed incidental to the systems as a whole as it is not sold separately or marketed separately and its production costs are minor as compared to those of the hardware system. Therefore, the Company’s hardware appliances are considered non-software elements and are not subject to the industry-specific software revenue recognition guidance.
Our multiple-element arrangements are generally comprised of a combination of equipment, software, installation and/or training services. Hardware and software elements are typically delivered at the same time and revenue is recognized when all the revenue recognition criteria for each unit are met. Delivery of installation and training services will vary based on certain factors such as the complexity of the equipment, staffing availability in a geographic location and customer preferences, and can range from a few days to a few months. Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer.
We have evaluated the deliverables in our multiple-element arrangements and concluded that they are separate units of accounting if the delivered item or items have value to the customer on a standalone basis and delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We allocate revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on vendor specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element has been met.
Infrequently, Astro-Med recognizes revenue for non-recurring engineering (NRE) fees for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue. NRE fees have not been significant in the periods presented herein.
Infrequently, Astro-Med receives requests from customers to hold product purchased from us for the customer’s convenience. Revenue is recognized for such bill and hold arrangements in accordance with the requirements of SEC Staff Accounting Bulletin No. 104 which requires, among other things, the existence of a valid business purpose for the arrangement; the transfer of ownership of the purchased product; a fixed delivery date that is reasonable and consistent with the buyer’s business purpose; the readiness of the product for shipment; the use of customary payment terms; no continuing performance obligation by us; and segregation of the product from our inventories.
Research and Development Costs: Astro-Med charges costs to expense in the period incurred, and these expenses are presented in the consolidated statement of income. Included in research and development expense are the following: salaries and benefits, external engineering service costs, engineering related information costs and supplies.
Foreign Currency Translation: The financial statements of foreign subsidiaries and branches are measured using the local currency as the functional currency. Foreign currency denominated assets and liabilities are translated into U.S. dollars at year-end exchange rates with the translation adjustment recorded as a component of accumulated comprehensive income (loss) in shareholders’ equity. Revenues and expenses are translated at the monthly average exchange rates. We do not provide for U.S. income taxes on foreign currency translation adjustments associated with our German subsidiary since its undistributed earnings are considered to be permanently invested. Our net foreign exchange losses were $323,000 and $219,000 for fiscal 2016 and 2015, respectively.
Advertising: Astro-Med expenses advertising costs as incurred. Advertising costs including advertising production, trade shows and other activities are designed to enhance demand for our products and amounted to approximately $1,058,000 and $1,717,000 in fiscal 2016 and 2015, respectively.
Long-Lived Assets: Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, as determined by the discounting of future cash flows. For both 2016 and 2015, these were no impairment charges for long-lived assets.
Assets Held for Sale: Assets held for sale are reported at the lower of cost or fair value. Cost to sell are accrued separately. Astro-Med’s former Grass facility located in Rockland, Massachusetts met the held for sale classification criteria for the period ended January 31, 2015. The Company estimated the fair value of the Rockland facility using the market values for similar properties and estimated the fair value less the cost to sell and was considered a Level 2 asset in as defined in ASC 820, “Fair Value Measurements.” Refer to Note 20, “Fair Value Measurements,” for further details.
Intangible Assets: Intangible assets include the value of customer relationships, non-competition agreements and backlog rights acquired in connection with business acquisitions and are stated at cost (fair value at acquisition) less accumulated amortization. These intangible assets have a definite life and are amortized over the assets’ useful lives using a systematic and rational basis which is representative of the assets’ use. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. If necessary, an impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. For both 2016 and 2015, there were no impairment charges for intangible assets.
Goodwill: Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether further impairment testing is necessary. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a two-step process is then performed. Step one compares the fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount exceeds the fair value of the reporting unit, step two is required to determine if there is an impairment of the goodwill. Step two compares the implied fair value of the reporting unit goodwill to the carrying amount of the goodwill. We estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long–term operating cash flow performance. In addition, the Company uses the market approach, which compares the reporting unit to publicly-traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates.
We performed a qualitative assessment for our 2016 analysis of goodwill. Based on this assessment, management does not believe that it is more likely than not that the carrying value of the reporting units exceed their fair values. Accordingly, no further testing was performed as management believes that there are no impairment issues in regards to goodwill at this time.
Income Taxes: Astro-Med uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and tax basis of the assets and liabilities and are measured using enacted tax rates that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recognized when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. At January 31, 2016 and 2015, a valuation allowance was provided for deferred tax assets attributable to certain state R&D credit carryforwards.
Astro-Med accounts for uncertain tax positions in accordance with the guidance provided in ASC 740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and requires recognition of tax benefits that satisfy a more-likely-than-not threshold. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure.
Net Income Per Common Share: Basic net income per share is based on the weighted average number of shares outstanding during the period. Diluted net income per share is based on the basic weighted average number of shares and potential common equivalent shares for stock options, restricted stock awards and restricted stock units outstanding during the period using the treasury stock method. In fiscal years 2016 and 2015, there were 425,200 and 156,600, respectively, of common equivalent shares that were not included in the computation of diluted net income per common share because their inclusion would be anti-dilutive.
Allowance for Doubtful Accounts: In circumstances where we are aware of a customer’s inability to meet its financial obligations, an allowance is established. The majority of accounts are individually evaluated on a regular basis and allowances are established to state such receivables at their net realizable value. The remainder of the allowance is based upon historical write-off experience and current market assessments.
Fair Value of Financial Instruments: Our financial instruments consist of cash and cash equivalents, investment securities, accounts receivable, a note receivable, a line of credit receivable and accounts payable. The carrying amount reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximates fair value due to the short-term nature of these items. Investment securities, all of which are available for sale, are carried in the consolidated balance sheets at fair value based on quoted market prices, when available. The note receivable is carried in the consolidated balance sheets at fair value based on the present value of the discounted cash flows over the life of the note.
The Company measures assets held for sale at fair value on a nonrecurring basis and records impairment charges when the assets are deemed to be impaired.
Share-Based Compensation: Share-based compensation expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and the Company’s dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of the option grants, the Company has observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grant and has assessed the expected risk tolerance of different option groups. The risk-free interest rate is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (RSA) and restricted stock units (RSU) is also based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of the Company’s common stock on the grant date.
The cash flow from the tax benefits that are a result of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are classified as a cash inflow from financing activities and a cash outflow from operating activity. Tax deductions from certain stock option exercises are treated as being realized when they reduce taxes payable in accordance with relevant tax law.
Recent Accounting Pronouncements:
Leases
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842).” ASU 2016-02 will supersede current guidance related to accounting for leases and is intended to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities in the balance sheet for operating leases with lease terms greater than twelve months. The update also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (Q1 fiscal 2020 for Astro-Med), with early adoption permitted. At adoption, this update will be applied using a modified retrospective approach. The Company is currently evaluating the effect of this new guidance on the Company’s consolidated financial statements.
Income Taxes
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740).” ASU 2015-17 amended guidance applicable to the presentation of income taxes and requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. This amendment represents a change in accounting principle and is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. As permitted by the standard, we adopted the new presentation retrospectively, beginning on February 1, 2014. As a result, all of the Company’s deferred taxes are presented as non-current in the accompanying consolidated balance sheets for the periods ended January 31, 2016 and 2015.
