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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION(Edgar Glimpses Via Acquire Media NewsEdge) 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, 2014. 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: • 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. • Test and Measurement Product Group (T&M)-offers a suite of ruggedized printer products designed primarily for military and commercial aerospace applications to be used to print weather maps, communications and other critical flight information. T&M also offers 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. 17 -------------------------------------------------------------------------------- Table of Contents 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. Consequently, the Company has classified the results of operations of its Grass segment as discontinued operations for the three and six months ended August 3, 2013 periods presented. On January 22, 2014, Astro-Med completed the acquisition of the Ruggedized Printer Product line from Miltope Corporation (Miltope), which is engaged in the design, development, manufacture and testing of ruggedized computers and computer peripheral equipment for military, industry and commercial applications. Astro-Med's ruggedized printer product line is part of the Test & Measurement (T&M) product group and is reported as part of the T&M segment. Miltope sales for the second quarter and six months ended August 2, 2014 were approximately $1.6 million and $3.8 million, respectively, and the results of the Miltope's ruggedized printer product line operations have been included in the condensed consolidated statements of operations for the three and six months ended August 2, 2014. 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 August 2, 2014 vs. Three Months Ended August 3, 2013 Net sales by product group and current quarter percentage change over prior year for the three months ended August 2, 2014 and August 3, 2013 were: As a As a % Change August 2, % of August 3, % of Over (Dollars in thousands) 2014 Net Sales 2013 Net Sales Prior Year QuickLabel $ 15,257 68.2 % $ 12,195 70.9 % 25.1 % T&M 7,109 31.8 % 4,999 29.1 % 42.2 % Total $ 22,366 100.0 % $ 17,194 100.0 % 30.1 % Net sales for the second quarter of the current year were $22,366,000, representing a 30.1% increase as compared to the previous year's second quarter sales of $17,194,000 and a 7.7% increase as compared to current year's first quarter sales of $20,774,000. Sales through the domestic channels for the current quarter were $15,176,000, an increase of 25.7% over the prior year's second quarter and a 3.8% increase compared to current year's first quarter domestic sales of $14,623,000. International sales for the second quarter of the current year were $7,190,000, representing a 40.4% increase from the previous year and a 16.9% increase over the current year's first quarter international sales of $6,151,000. Current year's second quarter international sales include favorable foreign exchange rate impact of $148,000. Hardware sales in the current quarter were $9,910,000, a 40.1% increase as compared to prior year's second quarter sales of $7,071,000. Both segments contributed to the current quarter increase, as hardware sales were up 57.5% in the QuickLabel product group and 31.1% in the T&M product group compared to prior year second quarter. The increase in current quarter hardware sales is due to strong sales of the hardware product lines in the QuickLabel, Ruggedized and Data Acquisition product groups. The sale of the ruggedized printers from the January 2014 acquisition of Miltope was also a strong contribution to the hardware sales volume. 18 -------------------------------------------------------------------------------- Table of Contents Consumables sales in the current quarter were $10,922,000, representing an 18.7% increase over prior year's second quarter consumable sales of $9,205,000. The current quarter increase in consumable sales as compared to the second quarter of the prior year is primarily due to the double-digit increase in sales of label and tag products and digital color printer supplies in the QuickLabel segment. Service and other revenues of $1,534,000 in the current quarter were up 67.0% from prior year's second quarter service and other revenues of $918,000, primarily due to the increase in repairs and parts revenue during the quarter due to the Miltope acquisition. Current year second quarter gross profit was $9,589,000, representing a 38.5% improvement as compared to prior year's second quarter gross profit of $6,923,000. The Company's gross profit margin of 42.9% in the current quarter also reflects an increase from the prior year's second quarter gross profit margin of 40.3%. The higher gross profit and related margin for the current quarter as compared to prior year is primarily attributable to higher sales, improved product mix and the Company's ongoing lean manufacturing initiatives. Operating expenses for the current quarter were $7,425,000, which