ALOT AstroNova Inc

Part I. FINANCIAL INFORMATION

See Notes to condensed consolidated financial statements (unaudited).

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See Notes to condensed consolidated financial statements (unaudited).

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See Notes to condensed consolidated financial statements (unaudited).

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ASTRONOVA, INC.

Note 2 – Summary of Significant Accounting Policies Update

The accounting polices used in preparing the condensed consolidated financial statements in this Form 10-Q are the same as those used in preparing the Consolidated Financial Statements for the year ended January 31, 2019, except for the change resulting from the adoption of Accounting Standard Update (“ASU”) 2016-02, “Leases (“Topic 842”), as provided below.

Leases

On February 1, 2019, we adopted ASU 2016-02 using the modified retrospective transition method, which requires that we recognize leases differently pre- and post-adoption. See “ Recently Adopted Accounting Pronouncements —Leases” below for more information.

The Company determines whether an arrangement contains a lease at the inception of a contract. Our lease agreements cover various office facilities and are considered operating leases. Operating Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement of the lease based on the present value of the future minimum lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of future payments. Operating lease ROU assets include any lease pre-payments made and exclude lease incentives and initial direct costs incurred when appropriate. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such option. Lease expense is recognized on a straight-line basis over the lease term and included in general and administrative expense on our condensed consolidated statement of income. Operating leases are included in Right of Use assets, Other Liabilities and Accrued Expenses, and Lease Liabilities on our condensed consolidated balance sheets.

For our lease agreements with lease and non-lease components, we generally account for each component separately.

Recently Adopted Accounting Pronouncements

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 and its subsequent amendments supersede previous guidance related to accounting for leases and are 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 updates also require improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases.

The Company adopted this guidance effective February 1, 2019 and elected the non-comparative transition option which does not require restatement for comparative purposes. Also upon adoption, the Company elected the package of practical expedients, which, include not reassessing 1) whether any expired or existing contracts contain leases, 2) lease classifications of expired or existing leases, and 3) initial direct costs, if any, for existing leases.

Adoption of the new standard resulted in the recording of ROU assets and lease liabilities of $2.0 million as of February 1, 2019.

Recent Accounting Standards Not Yet Adopted

Internal-Use Software

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (Q1 fiscal 2021 for AstroNova), with early adoption permitted. Implementation should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact this new guidance will have on its consolidated financial statements.

Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. This ASU is effective for annual periods beginning after December 15, 2019 including interim periods within those fiscal years (Q1 fiscal 2021 for AstroNova), with early adoption permitted. The provisions of ASU 2018-13 relating to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. The remaining provisions should be applied retrospectively to all periods presented upon their effective date. The Company is currently evaluating the impact this new guidance will have on its consolidated financial statements and related disclosures.

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No other new accounting pronouncements, issued or effective during the first three months of the current year, have had or are expected to have a material impact on our consolidated financial statements.

Note 3 - Revenue Recognition

We derive revenue from the sale of (i) hardware, including digital color label printers and specialty OEM printing systems, portable data acquisition systems and airborne printers used in the flight deck and cabin of military, commercial and business aircraft, (ii) related supplies required in the operation of the hardware, (iii) repairs and maintenance of hardware and (iv) service agreements.

Revenues disaggregated by primary geographic markets and major product types are as follows:

Primary geographical markets:

Major product types:

Contract Assets and Liabilities

We normally do not have contract assets, which are primarily unbilled accounts receivable that are conditional on something other than the passage of time. Our contract liabilities, which represent billings in excess of revenue recognized, are related to advanced billings for purchased service agreements and extended warranties and were $350,000 and $373,000 at May 4, 2019 and January 31, 2019, respectively, and are recorded as deferred revenue in the condensed consolidated balance sheet. The decrease in the deferred revenue balance during the three months ended May 4, 2019 is primarily due to approximately $205,000 of revenue recognized during the period that was included in the deferred revenue balance at January 31, 2019, offset by cash payments received in advance of satisfying performance obligations.

Contract Costs

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain costs related to obtaining sales contracts for our aerospace printer products meet the requirement to be capitalized. These costs are deferred and amortized based on the forecasted number of units sold over the estimated benefit term, which was estimated to be approximately 10 years. The balance of these contract assets at January 31, 2019 was $903,000. In the first quarter of fiscal 2020, amortization of

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these incremental direct costs were $27,000 and the balance of deferred incremental direct costs net of accumulated amortization at May 4, 2019 was $875,000, of which $109,000 is reported in other current assets and $766,000 is reported in other assets in the accompanying condensed consolidated balance sheet. The remaining contract costs are expected to be amortized over the estimated remaining period of benefit, which we currently estimate to be approximately 7 years.