Inventory
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330).” ASU 2015-11 requires inventory to be measured at the lower of cost and net realizable value instead of at lower of cost or market. This guidance does not apply to inventory that is measured using last-in, first out (LIFO) or the retail inventory method but applies to all other inventory including inventory measured using first-in, first-out (FIFO) or the average cost method. ASU 2015-11 will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years (Q1 fiscal 2018 for Astro-Med) and should be applied prospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. Astro-Med is currently evaluating the effect of this new guidance on the Company’s consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board (IASB) to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. In August 2015, the FASB modified ASU 2014-09 to be effective for annual reporting periods beginning after December 15, 2017 (Q1 fiscal 2019 for Astro-Med), including interim periods within that reporting period. As modified, the FASB permits the adoption of the new revenue standard early, but not before annual periods beginning after December 15, 2016. Entities have the choice to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information. The Company is currently evaluating the requirements of ASU 2014-09 and has not yet determined its impact on the Company’s consolidated financial statements.
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Note 2—Acquisition
On June 19, 2015, Astro-Med completed the acquisition of the aerospace printer product line for civil and commercial aircraft from Rugged Information Technology Equipment Corporation (RITEC) under the terms of an Asset Purchase Agreement dated June 18, 2015. The products of RITEC consist of aerospace printers for use in commercial aircraft sold primarily to aircraft manufacturers, tier one contractors and directly to airlines around the world. Astro-Med’s aerospace printer product line is part of the Test & Measurement (T&M) product group and is reported as part of the T&M segment. The Company began shipment of the RITEC products in the third quarter of fiscal 2016.
The purchase price of the acquisition was $7,360,000 which was funded using available cash and investment securities. Of the $7,360,000 purchase price, $750,000 is being held in escrow for twelve months following the acquisition date to support an indemnity to the Company in the event of any breach in the representations, warranties or covenants of RITEC. The assets acquired consist principally of accounts receivables and certain intangible assets. Acquisition related costs of approximately $109,000 are included in the general and administrative expenses in the Company’s consolidated statements of income for fiscal year ended 2016. The acquisition was accounted for under the acquisition method in accordance with the guidance provided by FASB ASC 805, “Business Combinations.”
Astro-Med also entered into a Transition Services Agreement, under which RITEC will provide transition services and continue to manufacture products in the acquired product line until the Company transitions the manufacturing to its West Warwick, Rhode Island facility, which the Company anticipates will occur in the second quarter of fiscal 2017. Upon expiration of the Transition Services Agreement, Astro-Med will purchase any inventory held by RITEC at its book value (net of reserves), which the Company estimates will be approximately $150,000.
Also as part of the Asset Purchase Agreement, Astro-Med entered into a License Agreement, which grants RITEC certain rights to use the intellectual property acquired by the Company in the design, development, marketing, manufacture, sale and servicing of aerospace printers for aircraft sold to the military end-user market and printers sold to other non-aircraft market segments. RITEC will pay royalties equal to 7.5% of the sales price on all products sold into the military end-user aircraft market during the first five years of the License Agreement.
The purchase price of the acquisition has been allocated on the basis of the fair value as follows:
(In thousands) | ||||
Accounts Receivable |
$ | 50 | ||
Identifiable Intangible Assets |
3,780 | |||
Goodwill |
3,530 | |||
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Total Purchase Price |
$ | 7,360 | ||
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The fair value of the intangible assets acquired was estimated by applying the income approach. This fair value measurement is based on significant inputs that are not observable in the market and therefore, represent a Level 3 measurement as defined in ASC 820, “Fair Value Measurement and Disclosure.” Key assumptions include (1) a weighted average cost of capital of 15.5%; (2) a range of earnings projections from $110,000-$700,000 and (3) a range of contract renewal probability from 30%-100%.
Goodwill of $3,530,000, which is deductible for tax purposes, represents the excess of the purchase price over the estimated fair value assigned to the tangible and identifiable intangible assets acquired from RITEC. The carrying amount of the goodwill was allocated to the T&M segment of the Company.
The following table reflects the fair value of the acquired identifiable intangible assets and related estimated useful lives:
(In thousands) | Fair Value |
Useful Life (Years) |
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Customer Contract Relationships |
$ | 2,830 | 10 | |||||
Non-Competition Agreement |
950 | 5 | ||||||
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Total |
$ | 3,780 | ||||||
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Assuming the acquisition of RITEC occurred on February 1, 2014, the impact on net sales, net income and earnings per share would not have been material to the Company for the years ended January 31, 2016 and 2015.
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Note 3—Intangible Assets
Intangible assets are as follows:
January 31, 2016 | January 31, 2015 | |||||||||||||||||||||||
(In thousands) | Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
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Miltope: |
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Customer Contract Relationships |
$ | 3,100 | $ | (758 | ) | $ | 2,342 | $ | 3,100 | $ | (402 | ) | $ | 2,698 | ||||||||||
Backlog |
— | — | — | 300 | (300 | ) | — | |||||||||||||||||
RITEC: |
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Customer Contract Relationships |
2,830 | (31 | ) | 2,799 | — | — | — | |||||||||||||||||
Non-Competition Agreement |
950 | (111 | ) | 839 | — | — | — | |||||||||||||||||
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Intangible assets, net |
$ | 6,880 | $ | (900 | ) | $ | 5,980 | $ | 3,400 | $ | (702 | ) | $ | 2,698 | ||||||||||
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There were no impairments to intangible assets during the periods ended January 31, 2016 and 2015. Amortization expense of $498,000 and $702,000 in regards to the above acquired intangibles has been included in the consolidated statements of income for years ended January 31, 2016 and 2015, respectively.
Estimated amortization expense for the next five years is as follows:
(In thousands) | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||
Estimated amortization expense |
$ | 715 | $ | 774 | $ | 769 | $ | 803 | $ | 706 |
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Note 4—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 month to three years. These securities are carried at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss), net of taxes 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:
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
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(In thousands) | ||||||||||||||||
January 31, 2016 |
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State and Municipal Obligations |
$ | 10,363 | $ | 15 | $ | (2 | ) | $ | 10,376 | |||||||
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January 31, 2015 |
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State and Municipal Obligations |
$ | 15,150 | $ | 26 | $ | (2 | ) | $ | 15,174 | |||||||
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The contractual maturity dates of these securities are as follows:
January 31 | ||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Less than one year |
$ | 3,833 | $ | 9,470 | ||||
One to three years |
6,543 | 5,704 | ||||||
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$ | 10,376 | $ | 15,174 | |||||
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Actual maturities may differ from contractual dates as a result of sales or earlier issuer redemptions.
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Note 5—Inventories
The components of inventories are as follows:
January 31 | ||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Materials and Supplies |
$ | 10,197 | $ | 10,600 | ||||
Work-in-Progress |
1,025 | 765 | ||||||
Finished Goods |
7,491 | 7,372 | ||||||
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18,713 | 18,737 | |||||||
Inventory Reserve |
(3,823 | ) | (3,155 | ) | ||||
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Balance at January 31 |
$ | 14,890 | $ | 15,582 | ||||
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Included within finished goods inventory is $1,354,000 and $1,030,000 of demonstration equipment at January 31, 2016 and 2015, respectively.
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Note 6—Accrued Expenses
Accrued expenses consisted of the following:
January 31 | ||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Warranty |
$ | 400 | $ | 375 | ||||
Product Replacement Cost Reserve |
278 | 353 | ||||||
Professional Fees |
328 | 256 | ||||||
Executive Retirement Package |
— | 250 | ||||||
Dealer Commissions |
221 | 163 | ||||||
Other |
982 | 946 | ||||||
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$ | 2,209 | $ | 2,343 | |||||
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Note 7—Line of Credit
Astro-Med has a $10 million revolving line of credit available to be used as needed for ongoing working capital requirements, business acquisitions or general corporate purposes. Any borrowings made under the line of credit bear interest at either a fluctuating base rate equal to the highest of (i) the Prime Rate, (ii) 1.50% above the daily one month LIBOR, and (iii) the Federal Funds Rate in effect plus 1.50% or at a fixed rate of LIBOR plus an agreed upon margin of between 0% and 2.25%, based on the Company’s funded debt to EBITDA ratio as defined in the agreement. In addition, the agreement provides for two financial covenant requirements, namely, Total Funded Debt to Adjusted EBITDA (as defined) of not greater than 3 to 1 and a Fixed Charge Coverage Ratio (as defined) of not less than 1.25 to 1, both measured at the end of each quarter on a rolling four quarter basis. As of January 31, 2016, there have been no borrowings against this line of credit and the Company was in compliance with its financial covenants. Under the terms, the line of credit will expire on August 30, 2017.
