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ALOT > SEC Filings for ALOT > Form 10-Q on 4-Jun-2013All Recent SEC Filings

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Form 10-Q for ASTRO MED INC /NEW/


4-Jun-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Business Overview

This section should be read in conjunction with Astro-Med's Condensed Consolidated Financial Statements included elsewhere herein and our Annual Report on Form 10-K for the fiscal year ended January 31, 2013.

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. We market and sell our products and services through the following two product groups:

Test and Measurement Product Group (T&M)-offers a suite of Ruggedized 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 manufactures and markets 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, service 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.

Results of Operations

Three Months Ended May 4, 2013 vs. Three Months Ended April 28, 2012

Net sales by product group and current quarter percentage change over prior year
for the three months ended May 4, 2013 and April 28, 2012 were:



                                         As a                             As a           % Change
                          May 4,         % of           April 28,         % of             Over
(Dollars in thousands)     2013        Net Sales          2012          Net Sales       Prior Year
T&M                      $  4,089            26.4 %    $     3,972            27.7 %            2.9 %
QuickLabel                 11,396            73.6 %         10,364            72.3 %           10.0 %

Total                    $ 15,485           100.0 %    $    14,336           100.0 %            8.0 %

Net sales for the first quarter of the current year were $15,485,000, representing an 8.0% increase as compared to the previous year's first quarter sales of $14,336,000. Sales through the domestic channels for the current quarter were $10,694,000, an increase of 2.4% over the prior year. International shipments for the first quarter of the current year were $4,791,000, representing an 23.0% increase from the previous year. Current year's first quarter international sales include an unfavorable foreign exchange rate impact of $60,000.

Hardware sales in the current quarter were $5,638,000, a slight increase compared to prior year's first quarter sales of $5,558,000. The current quarter increase is primarily due to increased sales of QuickLabel's color printer product line, as sales were up 45.4% in the current period compared to prior year first quarter sales. Also contributing to the current quarter increase in hardware sales is the continued increase in demand for T&M's Ruggedized products, as sales have increased 20.5% as compared to the prior year. The


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overall hardware sales increase is somewhat tempered by lower sales in QuickLabel's monochromatic printer line and T&M's recorder product line, although T&M's new TMX recorder and Dash MX product lines reported increases year over year.

Consumables sales in the current quarter were $8,902,000, representing a 12.4% increase over prior year's first quarter consumable sales of $7,921,000. The current quarter increase in consumable sales is primarily due to the double-digit increase in both digital color printer supplies and label and tag product sales in the QuickLabel segment.

Service and other revenues of $945,000 in the current quarter were up from prior year's first quarter service and other revenues of $857,000, primarily due to the increase in parts and service revenue during the quarter.

Current year first quarter gross profit was $5,105,000, reflecting a 7.2% decline as compared to prior year's first quarter gross profit of $5,499,000. The Company's gross profit margin of 33.0% in the current quarter reflects a decrease from the prior year's first quarter gross profit margin of 38.3%. The lower gross profit and related margin for the current quarter as compared to prior year is primarily attributable to $672,000 in product replacement program costs recognized in the current quarter related to replacing materials on certain of T&M's Ruggedized printers after the Company discovered that one of its suppliers was using non-conforming material in the cover of the power supply used in certain models. Astro-Med intends to seek full recovery from the supplier for all costs and any other damages associated with this issue since the supplier deviated from the agreed upon specifications for the power supply while providing certificates of conformance to the original specifications. Also contributing to the lower gross profits were certain one-time costs related to the deployment of the LEAN manufacturing process.