Note 4 - Net Income Per Common Share

Basic net income per share is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted average number of shares and, if dilutive, common equivalent shares, determined using the treasury stock method for stock options, restricted stock awards and restricted stock units outstanding during the period. A reconciliation of the shares used in calculating basic and diluted net income per share is as follows:

For the three months ended May 4, 2019 and April 28, 2018, the diluted per share amounts do not include common equivalent shares outstanding of 260,422 and 248,480 , respectively, because their effect would have been anti-dilutive.

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There were no impairments to intangible assets during the periods ended May 4, 2019 and April 28, 2018. With respect to the acquired intangibles included in the table above, amortization expense of $1.1 million and $1.0 million has been included in the condensed consolidated statements of income for the periods ended May 4, 2019 and April 28, 2018, respectively.

Estimated amortization expense for the next five fiscal years is as follows:

Note 7 - Revolving Line of Credit

The Company has a $10.0 million revolving line of credit under its existing Credit Agreement with Bank of America. Revolving credit loans may be borrowed, at the Company’s option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Krone. Amounts borrowed under the revolving credit facility bear interest at a rate per annum equal to, at the Company’s option, either (a) the LIBOR rate (or, in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.0% to 1.5% based on the Company’s consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal funds’ rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate or (iii) the LIBOR rate plus 1.00%, plus a margin that varies within a range of 0.0% to 0.5% based on the Company’s consolidated leverage ratio.

During fiscal 2019, $3.0 million was drawn on the revolving credit facility, of which $1.5 million was repaid. At May 4, 2019, $1.5 million remains outstanding on the revolving line of credit. The outstanding balance bears interest at a weighted average annual rate of 5.75% and $19,000 of interest has been incurred on this obligation and included in other expense in the accompanying condensed consolidated income statement for the period ended May 4, 2019. As of May 4, 2019, there is $8.5 million available for borrowing under the revolving credit facility.

The Company is required to pay a commitment fee on the undrawn portion of the revolving credit facility at the rate of 0.25% per annum .

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The schedule of required principal payments remaining during the next five years on long-term debt outstanding as of May 4, 2019 is as follows:

Note 9 - Derivative Financial Instruments and Risk Management

The Company has entered into a cross-currency interest rate swap to manage the interest rate risk and foreign currency exchange risk associated with the floating-rate foreign currency-denominated term loan borrowing by our Danish Subsidiary and an interest rate swap to manage the interest rate risk associated with the variable rate term loan borrowing by the Company. Both swaps have been designated as cash flow hedges of floating-rate borrowings.

The cross-currency interest rate swap agreement utilized by the Company effectively modifies the Company’s exposure to interest rate risk and foreign currency exchange rate risk by converting the Company’s floating-rate debt denominated in U.S. Dollars on our Danish subsidiary’s books to a fixed-rate debt denominated in Danish Krone for the term of the loan, thus reducing the impact of interest-rate and foreign currency exchange rate changes on future interest expense and principal repayments. This swap involves the receipt of floating rate amounts in U.S. Dollars in exchange for fixed-rate interest payments in Danish Krone, as well as exchanges of principal at the inception spot rate, over the life of the term loan. As of May 4, 2019, the total notional amount of the Company’s cross-currency interest rate swap was $5.9 million.

The interest rate swap agreement utilized by the Company on its term loan effectively modifies the Company’s exposure to interest rate risk by converting the Company’s floating-rate debt to fixed-rate debt for the next five years, thus reducing the impact of interest-rate changes on future interest expense. This swap involves the receipt of floating rate amounts in U.S. Dollars in exchange for fixed rate payments in U.S. dollars over the life of the term loan. As of May 4, 2019, the total notional amount of the Company’s interest rate swap was $10.5 million.

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The following table provides a summary of the fair values of the Company’s derivatives recorded in the condensed consolidated balance sheets:

The following table presents the impact of the derivative instruments in our condensed consolidated financial statements for the three months ended May 4, 2019 and April 28, 2018:

At May 4, 2019, the Company expects to reclassify approximately $0.3 million of net gains on the swap contracts from accumulated other comprehensive loss to earnings during the next 12 months due to changes in foreign exchange rates and the payment of variable interest associated with the floating-rate debt.

Note 10 – Royalty Obligation

In fiscal 2018, AstroNova, Inc. entered into an Asset Purchase and License Agreement with Honeywell International, Inc. (“Honeywell”) to acquire an exclusive, perpetual, world-wide license to manufacture Honeywell’s narrow-format flight deck printers for two aircraft families along with certain inventory used in the manufacturing of the licensed printers. The purchase price included a guaranteed minimum royalty payment of $15.0 million, to be paid over ten years, based on gross revenues from the sales of the printers, paper and repair services of the licensed products. The royalty rates vary based on the year in which they are paid or earned and product sold or service provided, and range from single-digit to mid double-digit percentages of gross revenue.