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Note 8—Note Receivable and Revolving Line of Credit 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 3.75% and is payable in sixteen quarterly installments of principal and interest which commenced on January 30, 2013. As of January 31, 2016, $191,000 remains outstanding on this note which approximates its estimated fair value.
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 of $600,000, which is fully secured by a first lien on various collateral, including the Asheboro plant and plant assets. This line of credit bears interest at a rate equal to the United States prime rate plus an additional margin of two percent of the outstanding credit balance (5.25% at January 31, 2016). Although the initial term was for a period of one-year from the date of the sale, the agreement had been extended through January 31, 2016. As of January 31, 2016, $150,000 remains outstanding on this revolving line of credit. Subsequent to fiscal 2016 year-end, the agreement was amended to extend the term of the agreement through January 31, 2017.
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Note 9—Accumulated Other Comprehensive Loss
The changes in the balance of accumulated other comprehensive loss by component are as follows:
(In thousands) | Foreign Currency Translation Adjustments |
Unrealized Holding Gain (Loss) on Available for Sale Securities |
Total | |||||||||
Balance at January 31, 2014 |
$ | 152 | $ | 24 | $ | 176 | ||||||
Other Comprehensive Loss |
(866 | ) | (9 | ) | (875 | ) | ||||||
Amounts Reclassified to Net Income |
— | — | — | |||||||||
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Net Other Comprehensive Loss |
(866 | ) | (9 | ) | (875) | |||||||
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Balance at January 31, 2015 |
(714 | ) | 15 | (699 | ) | |||||||
Other Comprehensive Loss |
(269 | ) | (7 | ) | (276 | ) | ||||||
Amounts Reclassified to Net Income |
— | — | — | |||||||||
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Net Other Comprehensive Loss |
(269 | ) | (7 | ) | (276 | ) | ||||||
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Balance at January 31, 2016 |
$ | (983 | ) | $ | 8 | $ | (975 | ) | ||||
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The amounts presented above in other comprehensive loss are net of taxes except for translation adjustments associated with our German subsidiary.
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Note 12—Income Taxes
The components of income before income taxes are as follows:
Years Ended January 31 |
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2016 | 2015 | |||||||
(In thousands) | ||||||||
Domestic |
$ | 5,982 | $ | 5,401 | ||||
Foreign |
927 | 1,531 | ||||||
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$ | 6,909 | $ | 6,932 | |||||
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The components of the provision for income taxes are as follows:
Years Ended January 31 |
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2016 | 2015 | |||||||
(In thousands) | ||||||||
Current: |
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Federal |
$ | 1,930 | $ | 1,666 | ||||
State |
470 | 466 | ||||||
Foreign |
276 | 535 | ||||||
|
|
|
|
|||||
2,676 | 2,667 | |||||||
|
|
|
|
|||||
Deferred: |
||||||||
Federal |
$ | (402 | ) | $ | (290 | ) | ||
State |
126 | (107 | ) | |||||
Foreign |
(16 | ) | — | |||||
|
|
|
|
|||||
(292 | ) | (397 | ) | |||||
|
|
|
|
|||||
$ | 2,384 | $ | 2,270 | |||||
|
|
|
|
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate of 34% in both fiscal 2016 and 2015 to income before income taxes due to the following:
Years Ended January 31 |
||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Income Tax Provision at Statutory Rate |
$ | 2,349 | $ | 2,357 | ||||
State Taxes, Net of Federal Tax Effect |
277 | 233 | ||||||
Change in Valuation Allowance |
116 | — | ||||||
Change in Reserves Related to ASC 740 Liability |
(67 | ) | 23 | |||||
Meals and Entertainment |
38 | 41 | ||||||
Domestic Production Deduction |
(134 | ) | (164 | ) | ||||
Share-Based Compensation |
21 | (25 | ) | |||||
Tax-Exempt Income |
(23 | ) | (24 | ) | ||||
R&D Credits |
(176 | ) | (135 | ) | ||||
Foreign Rate Differential |
(65 | ) | (56 | ) | ||||
Other Permanent Differences and Miscellaneous, Net |
48 | 20 | ||||||
|
|
|
|
|||||
$ | 2,384 | $ | 2,270 | |||||
|
|
|
|
The components of deferred income tax expense arise from various temporary differences and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows:
January 31 | ||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Deferred Tax Assets: |
||||||||
Inventory |
$ | 1,948 | $ | 1,666 | ||||
Share-Based Compensation |
830 | 572 | ||||||
State R&D Credits |
583 | 371 | ||||||
Compensation Accrual |
346 | 417 | ||||||
ASC 740 Liability Federal Benefit |
237 | 304 | ||||||
Deferred Service Contract Revenue |
200 | 235 | ||||||
Warranty Reserve |
149 | 140 | ||||||
Reserve for Doubtful Accounts |
140 | 116 | ||||||
Foreign Tax Credit |
426 | 356 | ||||||
Currency Translation Adjustment |
36 | — | ||||||
Other |
207 | 298 | ||||||
|
|
|
|
|||||
5,102 | 4,475 | |||||||
Deferred Tax Liabilities: |
||||||||
Accumulated Tax Depreciation in Excess of Book Depreciation |
1,355 | 766 | ||||||
Deferred Gain on Asset Held for Sale |
76 | 785 | ||||||
Currency Translation Adjustment |
— | 36 | ||||||
Other |
117 | 87 | ||||||
|
|
|
|
|||||
1,548 | 1,674 | |||||||
|
|
|
|
|||||
Subtotal |
3,554 | 2,801 | ||||||
Valuation Allowance |
(583 | ) | (255 | ) | ||||
|
|
|
|
|||||
Net Deferred Tax Assets |
$ | 2,971 | $ | 2,546 | ||||
|
|
|
|
The valuation allowance at January 31, 2016 relates to state research and development tax credit carryforwards which are expected to expire unused. The change in the valuation allowance in 2016 was an increase of approximately $328,000 due to the generation of research and development credits during the current year and a decision to fully reserve for the state tax benefits of all R&D tax credits, net of federal benefit. The change in the valuation allowance in 2015 was a decrease of approximately $3,000 and represented a decrease in the reserve due to the utilization of research and development credits during the current year, net of federal benefit.
The Company reasonably believes that it is possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balance of unrecognized tax benefits, excluding interest and penalties are as follows:
2016 | 2015 | |||||||
(In thousands) | ||||||||
Balance at February 1 |
$ | 707 | $ | 715 | ||||
Increases in prior period tax positions |
— | — | ||||||
Increases in current period tax positions |
49 | 87 | ||||||
Reductions related to lapse of statute of limitations |
(165 | ) | (95 | ) | ||||
|
|
|
|
|||||
Balance at January 31 |
$ | 591 | $ | 707 | ||||
|
|
|
|
If the $591,000 is recognized, $354,000 would decrease the effective tax rate in the period in which each of the benefits is recognized and the remainder would be offset by a reversal of deferred tax assets.
During fiscal 2016 and 2015, the Company recognized a benefit of $87,000 and an expense of $43,000, respectively, related to change in interest and penalties, which are included as a component of income tax expense in the accompanying statements of income. At January 31, 2016 and 2015, the Company had accrued potential interest and penalties of $373,000 and $460,000, respectively.