increased as compared to prior year's second quarter operating expenses of $6,036,000. The Company increased its spending in selling and market activities due to additional personnel and related commissions and benefits costs, as well as increased spending on targeted marketing and trade shows. The Company also expanded its R&D initiatives in the current quarter with new product programs aimed at growing the business. Although R&D expenses increased in the current quarter as compared to the prior year, current quarter spending in R&D represents 6.6% of sales, a decrease compared to prior year's second quarter level of 7.4%. The provision for federal, state and foreign taxes on continuing operations for the second quarter of the current year was $812,000, reflecting an effective tax rate of 36.1%. This compares to the prior year's second quarter provision on income from continued operations of $331,000, reflecting an effective tax rate of 38.4%. The Company reported income from continuing operations of $1,435,000 for the second quarter of the current year, reflecting a return on sales of 6.4% and generating EPS of $0.18 per diluted share, as compared to the prior year's second quarter income from continuing operations of $531,000, reflecting a return on sales of 3.1% and related $0.07 per diluted share. 19-------------------------------------------------------------------------------- Table of Contents Discontinued Operation On January 31, 2013, the Company completed the sale of substantially all of the assets of its Grass Technologies Product Group 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 the fiscal 2014 period presented. Results for discontinued operations are as follows: August 3, (In thousands) 2013 Net Sales $ 1,965 Gross Profit $ 327 Net Income from Discontinued Operations $ 165 Six Months Ended August 2, 2014 vs. Six Months Ended August 3, 2013 Net sales by product group and current quarter percentage change over prior year for the six months ended August 2, 2014 and August 3, 2013 were: As a As a % Change August 2, % of August 3, % of Over (Dollars in thousands) 2014 Net Sales 2013 Net Sales Prior Year QuickLabel $ 29,680 68.8 % $ 23,592 72.2 % 25.8 % T&M 13,460 31.2 % 9,087 27.8 % 48.1 % Total $ 43,140 100.0 % $ 32,679 100.0 % 32.0 % Net sales for the first six months of the current year were $43,140,000, representing a 32.0% increase as compared to the previous year's sales of $32,679,000. Sales through the domestic channels for the first half of the current year were $29,799,000, an increase of 30.9% over the prior year. International shipments for the first six months of the current year were $13,341,000, representing a 34.6% increase from the previous year. The current year's first six months international sales include a favorable foreign exchange rate impact of $293,000. Hardware sales in the first six months of the current year were $18,472,000, a 45.4% increase compared to prior sales of $12,708,000. Both product groups experienced growth in the current year, with T&M hardware sales at $11,530,000, a 39.3% increase as compared to prior year sales of $8,278,000 and QuickLabel hardware sales at $6,942,000 in the current year, a 56.7% increase from prior year sales of $4,430,000. The main source of the current year's increase was primarily due to T&M's Ruggedized product line sales as well as the increase in QuickLabel's new Kairo! product line sales. Consumables sales in first half of the current year were $21,760,000, representing a 20.2% increase over prior year's first six months sales of $18,107,000. The current year increase in consumable sales is primarily due to the double-digit increase in both label and tag, as well as digital color printer supplies product sales in the QuickLabel segment. Service and other revenues of $2,908,000 in the first six months of the current year were up 56.0% from prior year's first six months service and other revenues of $1,864,000, primarily due to the increase in repairs and parts revenue during the current year due to the Miltope acquisition. 20-------------------------------------------------------------------------------- Table of Contents Current year first six months gross profit was $18,225,000, reflecting a 51.5% improvement as compared to prior year's first six months gross profit of $12,027,000. The Company's gross profit margin of 42.2% in the current year also reflects an increase from the prior year's first six months gross profit margin of 36.8%. The higher gross profit and related margin for the current year as compared to prior year is primarily attributable to increased sales, improved product mix, as well as $672,000 in product replacement program costs recognized in the prior year related to a reserve established to address a non-compliant component used in a certain models of ToughWriter printers. Operating expenses for the first six months of the fiscal year were $14,362,000, an increase as compared to prior year's first six months operating expenses of $11,862,000. Specifically, selling and marketing expenses for the current year