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ALOT > SEC Filings for ALOT > Form 10-K on 8-Apr-2013All Recent SEC Filings

Show all filings for ASTRO MED INC /NEW/ | Request a Trial to NEW EDGAR Online Pro

Form 10-K for ASTRO MED INC /NEW/


Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations


Astro-Med is a multi-national enterprise, which designs, develops, manufactures, distributes and services a broad range of products that acquire, store, analyze and present data in multiple formats. The Company organizes its structure around a core set of competencies, including research and development, manufacturing, service, marketing and distribution. It markets and sells its products and services through the following two sales product groups:

Test and Measurement Product Group (T&M)-offers a suite of Rugged Printer products designed for military and commercial applications to be used in the avionics industry to print weather maps, communications and other critical flight information. T&M also comprises a suite of telemetry recorder products sold to the aerospace and defense industries, as well as portable data acquisition recorders, which offer diagnostic and test functions to a wide range of manufacturers including automotive, energy, paper and steel fabrication.

QuickLabel Systems Product Group (QuickLabel)-offers label printer hardware, labeling software, servicing contracts, and label and ink consumable products that digitally print color labels on a broad range of label and tag substrates.

On January 31, 2013, the Company completed the sale of substantially all of the assets of its Grass Technologies Product Group (Grass) in order to focus on its existing core businesses. Grass manufactured polysomnography and electroenecephalography systems for both clinical and research use along with the related accessories and proprietary electrodes. Consequently, the Company has classified the results of operations of its Grass segment as discontinued operations for all periods presented.

Astro-Med markets and sells its products and services globally through a diverse distribution structure of direct sales personnel, manufacturer's representatives and authorized dealers that deliver a full complement of branded products and services to customers in our respective markets.

Our growth strategy centers on organic growth through product innovation made possible by research and development initiatives, as well as strategic acquisitions that fit into existing core businesses. Research and development activities are funded and expensed by the Company at approximately 6.2% of annual sales for fiscal 2013. Including research and development expenditures of the discontinued Grass segment, the Company's, spending on research and development in 2013 was 8.0% of sales (excluding sales of the discontinued Grass Segment), a level that the Company anticipates will continue in 2014. We also continue to invest in sales and marketing initiatives by expanding the existing sales force and using various marketing campaigns to achieve our goals of sales growth and increased profitability notwithstanding today's challenging economic environment.

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Results of Operations

The following table presents the net sales of each of the Company's segments, as well as the percentage of total sales and change from prior year. As previously noted, the Company's Grass segment has been classified as a discontinued operation and therefore not presented in the table or discussion below.

($ in thousands)                           2013                                            2012
                     Net            As a % of              % Change             Net            As a % of
                    Sales        Total Net Sales        Over Prior Year        Sales        Total Net Sales
T&M                $ 17,636                  28.8 %                  2.9 %    $ 17,138                  28.2 %
QuickLabel           43,588                  71.2 %                   -  %      43,586                  71.8 %

Total              $ 61,224                 100.0 %                  0.8 %    $ 60,724                 100.0 %

Fiscal 2013 compared to Fiscal 2012

Astro-Med's sales in fiscal 2013 were $61,224,000, representing a slight increase as compared to prior year sales of $60,724,000. Domestic sales of $44,613,000 increased 2.4% from the prior year sales of $43,570,000. International sales of $16,611,000 includes an unfavorable impact of $846,000 due to foreign exchange rates and reflects a 3.2% decrease as compared to the prior year.

Hardware sales in fiscal 2013 were $25,169,000, a 9.2% increase as compared to prior year's sales of $23,044,000 and represents 41.1% of total sales as compared to 37.9% of sales in the prior year. Both product groups achieved growth in the current year, with T&M's hardware sales up 5.0% and QuickLabel's hardware sales up 17.2%. The primary drivers of this increase relate to increases in T&M's Rugged and TMX product line sales and the increase in sales due to the introduction of QuickLabel's new Kiaro! product line. The increase in the current year's hardware sales was tempered by lower sales of T&M's recorder and data acquisition product lines and QuickLabel's Vivo! and Zeo! product lines.