The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations prior to fiscal year ended January 2013.
At January 31, 2016, the Company has indefinitely reinvested $4,207,000 of the cumulative undistributed earnings of its foreign subsidiary in Germany, all of which would be subject to U.S. taxes if repatriated to the U.S. Through January 31, 2016, the Company has not provided deferred income taxes on the undistributed earnings of this subsidiary because such earnings are considered to be indefinitely reinvested. Non-U.S. income taxes are, however, provided on these undistributed earnings.
|
Note 13—Contractual Obligations
The following table summarizes our contractual obligations:
Total | 2017 | 2018 | 2019 | 2020 | 2021 and Thereafter |
|||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Purchase Commitments* |
$ | 22,225 | $ | 22,123 | $ | 28 | $ | 4 | $ | 70 | $ | — | ||||||||||||
Operating Lease Obligations |
668 | 300 | 251 | 103 | 14 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 22,893 | $ | 22,423 | $ | 279 | $ | 107 | $ | 84 | $ | — | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
* |
Purchase commitments consist primarily of inventory and equipment purchase orders made in the ordinary course of business.
|
|
Note 14—Nature of Operations, Segment Reporting and Geographical Information
The Company’s operations consist of the design, development, manufacture and sale of specialty printers and data acquisition and analysis systems, including both hardware and software and related consumable supplies. The Company organizes and manages its business as a portfolio of products and services designed around a common theme of data acquisition and information output. The Company has two reporting segments consistent with its sales product groups: QuickLabel and Test & Measurement (T&M).
QuickLabel produces an array of high-technology digital color and monochrome label printers, labeling software and consumables for a variety of commercial industries worldwide. T&M produces data recording equipment used worldwide for a variety of recording, monitoring and troubleshooting applications for many industries including aerospace, automotive, defense, rail, energy, industrial and general manufacturing.
Business is conducted in the United States and through foreign affiliates in Canada, Europe, Southeast Asia and Mexico. Manufacturing activities are primarily conducted in the United States. Sales and service activities outside the United States are conducted through wholly-owned entities and, to a lesser extent, through authorized distributors and agents. Transfer prices are intended to produce gross profit margins as would be associated with an arms-length transaction.
On June 19, 2015, Astro-Med completed the asset purchase of the aerospace printer product line from RITEC. Astro-Med’s aerospace printer product line is part of the T&M product group and is reported as part of the T&M segment. The Company began shipment of the RITEC products in the third quarter of the current fiscal year. Refer to Note 2, “Acquisition,” for further details.
The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies herein. The Company evaluates segment performance based on the segment profit before corporate and financial administration expenses.
Summarized below are the Net Sales and Segment Operating Profit (both in dollars and as a percentage of Net Sales) for each reporting segment:
($ in thousands) | Net Sales | Segment Operating Profit | Segment Operating Profit % of Net Sales |
|||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||
QuickLabel |
$ | 67,127 | $ | 59,779 | $ | 9,300 | $ | 7,259 | 13.9 | % | 12.1 | % | ||||||||||||
T&M |
27,531 | 28,568 | 3,664 | 5,627 | 13.3 | % | 19.7 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 94,658 | $ | 88,347 | 12,964 | 12,886 | 13.7 | % | 14.6 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Corporate Expenses |
7,030 | 5,655 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Operating Income |
5,934 | 7,231 | ||||||||||||||||||||||
Other Income (Expense) |
975 | (299 | ) | |||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Income before Income Taxes |
6,909 | 6,932 | ||||||||||||||||||||||
Income Tax Provision |
2,384 | 2,270 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net Income |
$ | 4,525 | $ | 4,662 | ||||||||||||||||||||
|
|
|
|
No customer accounted for greater than 10% of net sales in fiscal 2016 and 2015.
Other information by segment is presented below:
(In thousands) | Assets | |||||||
2016 | 2015 | |||||||
QuickLabel |
$ | 27,143 | $ | 24,874 | ||||
T&M |
28,570 | 22,323 | ||||||
Corporate* |
22,250 | 27,133 | ||||||
|
|
|
|
|||||
Total |
$ | 77,963 | $ | 74,330 | ||||
|
|
|
|
* | Corporate assets consist principally of cash and cash equivalents, securities available for sale, and building held for sale. |
(In thousands) | Depreciation and Amortization |
Capital Expenditures | ||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
QuickLabel |
$ | 690 | $ | 678 | $ | 2,284 | $ | 1,408 | ||||||||
T&M |
1,375 | 1,385 | 777 | 839 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 2,065 | $ | 2,063 | $ | 3,061 | $ | 2,247 | ||||||||
|
|
|
|
|
|
|
|
Geographical Data
Presented below is selected financial information by geographic area:
(In thousands) | Net Sales | Long-Lived Assets* | ||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
United States |
$ | 68,316 | $ | 61,494 | $ | 15,290 | $ | 10,422 | ||||||||
Europe |
16,830 | 18,181 | 290 | 383 | ||||||||||||
Canada |
4,487 | 3,934 | 207 | 272 | ||||||||||||
Asia |
1,741 | 1,408 | — | — | ||||||||||||
Central and South America |
2,436 | 1,919 | — | — | ||||||||||||
Other |
848 | 1,411 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 94,658 | $ | 88,347 | $ | 15,787 | $ | 11,077 | ||||||||
|
|
|
|
|
|
|
|
* | Long-lived assets excludes goodwill assigned to the T&M segment of $4.5 million and $1.0 million at January 31, 2016 and 2015, respectively. |
|
Note 15—Employee Benefit Plans
Employee Stock Ownership Plan (ESOP):
Astro-Med has an ESOP providing retirement benefits to all eligible employees. Annual contributions in amounts determined by the Company’s Board of Directors are invested by the ESOP’s Trustees in shares of common stock of Astro-Med. Contributions may be in cash or stock. Astro-Med did not make a contribution to the ESOP in fiscal 2016. The Company’s contribution amounted to $100,000 in fiscal 2015 and was recorded as compensation expense. All shares owned by the ESOP have been allocated to participants.
Profit-Sharing Plan:
Astro-Med sponsors a Profit-Sharing Plan (the “Plan”) which provides retirement benefits to all eligible domestic employees. The Plan allows participants to defer a portion of their cash compensation and contribute such deferral to the Plan through payroll deductions. The Company makes matching contributions up to specified levels. The deferrals are made within the limits prescribed by Section 401(k) of the Internal Revenue Code.
All contributions are deposited into trust funds. It is the policy of the Company to fund any contributions accrued. The Company’s annual contribution amounts are determined by the Board of Directors. Contributions paid or accrued amounted to $306,000 and $294,000 in fiscal 2016 and 2015, respectively.
|
Note 16—Product Warranty Liability
Astro-Med offers a manufacturer’s warranty for the majority of its hardware products. The specific terms and conditions of warranty vary depending upon the product sold and country in which the Company does business. For products sold in the United States, the Company provides a basic limited warranty, including parts and labor. The Company estimates the warranty costs based on historical claims experience and records a liability in the amount of such estimates at the time product revenue is recognized. The Company regularly assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Activity in the product warranty liability, which is included in other accrued expenses in the accompanying consolidated balance sheet, is as follows:
January 31 | ||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Balance, beginning of the year |
$ | 375 | $ | 355 | ||||
Warranties issued |
887 | 546 | ||||||
Settlements made |
(862 | ) | (526 | ) | ||||
|
|
|
|
|||||
Balance, end of the year |
$ | 400 | $ | 375 | ||||
|
Note 17—Product Replacement Costs
In April 2013, tests conducted by the Company revealed that one of its suppliers had been using a non-conforming material in certain models of Astro-Med’s Test & Measurement printers. No malfunctions have been reported by customers as a result of the non-conforming material.