increased as compared to the previous year's first six months due to additional personnel and related benefit and commission costs, as well as an increase in targeted marketing and trade show expenditures. G&A expenses slightly increased to $2,634,000 in the first six months of the current year as compared to prior year's first six months G&A expenses of $2,521,000 primarily due to an increase in professional fees. Although, investment in R&D in the first six months of the current year of $2,850,000 increased compared to prior year's first six months investment of $2,387,000 due primarily to the expansion of new product programs, current year spending in R&D represents 6.6% of sales as compared to prior year's first six months level of 7.3%. First six months operating income of $3,863,000, resulted in an operating profit margin of 9.0%, an increase as compared to the prior year's first six months operating income of $165,000 and related operating margin of 0.5%. The increase in operating income and related margin is primarily attributable to increased sales volume, favorable product mix, as well as operating efficiencies in manufacturing operations. Other expense during the first six months was $38,000 compared to $62,000 in the first six months of the previous year. The lower expense was primarily due to the decline in foreign exchange loss recognized in the first six months of the current year as compared to the prior year. Included in this years other expense is a $251,000 write down on the disposition of inventory related to the conclusion and settlement of the Grass Transition Service Agreement. The Company recognized a $1,261,000 income tax expense on income from continuing operations for the first six months of the current fiscal year which includes a $100,000 benefit related to the favorable resolution of a previously uncertain tax position. This compares to the prior year's first six months income tax expense on income from continued operations of $11,000. The Company reported net income from continuing operations of $2,564,000 for the first six months of the current year, reflecting a return on sales of net 5.9% and generating a EPS of $0.33 per diluted share. On a comparative basis, in the prior year's first six months, the Company recognized income from continuing operations of $92,000, reflecting a return on sales of 0.3% and an EPS of $0.01 per diluted share. 21 -------------------------------------------------------------------------------- Table of Contents 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: Six Months Ended August 3, (In thousands) 2013 Net Sales $ 3,716 Gross Profit $ 378 Net Income from Discontinued Operations $ 155 Segment Analysis The Company reports two segments consistent with its product groups: QuickLabel Systems (QuickLabel) and Test & Measurement (T&M). 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 for each reporting segment: Three Months Ended Six Months Ended Net Sales Segment Operating Profit Net Sales Segment Operating Profit August 2, August 3, August 2, August 3, August 2, August 3, August 2, August 3, (In thousands) 2014 2013 2014 2013 2014 2013 2014 2013 QuickLabel $ 15,257 $ 12,195 $ 2,247 $ 1,576 $ 29,680 $ 23,592 $ 4,445 $ 2,468 T&M 7,109 4,999 1,360 691 13,460 9,087 2,052 890 Total $ 22,366 $ 17,194 3,607 2,267 $ 43,140 $ 32,679 6,497 3,358 Product Replacement Related Costs - - - 672 Corporate Expenses 1,443 1,380 2,634 2,521 Operating Income 2,164 887 3,863 165 Other Income (Expense)-Net 83 (25 ) (38 ) (62 ) Income From Continuing Operations Before Income Taxes 2,247 862 3,825 103 Income Tax Provision 812 331 1,261 11 Income From Continuing Operations 1,435 531 2,564 92 Income From Discontinued Operations, Net of Income Taxes - 165 - 155 Net Income $ 1,435 $ 696 $ 2,564 $ 247 22 -------------------------------------------------------------------------------- Table of Contents QuickLabel Systems-QuickLabel Sales revenues from the QuickLabel product group increased 25.1% with sales of $15,257,000 in the second quarter of the current year as compared to $12,195,000 in the same period of the prior year. The current quarter increase in sales is due to both the consumables and hardware product lines. Consumable sales increased 17.0% from the same period in the prior year, primarily due to the increased demand for label and tag as well as digital color printer supplies products, both which have experienced double-digit growth as compared to the prior year. Sales in the hardware product line increased 57.5% primarily attributable to sales in the ink jet printer product lines. QuickLabel's current quarter segment operating profit was $2,247,000, reflecting a profit margin of 14.7%, an increase from prior year's second quarter segment profit of $1,576,000 and related profit margin of 12.9 %. The increase in QuickLabel's current year's segment operating profit and related margin is primarily due to higher sales, lower manufacturing costs and favorable product mix. Sales revenues from the QuickLabel product group were $29,680,000 for the first six months of the