Consumable sales in fiscal 2013 were $32,540,000, representing a 3.8% decrease as compared to prior year sales of $33,841,000. The key driver of the overall decrease in consumable sales for the current fiscal year was primarily traceable to the decline in label and tag sales in the QuickLabel product group due to the January 2012 divestiture of the Asheboro, North Carolina facility, which contributed sales of approximately $4,100,000 in fiscal 2012. The decline in consumable product sales for the current year was tempered by an increase in sales of digital color printer supplies within the QuickLabel product group, which were up 16.9% over the prior year, as well as a slight increase in sales of QuickLabel's thermal transfer ribbon.

Service and other sales revenue in fiscal 2013 were $3,515,000, a 8.4% decrease compared to prior year sales of $3,839,000 due to lower repair and service revenue.

The Company achieved $23,728,000 in gross profit for fiscal 2013 and generated a gross profit margin of 38.8%, an increase as compared to prior year's gross profit margin of 36.3%. The increase in gross profit margin for the current year is due to lower manufacturing costs and favorable product mix.

Operating expenses for the current year were $20,802,000, representing a 1.2% decrease from prior year's operating expenses of $21,062,000. Specifically, selling and marketing expenses decreased 2.9% from prior year to $12,412,000 in fiscal 2013, representing 20.3% of sales, a slight decrease as compared to the prior year's 21.0% of sales. The decrease in selling and marketing was primarily the result of lower wages and benefits. General and administrative (G&A) expenses increased 15.4% from prior year to $4,574,000 in fiscal 2013. The higher G&A expense was primarily due to an increase in wages and benefits for the current year, as well as an increase in professional fees spending as compared to the prior year. Funding of research & development (R&D) in fiscal 2013 has decreased 11.7% to $3,816,000. The decrease in R&D for fiscal 2013 is primarily due to the decrease in personnel costs and in prototype and outside research and development spending compared to the prior year. The R&D spending level for fiscal 2013 represents 6.2% of net sales, a decline from the prior year's level of 7.1%.

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In fiscal 2012, the Company recognized a $681,000 loss on the sale of our manufacturing operations in Asheboro, North Carolina.

Other expense in fiscal 2013 was $41,000 as compared to other income of $316,000 in fiscal 2012. This decrease for the current year is primarily the result of the $300,000 of income recognized in fiscal 2012 related to the disposition of a key-man life insurance policy, as well as a decrease in investment income in the current year. The decrease was slightly tempered by a decrease foreign exchange loss recognized in the current year.

Astro-Med's fiscal 2013 pretax income was reduced by approximately $480,000 related to stock-based compensation expense as compared to fiscal 2012 pretax income, which was reduced by approximately $208,000 in stock-based compensation expense.

During fiscal 2013, the Company recognized income tax expense on income from continuing operations of $847,000 and had an effective tax rate of 29.4%. This compares to an income tax benefit on income from continuing operations of $97,000 in fiscal 2012.

Income from continuing operations for fiscal 2013 was $2,038,000, providing a return of 3.3% on sales and generating an EPS of $0.27 per diluted share. On a comparative basis, fiscal 2012 income from continuing operations was $741,000 or $0.10 per diluted share and includes a $450,000 loss, net of tax, related to the sale of the Asheboro operations, equal to $0.06 per diluted share and income of $300,000 related to key-man life insurance proceeds received, equal to $0.04 per diluted share.

Discontinued Operation

On January 31, 2013, the Company completed the sale of substantially all of the assets of its Grass Technologies Product Group (Grass) for a purchase price of $18,600,000. Consequently, the Company has classified the results of operations of its Grass segment as discontinued operations for all periods presented.

Results for discontinued operations are as follows:

      ($ in thousands)                                      2013         2012
      Net Sales                                           $ 19,195     $ 18,469
      Gross Profit                                        $ 10,123     $  9,711
      Gain on Sale of Assets of Discontinued Operations   $ 10,162            -
      Income from Discontinued Operations, net of taxes   $  8,729     $  2,391

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Segment Analysis

Astro-Med reports two segments consistent with its sales product groups: Test & Measurement (T&M) and QuickLabel Systems (QuickLabel). Segment performance is evaluated based on the operating segment's profit before corporate and financial administration expenses.

The following table summarizes selected financial information by segment. As previously noted, the Company's Grass segment has been classified as a discontinued operation for all periods presented.