Operating expenses for the current quarter were $5,827,000, a 14.9% increase as compared to prior year's first quarter operating expenses of $5,071,000. Specifically, selling and marketing expenses for the current quarter increased 17.1% to $3,572,000 as compared to the previous year's first quarter selling and marketing expenses of $3,051,000. The increase in selling and marketing for the current quarter was primarily due to increases in wages and benefits. G&A expenses increased 10.2% to $1,142,000 in the first quarter of the current year as compared to prior year's first quarter G&A expenses of $1,036,000. The increase in G&A was primarily due to an increase in wages and benefits and travel spending, tempered by a decline in professional service costs. Investment in R&D in the first quarter of the current year of $1,113,000 represents a 13.1% increase compared to prior year's first quarter investment of $984,000. The current quarter spending in R&D represents 7.2% of sales, an increase as compared to prior year's first quarter level of 6.9%.

First quarter operating loss of $722,000, resulted in a negative operating profit margin of 4.7%, lower as compared to the prior year's first quarter operating income of $428,000 and related operating margin of 3.0%. The decrease in operating income and related margin is primarily attributable to $672,000 of product replacement program costs recognized this quarter as discussed above, as well as higher operating expenses in the current quarter.


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Other expense during the first quarter was $36,000 compared to other expense of $13,000 in the first quarter of the previous year. The increase in expense was primarily due to the increase in foreign exchange loss recognized in the first quarter of the current year.

The Company recognized a $319,000 tax benefit for the current quarter as a result of the $758,000 loss from continuing operations. This compares to the prior year's first quarter income tax benefit for continued operations of $144,000, which included an expense of $141,000 on the quarter's pretax income from continuing operations and a benefit $285,000 related to the favorable resolution of a previously uncertain tax position.

The Company reported a $439,000 loss from continuing operations for the first quarter of the current year, reflecting a negative return on sales of 2.8% and generating a loss of $0.06 per diluted share. On a comparative basis, in the prior year's first quarter, the Company recognized income from continuing operations of $559,000, reflecting a return on sales of 3.9% and an EPS of $0.07 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:

                                                            May 4,        April 28,
 (In thousands)                                              2013           2012
 Net Sales                                                  $ 1,745      $     4,089
 Gross Profit                                               $    48      $     1,872
 Income (Loss) from Discontinued Operations, net of taxes   $   (10 )    $       278

Segment Analysis

The Company reports two segments consistent with its product groups: Test & Measurement (T&M) and QuickLabel Systems (QuickLabel). The Company evaluates segment performance based on the segment profit before corporate and financial administration expenses.


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Summarized below are the Net Sales and Segment Operating Profit for each reporting segment:

                                                                 Three Months Ended
                                                  Net Sales                    Segment Operating Profit
                                           May 4,         April 28,          May 4,              April 28,
(In thousands)                              2013            2012              2013                 2012
T&M                                       $  4,089       $     3,972       $       201          $       543
QuickLabel                                  11,396            10,364               891                  903

Total                                     $ 15,485       $    14,336             1,092                1,446

Product Replacement Related Costs                                                  672                   -
Corporate Expenses                                                               1,142                1,018

Operating Income (Loss)                                                           (722 )                428
Other Expense-Net                                                                  (36 )                (13 )

Income (Loss) From Continuing
Operations Before Income Taxes                                                    (758 )                415
Income Tax Benefit                                                                (319 )               (144 )

                                                                                  (439 )                559
Income (Loss) From Discontinued
Operations, Net of Income Taxes                                                    (10 )                278


Net Income (Loss)                                                          $      (449 )        $       837

Test & Measurement-T&M

Sales revenues from the T&M product group were $4,089,000 for the first quarter of the current fiscal year, representing a 2.9% increase as compared to sales of $3,972,000 for the same period in the prior year. The increase is primarily attributable to the hardware product line, as both the Ruggedized and TMX product line sales experienced double-digit growth as compared to prior year's sales volume. T&M's first quarter segment operating profit of $201,000 resulted in a 4.9% profit margin as compared to the prior year's segment operating profit of $543,000 and related operating margin of 13.7%. The decrease in both segment operating profit and related margin was due to higher manufacturing costs and operating expenses.