Upon identifying this issue, Astro-Med immediately suspended production of the printers, notified all customers and contacted the supplier who confirmed the problem. Astro-Med is continuing to work with its customers to replace the non-conforming material on existing printers with conforming material. The estimated costs associated with the replacement program were $672,000, which was based upon the number of printers shipped during the period the non-conforming material was used. Those costs were recognized and recorded in the first quarter of fiscal 2014. As of January 31, 2016, the Company had expended $394,000 in replacement costs which have been charged against this reserve. The remaining reserve amount of $278,000 is included in other accrued expenses in the accompanying consolidated balance sheet as of January 31, 2016.
Since the supplier deviated from the agreed upon specifications for the power supply while providing certificates of conformance to the original specifications, Astro-Med received a non-refundable $450,000 settlement from the supplier in January 2014 for recovery of the costs and expense associated with this issue. In addition to this cash settlement, the Company will receive lower product prices from the supplier through fiscal 2017.
|
Note 18—Concentration of Risk
Credit is generally extended on an uncollateralized basis to almost all customers after review of credit worthiness. Concentration of credit and geographic risk with respect to accounts receivable is limited due to the large number and general dispersion of accounts which constitute the Company’s customer base. The Company periodically performs on-going credit evaluations of its customers. The Company has not historically experienced significant credit losses on collection of its accounts receivable.
Excess cash is invested principally in investment grade government and state municipal securities. The Company has established guidelines relative to diversification and maturities that maintain safety of principal, liquidity and yield. These guidelines are periodically reviewed and modified to reflect changes in market conditions. The Company has not historically experienced any significant losses on its cash equivalents or investments.
During the years ended January 31, 2016 and 2015, one vendor accounted for 23.7% and 21.9% of purchases, and 16.7% and 55.1% of accounts payable, respectively.
|
Note 19—Commitments and Contingencies
Astro-Med is subject to contingencies, including legal proceedings and claims arising in the normal course of business that cover a wide range of matters including, among others, contract and employment claims; workers compensation claims; product liability; warranty and modification; and adjustment or replacement of component parts of units sold.
Direct costs associated with the estimated resolution of contingencies are accrued at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, the Company believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations. It is possible, however, that future results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of the Company’s control.
|
Note 20—Fair Value Measurements
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. 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:
• |
Level 1—Quoted prices in active markets for identical assets or liabilities; |
• |
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 |
• |
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, note receivable, accrued compensation and other expenses; and income tax payable are reflected in the 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:
January 31, 2016 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In thousands) | ||||||||||||||||
Money market funds (included in cash and cash equivalents) |
$ | 4,340 | $ | – | $ | – | $ | 4,340 | ||||||||
State and municipal obligations (included in securities available for sale) |
– | 10,376 | – | 10,376 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 4,340 | $ | 10,376 | $ | – | $ | 14,716 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
January 31, 2015 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In thousands) | ||||||||||||||||
Money market funds (included in cash and cash equivalents) |
$ | 3,028 | $ | – | $ | – | $ | 3,028 | ||||||||
State and municipal obligations (included in securities available for sale) |
– | 15,174 | – | 15,174 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 3,028 | $ | 15,174 | $ | – | $ | 18,202 | ||||||||
|
|
|
|
|
|
|
|
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 similar assets.
Non-financial assets such as goodwill, intangible assets, and property, plant and equipment are required to be measured at fair value only when an impairment loss is recognized. The Company did not record an impairment loss related to these assets during the period ended January 31, 2016.
Non-financial assets measured at fair value on a non-recurring basis are summarized below:
January 31, 2015 |
Level 1 | Level 2 | Level 3 | |||||||||
(In thousands) | ||||||||||||
Asset Held for Sale |
$ | – | $ | 1,900 | $ | – | ||||||
|
|
|
|
|
|
Asset held for sale consisted of Astro-Med’s former Grass facility in Rockland, Massachusetts which was being actively marketed for sale at January 31, 2015. In accordance with ASC 360, “Property, Plant and Equipment,” assets held for sale are written down to fair value less cost to sell and as such, the Company recorded an impairment charge of $220,000 in fiscal 2015. In fiscal 2015, the impairment charge was included in other income (expense), other, net in the consolidated statement of income. The Company estimated the fair value of the Rockland facility using the market values for similar properties less the cost to sell. On October 29, 2015, the Company completed the sale of this facility for $1,800,000 in cash. The net cash proceeds received of $1,698,000 reflect closing costs and broker fees previously accrued. After considering reserved amounts, the net loss on the sale of $3,000 was recognized in the consolidated income statement for the period ended January 31, 2016.
|
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Description |
Balance at Beginning of Year |
Provision Charged to Operations |
Deductions(2) | Balance at End of Year |
||||||||||||
Allowance for Doubtful Accounts(1): |
||||||||||||||||
(In thousands) | ||||||||||||||||
Year Ended January 31, |
||||||||||||||||
2016 |
$ | 343 | $ | 112 | $ | (51 | ) | $ | 404 | |||||||
2015 |
$ | 370 | $ | 60 | $ | (87 | ) | $ | 343 |
(1) | The allowance for doubtful accounts has been netted against accounts receivable as of the respective balance sheet dates. |
(2) | Uncollectible accounts written off, net of recoveries, also includes foreign exchange adjustment. |
|
Basis of Presentation: The accompanying financial data have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and are presented in conformity with U.S. generally accepted accounting principles (U.S. GAAP). Our fiscal year end is January 31. Unless otherwise stated, all years and dates refer to our fiscal year.
Principles of Consolidation: The consolidated financial statements include the accounts of Astro-Med, Inc. and its subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.
Reclassification: Certain amounts in prior year’s financial statements have been reclassified to conform to the current year’s presentation.
Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect these financial statements and accompanying notes. Some of the more significant estimates relate to the allowances for doubtful accounts and credits, inventory valuation, valuation and estimated lives of intangible assets, impairment of long-lived assets, asset held for sale, 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.
Cash and Cash Equivalents: Highly liquid investments with an original maturity of 90 days or less are considered to be cash equivalents. Similar investments with original maturities beyond three months are classified as securities available for sale. Cash of $2,959,000 and $2,995,000 was held in foreign bank accounts at January 31, 2016 and 2015, respectively.
Securities Available for Sale: Securities available for sale are carried at fair value based on quoted market prices, where available. The difference between cost and fair value, net of related tax effects, is recorded as a component of accumulated other comprehensive loss in shareholders’ equity.
Inventories: Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and manufacturing overhead.
Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets (land improvements—10 to 20 years; buildings and improvements—10 to 45 years; machinery and equipment—3 to 10 years). Depreciation expense was $1,567,000 for fiscal 2016 and $1,361,000 for 2015.
Revenue Recognition: Astro-Med’s product sales are recognized when all of the following criteria have been met: persuasive evidence of an arrangement exists; price to the buyer is fixed or determinable; delivery has occurred and legal title and risk of loss have passed to the customer; and collectability is reasonably assured. Returns and customer credits are infrequent and are recorded as a reduction to sales. Rights of return are not included in sales arrangements. Revenue associated with products that contain specific customer acceptance criteria is not recognized before the customer acceptance criteria are satisfied. Discounts from list prices are recorded as a reduction to sales. Amounts billed to customers for shipping and handling fees are included in sales while related shipping and handling costs are included in cost of sales.
The majority of our equipment contains embedded operating systems and data management software which is included in the purchase price of the equipment. The software is deemed incidental to the systems as a whole as it is not sold separately or marketed separately and its production costs are minor as compared to those of the hardware system. Therefore, the Company’s hardware appliances are considered non-software elements and are not subject to the industry-specific software revenue recognition guidance.