                                                                                                         Segment Operating Profit as
($ in thousands)                         Net Sales                 Segment Operating Profit                   a % of Net Sales
                                    2013           2012             2013               2012               2013                  2012
T&M                               $  17,636      $  17,138      $      3,109        $     2,425                17.6 %              14.1 %
QuickLabel                           43,588         43,586             4,380              2,553                10.0 %               5.9 %

Total                             $  61,224      $  60,724             7,489              4,978                12.2 %               8.2 %

Corporate Expenses                                                     4,563              3,969
Loss on Sale of Asheboro
Operations*                                                               -                (681 )

Operating Income                                                       2,926                328
Other Income (Expense), Net                                              (41 )              316

Income from Continuing
Operations Before Income Taxes                                         2,885                644
Income Tax Provision (Benefit)
from Continuing Operations                                               847                (97 )

Income from Continuing
Operations                                                             2,038                741
Income from Discontinued
Operations, Net of Taxes                                               8,729              2,391

Net Income                                                      $     10,767        $     3,132

* The Asheboro operations were part of the QuickLabel System segment.

Test & Measurement

T&M's sales increased 2.9% in fiscal 2013 to $17,636,000 from $17,138,000 in the prior year. The increase is primarily due to the 17.2% growth in the Rugged printer product line due to the continued increase in contract sales. Also contributing to the increase in sales was the continued increase in demand for the TMX product line, as current year sales grew 23.5% as compared to the prior year. The current year sales increase is tempered by declining sales in the data acquisition and recorder product lines as compared to the prior year. T&M's segment operating profit was $3,109,000 in fiscal 2013, reflecting a profit margin of 17.6%, an improvement as compared to the prior year's segment operating profit of $2,425,000 and related profit margin of 14.1%. The fiscal 2013 increase in operating profit is an outgrowth of higher sales and lower operating expenses.

QuickLabel Systems

QuickLabel Systems sales remained flat in fiscal 2013 with sales of $43,588,000 compared to sales of $43,586,000 in the prior year. The consistent result was primarily due to the decline in label and tag sales in the QuickLabel product group due to the January 2012 divestiture of the Asheboro, North Carolina facilities, which contributed sales of approximately $4,100,000 in fiscal 2012, offset by the 16.9% increase in the consumable sales of digital color printer supplies; sales of the new Kiaro! product line, which was introduced in July 2012; as well as the double-digit increase in sales of monochromatic printers as compared to the prior year. The segment operating profit margin of 10.0% for the current year has improved relative to a 5.9% profit margin for the previous year. The current year increase in QuickLabel's profit margin is due to lower manufacturing costs, favorable product mix and lower selling and marketing expenses.

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Liquidity and Capital Resources

The Company expects to finance its future working capital needs, capital expenditures and acquisition requirements through internal funds and believes that cash provided by operations will be sufficient to meet our operating and capital needs for at least the next twelve months. To the extent our capital and liquidity requirements are not satisfied internally, we may utilize a $5.0 million revolving bank line of credit, all of which is currently available. Borrowings under this line of credit bear interest at either a fluctuating rate equal to 75 basis points below the base rate, as defined in the agreement, or at a fixed rate equal to 150 basis points above LIBOR.

Astro-Med's Statements of Cash Flows for the two years ended January 31, 2013 and 2012 are included on page 36. Net cash flows provided by operating activities was $3,863,000 in the current year compared to net cash provided by operating activities of $5,472,000 in the previous year. The decrease in net cash flow from operations for the current year is attributed to increased working capital requirements, as both the accounts receivable and inventory balances increased during the current year and accounts payable and accrued expenses decreased in the current year as compared to prior year. The accounts receivable collection cycle was 51 days sales outstanding for both January 31, 2013 and 2012. Inventory days on hand increased to 109 days at the end of the current fiscal year from 105 days at prior year end.

Net cash flow provided by investing activities for fiscal 2013 was $18,466,000, which included cash proceeds of $16,800,000 from the sale of the assets of Company's Grass Technologies Product Group. The increase in cash proceeds was slightly offset by cash used for capital expenditures of approximately $849,000, including $327,000 for information technology, $161,000 for tools and dies, $156,000 for land and building improvements, $123,000 for machinery and equipment and $82,000 for furniture and fixtures and other capital expenditures.