QuickLabel Systems-QuickLabel

Sales revenues from the QuickLabel product group were $11,396,000 in the first quarter of the current year as compared to $10,364,000 in the same quarter of the prior year. The increase in sales is primarily due to the consumables product line which increased 12.1% from the prior year, primarily attributable to the increased demand for digital color printer supplies, as well as for the label and tag product lines, which increased 29.3% and 18.4%, respectively, compared to the prior year. Also contributing to the current quarter increase were sales of the new Kario! product line. The current quarter increase in sales was somewhat tempered by lower sales of both the monochromatic product line and other color printer product lines. QuickLabel's current quarter segment operating profit was $891,000, reflecting a profit margin of 7.8% and a decrease from prior year's first quarter segment profit of $903,000 and with a related profit margin of 8.7%. The decrease in QuickLabel's current year's segment operating profit and related margin is primarily due to unfavorable product mix and higher manufacturing costs.


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Financial Condition and Liquidity

The Company believes that cash provided by operations will continue to be sufficient to meet operating and capital needs for at least the next twelve months. However, in the event that cash from operations is not sufficient, the Company has a substantial cash and short term marketable securities balance, as well as 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.

The Company's statements of cash flows for the three months ended May 4, 2013 and April 28, 2012 are included on page 6. Net cash flows used by operating activities was $6,973,000 in the current year compared to net cash provided by operating activities of $1,108,000 in the previous year. The decline in operating cash flow provided in the first three months of the current year as compared to the previous year is related to the net loss, income tax payments made in connection with the gain on the sale of Grass, and higher inventory balances. Accounts receivables decreased to $8,399,000 at the end of the first quarter as compared to $9,376,000 at year-end and the accounts receivable collection cycle decreased to 47 days sales outstanding at the end of the current quarter as compared to 51 days outstanding at year end. Inventory increased to $11,755,000 at the end of the first quarter compared to $11,179,000 at year end and inventory days on hand also increased to 110 days on hand at the end of the current quarter from 109 days at year end.

The Company's cash, cash equivalents and investments at the end of the third quarter totaled $32,291,000 compared to $39,508,000 at year end. The lower cash and investment position at May 4, 2013 resulted from the increase in inventory and the decrease in income taxes payable, as noted above, as well as cash used to acquire property, plant and equipment of $113,000 and to pay cash dividends of $521,000.

The Company's backlog increased 14.1% from year-end to $7,015,000 at the end of the first quarter.

Critical Accounting Policies, Commitments and Certain Other Matters

In the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2013, the Company's most critical accounting policies and estimates upon which our financial status depends were identified as those relating to revenue recognition, warranty claims, bad debts, inventories, income taxes, long-lived assets, goodwill and share-based compensation. We considered the disclosure requirements of Financial Release ("FR") 60 ("FR-60") regarding critical accounting policies and FR-61 regarding liquidity and capital resources, certain trading activities and related party/certain other disclosures, and concluded that nothing materially changed during the quarter that would warrant further disclosure under these releases.


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Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect our current expectations concerning future events and results. We generally use the words "believes," "expects," "intends," "plans," "anticipates," "likely," "continues," "may," "will," and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors which could cause actual results to differ materially from those anticipated include, but are not limited to (a) general economic, financial and business conditions;
(b) declining demand in the test and measurement markets, especially defense and aerospace; (c) competition in the specialty printer industry; (d) ability to develop market acceptance of our products and effective design of customer required features; (e) competition in the data acquisition industry; (f) the impact of changes in foreign currency exchange rates on the results of operations; (g) the ability to successfully integrate acquisitions and realize benefits from divestitures; (h) the business abilities and judgment of personnel and changes in business strategy; (i) the efficacy of research and development investments to develop new products; (j) the launching of significant new products which could result in unanticipated expenses; (k) bankruptcy or other financial problems at major suppliers or customers that could cause disruptions in the Company's supply chain or difficulty in collecting amounts owed by such customers; (l) and other risks included under "Item 1A-Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended January 31, 2013. We assume no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

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