Our multiple-element arrangements are generally comprised of a combination of equipment, software, installation and/or training services. Hardware and software elements are typically delivered at the same time and revenue is recognized when all the revenue recognition criteria for each unit are met. Delivery of installation and training services will vary based on certain factors such as the complexity of the equipment, staffing availability in a geographic location and customer preferences, and can range from a few days to a few months. Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer.
We have evaluated the deliverables in our multiple-element arrangements and concluded that they are separate units of accounting if the delivered item or items have value to the customer on a standalone basis and delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We allocate revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on vendor specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element has been met.
Infrequently, Astro-Med recognizes revenue for non-recurring engineering (NRE) fees for product modification orders upon completion of agreed-upon milestones. Revenue is deferred for any amounts received prior to completion of milestones. Certain of our NRE arrangements include formal customer acceptance provisions. In such cases, we determine whether we have obtained customer acceptance for the specific milestone before recognizing revenue. NRE fees have not been significant in the periods presented herein.
Infrequently, Astro-Med receives requests from customers to hold product purchased from us for the customer’s convenience. Revenue is recognized for such bill and hold arrangements in accordance with the requirements of SEC Staff Accounting Bulletin No. 104 which requires, among other things, the existence of a valid business purpose for the arrangement; the transfer of ownership of the purchased product; a fixed delivery date that is reasonable and consistent with the buyer’s business purpose; the readiness of the product for shipment; the use of customary payment terms; no continuing performance obligation by us; and segregation of the product from our inventories.
Research and Development Costs: Astro-Med charges costs to expense in the period incurred, and these expenses are presented in the consolidated statement of income. Included in research and development expense are the following: salaries and benefits, external engineering service costs, engineering related information costs and supplies.
Foreign Currency Translation: The financial statements of foreign subsidiaries and branches are measured using the local currency as the functional currency. Foreign currency denominated assets and liabilities are translated into U.S. dollars at year-end exchange rates with the translation adjustment recorded as a component of accumulated comprehensive income (loss) in shareholders’ equity. Revenues and expenses are translated at the monthly average exchange rates. We do not provide for U.S. income taxes on foreign currency translation adjustments associated with our German subsidiary since its undistributed earnings are considered to be permanently invested. Our net foreign exchange losses were $323,000 and $219,000 for fiscal 2016 and 2015, respectively.
Advertising: Astro-Med expenses advertising costs as incurred. Advertising costs including advertising production, trade shows and other activities are designed to enhance demand for our products and amounted to approximately $1,058,000 and $1,717,000 in fiscal 2016 and 2015, respectively.
Long-Lived Assets: Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, as determined by the discounting of future cash flows. For both 2016 and 2015, these were no impairment charges for long-lived assets.
Assets Held for Sale: Assets held for sale are reported at the lower of cost or fair value. Cost to sell are accrued separately. Astro-Med’s former Grass facility located in Rockland, Massachusetts met the held for sale classification criteria for the period ended January 31, 2015. The Company estimated the fair value of the Rockland facility using the market values for similar properties and estimated the fair value less the cost to sell and was considered a Level 2 asset in as defined in ASC 820, “Fair Value Measurements.” Refer to Note 20, “Fair Value Measurements,” for further details.
Intangible Assets: Intangible assets include the value of customer relationships, non-competition agreements and backlog rights acquired in connection with business acquisitions and are stated at cost (fair value at acquisition) less accumulated amortization. These intangible assets have a definite life and are amortized over the assets’ useful lives using a systematic and rational basis which is representative of the assets’ use. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. If necessary, an impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. For both 2016 and 2015, there were no impairment charges for intangible assets.
Goodwill: Management evaluates the recoverability of goodwill annually or more frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is first qualitatively assessed to determine whether further impairment testing is necessary. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a two-step process is then performed. Step one compares the fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount exceeds the fair value of the reporting unit, step two is required to determine if there is an impairment of the goodwill. Step two compares the implied fair value of the reporting unit goodwill to the carrying amount of the goodwill. We estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long–term operating cash flow performance. In addition, the Company uses the market approach, which compares the reporting unit to publicly-traded companies and transactions involving similar business, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenue, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates.
We performed a qualitative assessment for our 2016 analysis of goodwill. Based on this assessment, management does not believe that it is more likely than not that the carrying value of the reporting units exceed their fair values. Accordingly, no further testing was performed as management believes that there are no impairment issues in regards to goodwill at this time.
Income Taxes: Astro-Med uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and tax basis of the assets and liabilities and are measured using enacted tax rates that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recognized when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. At January 31, 2016 and 2015, a valuation allowance was provided for deferred tax assets attributable to certain state R&D credit carryforwards.
Astro-Med accounts for uncertain tax positions in accordance with the guidance provided in ASC 740, “Accounting for Income Taxes.” This guidance describes a recognition threshold and measurement attribute for the financial statement disclosure of tax positions taken or expected to be taken in a tax return and requires recognition of tax benefits that satisfy a more-likely-than-not threshold. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure.
Net Income Per Common Share: Basic net income per share is based on the weighted average number of shares outstanding during the period. Diluted net income per share is based on the basic weighted average number of shares and potential common equivalent shares for stock options, restricted stock awards and restricted stock units outstanding during the period using the treasury stock method. In fiscal years 2016 and 2015, there were 425,200 and 156,600, respectively, of common equivalent shares that were not included in the computation of diluted net income per common share because their inclusion would be anti-dilutive.
Allowance for Doubtful Accounts: In circumstances where we are aware of a customer’s inability to meet its financial obligations, an allowance is established. The majority of accounts are individually evaluated on a regular basis and allowances are established to state such receivables at their net realizable value. The remainder of the allowance is based upon historical write-off experience and current market assessments.
Fair Value of Financial Instruments: Our financial instruments consist of cash and cash equivalents, investment securities, accounts receivable, a note receivable, a line of credit receivable and accounts payable. The carrying amount reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximates fair value due to the short-term nature of these items. Investment securities, all of which are available for sale, are carried in the consolidated balance sheets at fair value based on quoted market prices, when available. The note receivable is carried in the consolidated balance sheets at fair value based on the present value of the discounted cash flows over the life of the note.
The Company measures assets held for sale at fair value on a nonrecurring basis and records impairment charges when the assets are deemed to be impaired.
Share-Based Compensation: Share-based compensation expense is measured based on the estimated fair value of the share-based award when granted and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). We have estimated the fair value of each option on the date of grant using the Black-Scholes option-pricing model. Our estimate of share-based compensation requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), the risk-free interest rate and the Company’s dividend yield. The stock price volatility assumption is based on the historical weekly price data of our common stock over a period equivalent to the weighted average expected life of our options. Management evaluated whether there were factors during that period which were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. In determining the expected life of the option grants, the Company has observed the actual terms of prior grants with similar characteristics and the actual vesting schedule of the grant and has assessed the expected risk tolerance of different option groups. The risk-free interest rate is based on the actual U.S. Treasury zero coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend assumption is based upon the prior year’s average dividend yield. No compensation expense is recognized for options that are forfeited for which the employee does not render the requisite service. Our accounting for share-based compensation for restricted stock awards (RSA) and restricted stock units (RSU) is also based on the fair value method. The fair value of the RSUs and RSAs is based on the closing market price of the Company’s common stock on the grant date.
The cash flow from the tax benefits that are a result of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are classified as a cash inflow from financing activities and a cash outflow from operating activity. Tax deductions from certain stock option exercises are treated as being realized when they reduce taxes payable in accordance with relevant tax law.
Recent Accounting Pronouncements:
Leases
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842).” ASU 2016-02 will supersede current guidance related to accounting for leases and is intended to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities in the balance sheet for operating leases with lease terms greater than twelve months. The update also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (Q1 fiscal 2020 for Astro-Med), with early adoption permitted. At adoption, this update will be applied using a modified retrospective approach. The Company is currently evaluating the effect of this new guidance on the Company’s consolidated financial statements.