current fiscal year as compared to $23,592,000 in the same period of the prior year. The increase in sales is primarily due to the consumables product line which increased 18.7% from the prior year, primarily attributable to the increased demand for the label and tag, as well as digital color printer supplies product lines. Also contributing to the current year increase were sales in the hardware product line, which increased 56.7% from the same period of the prior year, primarily due to the ink jet printer product line. QuickLabel's current year's segment operating profit was $4,445,000, reflecting a profit margin of 15.0% an increase from prior year's segment profit of $2,468,000 and related profit margin of 10.5%. The increase in QuickLabel's current year's segment operating profit and related margin is primarily due to increased sales and favorable product mix. Test & Measurement-T&M Sales revenues from the T&M product group were $7,109,000 for the second quarter of the current fiscal year, representing a 42.2% increase as compared to sales of $4,999,000 for the same period in the prior year. The increase is primarily attributable to the sales 23 -------------------------------------------------------------------------------- Table of Contents growth in the second quarter in the Ruggedized product lines, including the Miltope ruggedized aerospace printer product line acquired in January 2014. T&M also experienced increase in demand for its high-speed data recorder products line during the current quarter. T&M's second quarter segment operating profit of $1,360,000 resulted in a 19.1% profit margin as compared to the prior year's segment operating profit of $691,000 and related operating margin of 13.8%. The higher segment operating profit and related margin were due to higher sales and favorable product mix. Sales revenues from the T&M product group were $13,460,000 for the first six months of the current fiscal year, representing a 48.1% increase as compared to sales of $9,087,000 for the same period in the prior year. The increase is primarily attributable to the hardware product line, as both the Ruggedized and high-speed data recorder product lines experienced growth over prior year. T&M's segment operating profit for the first six months of the current fiscal year was $2,052,000 which resulted in a 15.2% profit margin as compared to the prior year's segment operating profit of $890,000 and related operating margin of 9.8%. The increase in segment operating profit and related margin was due to increased sales and favorable product mix. 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. The Company's $10.0 million revolving bank line of credit, all of which was available, expired on May 30, 2014 and the Company is currently in the process of negotiating a new $10.0 credit line facility for a three year term which is expected bear interest at a base rate plus margin. The Company's statements of cash flows for the six months ended August 2, 2014 and August 3, 2013 are included on page 6. Net cash flows used by operating activities was $2,370,000 in the current year compared to $6,187,000 in the previous year. The decrease in operating cash flow used in the six months of the current year as compared to the previous year is related to income tax payments made in the prior year in connection with the gain on the sale of Grass, partially offset by higher accounts receivable and inventory balances in the current year. Accounts receivables increased to $14,075,000 at the end of the second quarter as compared to $11,366,000 at year-end, although the accounts receivable collection cycle decreased to 53 days sales outstanding at the end of the current quarter as compared to 54 days outstanding at year end. Inventory increased to $16,023,000 at the end of the second quarter compared to $15,178,000 at year end and inventory days on hand slightly decreased to 112 days on hand at the end of the current quarter from 113 days at year end. The Company's cash, cash equivalents and investments at the end of the second quarter totaled $28,007,000 compared to $27,107,000 at year end. The increased cash and investment position at August 2, 2014 resulted from current six months net income, 24 -------------------------------------------------------------------------------- Table of Contents $1.8 million cash received in the first quarter related to the cash held in escrow as part of the sale of Grass and cash received in the first quarter related to the disposition of inventory to the purchaser of Grass. This increase was partially offset by increases in accounts receivable and inventory, as discussed above, dividends paid of $1,076,000 and cash used to acquire property, plant and equipment of $874,000. The Company's backlog increased 4.6% from year-end to $14,700,000 at the end of the current second 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, 2014, 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. 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, 2014. 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. |