Included in net cash flow used by financing activities for fiscal 2013 were dividends paid of $2,595,000. Dividends paid in fiscal 2012 were $2,055,000. The Company's annual dividend per share was $0.35 in fiscal 2013 and $0.28 in fiscal 2012. The Company purchased 110,000 shares of its common stock in fiscal 2013 at a price of $7.00 per share. Since the inception of the common stock buy back program in fiscal 1997, the Company has repurchased a total of 1,530,010 shares of its common stock. At January 31, 2013, the Company's Board of Directors has authorized the purchase of an additional 390,000 shares of the Company's common stock in the future.

Contractual Obligations, Commitments and Contingencies

Astro-Med is subject to contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, such as:
contract and employment claims; workers compensation claims; product liability claims; warranty claims; and claims related to modification, adjustment or replacement of component parts of units sold. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on our consolidated financial position or results of operations. It is possible, however, that results of operations for any 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.

Critical Accounting Policies and Estimates

Astro-Med's discussion and analysis of financial condition and results of operations are based upon the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these

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judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements. These judgments and estimates are based on the Company's historical experience, current trends and information available from other sources, as appropriate. If different conditions result from those assumptions used in our judgments, the results could be materially different from our estimates. We believe the following are our most critical accounting policies as they require significant judgments and estimates in the preparation of our financial statements:

Revenue Recognition: Our 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. When other significant obligations remain after products are delivered, revenue is recognized only after such obligations are fulfilled. 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. When a sale arrangement involves training or installation, the deliverables in the arrangement are evaluated to determine whether they represent multiple element arrangements. This evaluation occurs at inception of the arrangement and as each item in the arrangement is delivered. The total fee from the arrangement is allocated to each unit of accounting based on its relative fair value. Fair value for each element is established generally based on the sales price charged when the same or similar element is sold separately. 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 our 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 have been met. The amount of product revenue recognized is affected by our judgments as to whether an arrangement includes multiple elements.

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.

Infrequently, the Company receives requests from customers to hold product being purchased from us for the customers' convenience. We recognize revenue for such bill and hold arrangements provided the transaction meets the following criteria: a valid business purpose for the arrangement exists; risk of ownership of the purchased product has transferred to the buyer; there is a fixed delivery date that is reasonable and consistent with the buyer's business purpose; the product is ready for shipment; the payment terms are customary; we have no continuing performance obligation in regards to the product and the product has been segregated from our inventories.

Warranty Claims and Bad Debts: Provisions for the estimated costs for future product warranty claims and bad debts are recorded in cost of sales and general and administrative expense, respectively, at the time a sale is recorded. The amounts recorded are generally based upon historically derived percentages while also factoring in any new business conditions that might impact the historical analysis such as new product introduction for warranty and bankruptcies of particular customers for bad debts. We also periodically evaluate the adequacy of our reserves for warranty and bad debts recorded in its consolidated balance sheet as a further test to ensure the adequacy of the recorded provisions. Warranty and bad debt analysis often involves subjective analysis of a particular customer's ability to pay. As a result, significant judgment is required in determining the appropriate amounts to record and such judgments may prove to be incorrect in the future. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to the actual amounts.

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Inventories: Inventories are stated at the lower of cost (first-in, first-out) or market. The Company records provisions to write-down obsolete and excess inventory to its estimated net realizable value. The process for evaluating obsolete and excess inventory consists of analyzing the inventory supply on hand and estimating the net realizable value of the inventory based on historical experience, current business conditions and anticipated future sales. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to actual experience.

Income Taxes: A valuation allowance is established when it is "more-likely-than-not" that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence must be considered, including our performance, the market environment in which we operate, length of carryforward periods, existing sales backlog and future sales projections. If actual factors and conditions differ materially from the estimates made by management, the actual realization of the net deferred tax assets or liabilities could vary materially from the amounts previously recorded. At January 31, 2013, the Company has provided valuation allowances for future tax benefits resulting from certain R&D tax credits which could expire unused.

The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions. Although guidance on the accounting for uncertain income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what we have estimated, our income tax expense could be materially impacted.

Long-Lived Assets and Goodwill: The impairment of 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. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset.

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. During the fourth quarter of fiscal 2012, we adopted new accounting guidance which simplifies goodwill impairment testing. Under the new guidance, 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 . . .

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