Income Taxes
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740).” ASU 2015-17 amended guidance applicable to the presentation of income taxes and requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. This amendment represents a change in accounting principle and is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. As permitted by the standard, we adopted the new presentation retrospectively, beginning on February 1, 2014. As a result, all of the Company’s deferred taxes are presented as non-current in the accompanying consolidated balance sheets for the periods ended January 31, 2016 and 2015.
Inventory
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330).” ASU 2015-11 requires inventory to be measured at the lower of cost and net realizable value instead of at lower of cost or market. This guidance does not apply to inventory that is measured using last-in, first out (LIFO) or the retail inventory method but applies to all other inventory including inventory measured using first-in, first-out (FIFO) or the average cost method. ASU 2015-11 will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years (Q1 fiscal 2018 for Astro-Med) and should be applied prospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. Astro-Med is currently evaluating the effect of this new guidance on the Company’s consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board (IASB) to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. In August 2015, the FASB modified ASU 2014-09 to be effective for annual reporting periods beginning after December 15, 2017 (Q1 fiscal 2019 for Astro-Med), including interim periods within that reporting period. As modified, the FASB permits the adoption of the new revenue standard early, but not before annual periods beginning after December 15, 2016. Entities have the choice to apply ASU 2014-09 either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information. The Company is currently evaluating the requirements of ASU 2014-09 and has not yet determined its impact on the Company’s consolidated financial statements.
|
The purchase price of the acquisition has been allocated on the basis of the fair value as follows:
(In thousands) | ||||
Accounts Receivable |
$ | 50 | ||
Identifiable Intangible Assets |
3,780 | |||
Goodwill |
3,530 | |||
|
|
|||
Total Purchase Price |
$ | 7,360 | ||
|
|
The following table reflects the fair value of the acquired identifiable intangible assets and related estimated useful lives:
(In thousands) | Fair Value |
Useful Life (Years) |
||||||
Customer Contract Relationships |
$ | 2,830 | 10 | |||||
Non-Competition Agreement |
950 | 5 | ||||||
|
|
|||||||
Total |
$ | 3,780 | ||||||
|
|
|
Intangible assets are as follows:
January 31, 2016 | January 31, 2015 | |||||||||||||||||||||||
(In thousands) | Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||||||||||
Miltope: |
||||||||||||||||||||||||
Customer Contract Relationships |
$ | 3,100 | $ | (758 | ) | $ | 2,342 | $ | 3,100 | $ | (402 | ) | $ | 2,698 | ||||||||||
Backlog |
— | — | — | 300 | (300 | ) | — | |||||||||||||||||
RITEC: |
||||||||||||||||||||||||
Customer Contract Relationships |
2,830 | (31 | ) | 2,799 | — | — | — | |||||||||||||||||
Non-Competition Agreement |
950 | (111 | ) | 839 | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Intangible assets, net |
$ | 6,880 | $ | (900 | ) | $ | 5,980 | $ | 3,400 | $ | (702 | ) | $ | 2,698 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amortization expense for the next five years is as follows:
(In thousands) | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||
Estimated amortization expense |
$ | 715 | $ | 774 | $ | 769 | $ | 803 | $ | 706 |
|
The fair value, amortized cost and gross unrealized gains and losses of the securities are as follows:
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
(In thousands) | ||||||||||||||||
January 31, 2016 |
||||||||||||||||
State and Municipal Obligations |
$ | 10,363 | $ | 15 | $ | (2 | ) | $ | 10,376 | |||||||
|
|
|
|
|
|
|
|
|||||||||
January 31, 2015 |
||||||||||||||||
State and Municipal Obligations |
$ | 15,150 | $ | 26 | $ | (2 | ) | $ | 15,174 | |||||||
|
|
|
|
|
|
|
|
The contractual maturity dates of these securities are as follows:
January 31 | ||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Less than one year |
$ | 3,833 | $ | 9,470 | ||||
One to three years |
6,543 | 5,704 | ||||||
|
|
|
|
|||||
$ | 10,376 | $ | 15,174 | |||||
|
|
|
|
|
The components of inventories are as follows:
January 31 | ||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Materials and Supplies |
$ | 10,197 | $ | 10,600 | ||||
Work-in-Progress |
1,025 | 765 | ||||||
Finished Goods |
7,491 | 7,372 | ||||||
|
|
|
|
|||||
18,713 | 18,737 | |||||||
Inventory Reserve |
(3,823 | ) | (3,155 | ) | ||||
|
|
|
|
|||||
Balance at January 31 |
$ | 14,890 | $ | 15,582 | ||||
|
|
|
|
|
Accrued expenses consisted of the following:
January 31 | ||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Warranty |
$ | 400 | $ | 375 | ||||
Product Replacement Cost Reserve |
278 | 353 | ||||||
Professional Fees |
328 | 256 | ||||||
Executive Retirement Package |
— | 250 | ||||||
Dealer Commissions |
221 | 163 | ||||||
Other |
982 | 946 | ||||||
|
|
|
|
|||||
$ | 2,209 | $ | 2,343 | |||||
|
|
|
|
|
The changes in the balance of accumulated other comprehensive loss by component are as follows:
(In thousands) | Foreign Currency Translation Adjustments |
Unrealized Holding Gain (Loss) on Available for Sale Securities |
Total | |||||||||
Balance at January 31, 2014 |
$ | 152 | $ | 24 | $ | 176 | ||||||
Other Comprehensive Loss |
(866 | ) | (9 | ) | (875 | ) | ||||||
Amounts Reclassified to Net Income |
— | — | — | |||||||||
|
|
|||||||||||
Net Other Comprehensive Loss |
(866 | ) | (9 | ) | (875) | |||||||
|
|
|||||||||||
Balance at January 31, 2015 |
(714 | ) | 15 | (699 | ) | |||||||
Other Comprehensive Loss |
(269 | ) | (7 | ) | (276 | ) | ||||||
Amounts Reclassified to Net Income |
— | — | — | |||||||||
|
|
|||||||||||
Net Other Comprehensive Loss |
(269 | ) | (7 | ) | (276 | ) | ||||||
|
|
|||||||||||
Balance at January 31, 2016 |
$ | (983 | ) | $ | 8 | $ | (975 | ) | ||||
|
|
|
The components of income before income taxes are as follows:
Years Ended January 31 |
||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Domestic |
$ | 5,982 | $ | 5,401 | ||||
Foreign |
927 | 1,531 | ||||||
|
|
|
|
|||||
$ | 6,909 | $ | 6,932 | |||||
|
|
|
|
The components of the provision for income taxes are as follows:
Years Ended January 31 |
||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Current: |
||||||||
Federal |
$ | 1,930 | $ | 1,666 | ||||
State |
470 | 466 | ||||||
Foreign |
276 | 535 | ||||||
|
|
|
|
|||||
2,676 | 2,667 | |||||||
|
|
|
|
|||||
Deferred: |
||||||||
Federal |
$ | (402 | ) | $ | (290 | ) | ||
State |
126 | (107 | ) | |||||
Foreign |
(16 | ) | — | |||||
|
|
|
|
|||||
(292 | ) | (397 | ) | |||||
|
|
|
|
|||||
$ | 2,384 | $ | 2,270 | |||||
|
|
|
|
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate of 34% in both fiscal 2016 and 2015 to income before income taxes due to the following:
Years Ended January 31 |
||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Income Tax Provision at Statutory Rate |
$ | 2,349 | $ | 2,357 | ||||
State Taxes, Net of Federal Tax Effect |
277 | 233 | ||||||
Change in Valuation Allowance |
116 | — | ||||||
Change in Reserves Related to ASC 740 Liability |
(67 | ) | 23 | |||||
Meals and Entertainment |
38 | 41 | ||||||
Domestic Production Deduction |
(134 | ) | (164 | ) | ||||
Share-Based Compensation |
21 | (25 | ) | |||||
Tax-Exempt Income |
(23 | ) | (24 | ) | ||||
R&D Credits |
(176 | ) | (135 | ) | ||||
Foreign Rate Differential |
(65 | ) | (56 | ) | ||||
Other Permanent Differences and Miscellaneous, Net |
48 | 20 | ||||||
|
|
|
|
|||||
$ | 2,384 | $ | 2,270 | |||||
|
|
|
|
The components of deferred income tax expense arise from various temporary differences and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows:
January 31 | ||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Deferred Tax Assets: |
||||||||
Inventory |
$ | 1,948 | $ | 1,666 | ||||
Share-Based Compensation |
830 | 572 | ||||||
State R&D Credits |
583 | 371 | ||||||
Compensation Accrual |
346 | 417 | ||||||
ASC 740 Liability Federal Benefit |
237 | 304 | ||||||
Deferred Service Contract Revenue |
200 | 235 | ||||||
Warranty Reserve |
149 | 140 | ||||||
Reserve for Doubtful Accounts |
140 | 116 | ||||||
Foreign Tax Credit |
426 | 356 | ||||||
Currency Translation Adjustment |
36 | — | ||||||
Other |
207 | 298 | ||||||
|
|
|
|
|||||
5,102 | 4,475 | |||||||
Deferred Tax Liabilities: |
||||||||
Accumulated Tax Depreciation in Excess of Book Depreciation |
1,355 | 766 | ||||||
Deferred Gain on Asset Held for Sale |
76 | 785 | ||||||
Currency Translation Adjustment |
— | 36 | ||||||
Other |
117 | 87 | ||||||
|
|
|
|
|||||
1,548 | 1,674 | |||||||
|
|
|
|
|||||
Subtotal |
3,554 | 2,801 | ||||||
Valuation Allowance |
(583 | ) | (255 | ) | ||||
|
|
|
|
|||||
Net Deferred Tax Assets |
$ | 2,971 | $ | 2,546 | ||||
|
|
|
|
The changes in the balance of unrecognized tax benefits, excluding interest and penalties are as follows:
2016 | 2015 | |||||||
(In thousands) | ||||||||
Balance at February 1 |
$ | 707 | $ | 715 | ||||
Increases in prior period tax positions |
— | — | ||||||
Increases in current period tax positions |
49 | 87 | ||||||
Reductions related to lapse of statute of limitations |
(165 | ) | (95 | ) | ||||
|
|
|
|
|||||
Balance at January 31 |
$ | 591 | $ | 707 | ||||
|
|
|
|
|
The following table summarizes our contractual obligations:
Total | 2017 | 2018 | 2019 | 2020 | 2021 and Thereafter |
|||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Purchase Commitments* |
$ | 22,225 | $ | 22,123 | $ | 28 | $ | 4 | $ | 70 | $ | — | ||||||||||||
Operating Lease Obligations |
668 | 300 | 251 | 103 | 14 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 22,893 | $ | 22,423 | $ | 279 | $ | 107 | $ | 84 | $ | — | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
* | Purchase commitments consist primarily of inventory and equipment purchase orders made in the ordinary course of business. |
|
Summarized below are the Net Sales and Segment Operating Profit (both in dollars and as a percentage of Net Sales) for each reporting segment:
($ in thousands) | Net Sales | Segment Operating Profit | Segment Operating Profit % of Net Sales |
|||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||
QuickLabel |
$ | 67,127 | $ | 59,779 | $ | 9,300 | $ | 7,259 | 13.9 | % | 12.1 | % | ||||||||||||
T&M |
27,531 | 28,568 | 3,664 | 5,627 | 13.3 | % | 19.7 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 94,658 | $ | 88,347 | 12,964 | 12,886 | 13.7 | % | 14.6 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Corporate Expenses |
7,030 | 5,655 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Operating Income |
5,934 | 7,231 | ||||||||||||||||||||||
Other Income (Expense) |
975 | (299 | ) | |||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Income before Income Taxes |
6,909 | 6,932 | ||||||||||||||||||||||
Income Tax Provision |
2,384 | 2,270 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net Income |
$ | 4,525 | $ | 4,662 | ||||||||||||||||||||
|
|
|
|
Other information by segment is presented below:
(In thousands) | Assets | |||||||
2016 | 2015 | |||||||
QuickLabel |
$ | 27,143 | $ | 24,874 | ||||
T&M |
28,570 | 22,323 | ||||||
Corporate* |
22,250 | 27,133 | ||||||
|
|
|
|
|||||
Total |
$ | 77,963 | $ | 74,330 | ||||
|
|
|
|
* | Corporate assets consist principally of cash and cash equivalents, securities available for sale, and building held for sale. |
(In thousands) | Depreciation and Amortization |
Capital Expenditures | ||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
QuickLabel |
$ | 690 | $ | 678 | $ | 2,284 | $ | 1,408 | ||||||||
T&M |
1,375 | 1,385 | 777 | 839 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 2,065 | $ | 2,063 | $ | 3,061 | $ | 2,247 | ||||||||
|
|
|
|
|
|
|
|
Presented below is selected financial information by geographic area:
(In thousands) | Net Sales | Long-Lived Assets* | ||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
United States |
$ | 68,316 | $ | 61,494 | $ | 15,290 | $ | 10,422 | ||||||||
Europe |
16,830 | 18,181 | 290 | 383 | ||||||||||||
Canada |
4,487 | 3,934 | 207 | 272 | ||||||||||||
Asia |
1,741 | 1,408 | — | — | ||||||||||||
Central and South America |
2,436 | 1,919 | — | — | ||||||||||||
Other |
848 | 1,411 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 94,658 | $ | 88,347 | $ | 15,787 | $ | 11,077 | ||||||||
|
|
|
|
|
|
|
|
* | Long-lived assets excludes goodwill assigned to the T&M segment of $4.5 million and $1.0 million at January 31, 2016 and 2015, respectively. |
|
The Company regularly assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Activity in the product warranty liability, which is included in other accrued expenses in the accompanying consolidated balance sheet, is as follows:
January 31 | ||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Balance, beginning of the year |
$ | 375 | $ | 355 | ||||
Warranties issued |
887 | 546 | ||||||
Settlements made |
(862 | ) | (526 | ) | ||||
|
|
|
|
|||||
Balance, end of the year |
$ | 400 | $ | 375 | ||||
|
|
|
|
|
Assets measured at fair value on a recurring basis are summarized below:
January 31, 2016 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In thousands) | ||||||||||||||||
Money market funds (included in cash and cash equivalents) |
$ | 4,340 | $ | – | $ | – | $ | 4,340 | ||||||||
State and municipal obligations (included in securities available for sale) |
– | 10,376 | – | 10,376 | ||||||||||||
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Total |
$ | 4,340 | $ | 10,376 | $ | – | $ | 14,716 | ||||||||
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January 31, 2015 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In thousands) | ||||||||||||||||
Money market funds (included in cash and cash equivalents) |
$ | 3,028 | $ | – | $ | – | $ | 3,028 | ||||||||
State and municipal obligations (included in securities available for sale) |
– | 15,174 | – | 15,174 | ||||||||||||
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Total |
$ | 3,028 | $ | 15,174 | $ | – | $ | 18,202 | ||||||||
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Non-financial assets measured at fair value on a non-recurring basis are summarized below:
January 31, 2015 |
Level 1 | Level 2 | Level 3 | |||||||||
(In thousands) | ||||||||||||
Asset Held for Sale |
$ | – | $ | 1,900 | $ | – | ||||||
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