The guaranteed minimum royalty payment obligation of $15.0 million was recorded at the present value of the minimum annual royalty payments using a present value factor of 2.8%, which is based on the estimated after-tax cost of debt for similar companies. As of May 4, 2019, the Company had paid an aggregate of $2.0 million of the guaranteed minimum royalty obligation. At May 4, 2019, the current portion of the outstanding guaranteed minimum royalty obligation of $2.0 million is to be paid over the next twelve months and is reported as a current liability and the remainder of $9.4 million is reported as a long-term liability on the Company’s condensed consolidated balance sheet. In addition to the guaranteed minimum royalty payments, the Company also incurred $0.6 million and $0.5 million, respectively, in excess royalty expense, which is included in cost of revenue in the Company’s consolidated statements of income for the three months ended May 4, 2019 and April 28, 2018, respectively. A total of $1.3 million of excess royalty is payable and reported as a current liability on the Company’s condensed consolidated balance sheet at May 4, 2019.

Note 11 – Leases

We lease certain facilities at various locations worldwide that are classified as operating leases. Our leases have remaining lease terms of 1 to 12 years, some of which include options to extend the lease term for periods up to 5 years, as well as options to terminate the lease within one year when it is reasonably certain the Company will exercise such options.

The company leases office space from an affiliate. The lease is classified as an operating lease and provides for annual rentals of approximately $64,000 and $66,000 in fiscal 2020 and 2021, respectively.

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Balance sheet and other information related to our leases is as follows:

Lease cost information is as follows:

Maturities of operating lease liabilities are as follows:

As of May 4, 2019, the weighted-average remaining lease term and weighted-average discount rate for our operating leases are 6.3 years and 4.02%, respectively. We calculated the weighted-average discount rates using incremental borrowing rates, which equal the rates of interest that we would pay to borrow funds on a fully collateralized basis over a similar term.

Supplemental cash flow information related to leases for the three months ended May 4, 2019 is as follows:

As previously disclosed in our fiscal year 2019 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum operating lease commitments that had initial or remaining non-cancelable lease terms in excess of one year at January 31, 2019 were as follows:

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The amounts presented above in other comprehensive loss are net of taxes except for translation adjustments associated with our German and Danish subsidiaries.

Note 13 - Share-Based Compensation

We have one equity incentive plan from which we are authorized to grant equity awards, the AstroNova, Inc. 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for, among other things, the issuance of awards, including incentive stock options, non-qualified stock options, stock appreciation rights, time or performance-based restricted stock unit (RSUs) and, restricted stock awards (RSAs), with respect to up to 650,000 shares of the Company’s common stock, plus an additional number of shares equal to the number of shares subject to awards granted under previous equity incentive plans that are forfeited, cancelled, satisfied without the issuance of stock, otherwise terminated (other than by exercise), or, for shares of stock issued pursuant to any unvested award, reacquired by the Company at not more than the grantee’s purchase price (other than by exercise). Under the 2018 Plan, all awards to employees generally have a minimum vesting period of one year. Options granted under the 2018 Plan must be issued at an exercise price of not less than the fair market value of the Company’s common stock on the date of grant and expire after ten years. As of May 4, 2019, 182,896 unvested shares of restricted stock and options to purchase an aggregate of 146,000 shares were outstanding under the 2018 Plan.

In addition to the 2018 Plan, we previously granted equity awards under our 2015 Equity Incentive Plan (the “2015 Plan”) and our 2007 Equity Incentive Plan (the “2007 Plan”). Both the 2007 Plan and the 2015 Plan have expired and no new awards may be issued under either, but outstanding awards will continue to be governed by those respective Plans. As of May 4, 2019, 1,007 unvested shares of restricted stock and options to purchase an aggregate of 391,145 shares were outstanding under the 2007 Plan and 42,204 unvested shares of restricted stock and options to purchase an aggregate of 199,545 shares were outstanding under the 2015 Plan.

On January 31, 2019, the compensation committee of the Company’s board of directors adopted an Amended and Restated Non-Employee Director Annual Compensation Program (the “New Program”), which became effective as of February 1, 2019 and supersedes the prior program. Pursuant to the New Program, beginning with fiscal 2020, each non-employee director will automatically receive a grant of restricted stock on the date of their re-election to the Company’s board of directors. The number of whole shares to be granted will be equal to the number calculated by dividing the stock component of the director compensation amount determined by the compensation committee for that year by the fair market value of our stock on that day. The value of the restricted stock award for fiscal 2020 is $60,000. To account for the partial year beginning on February 1, 2019 and continuing through the 2019 annual meeting and thereby provide for the alignment of the timing of annual grants of restricted stock under the New Program with the election of directors at the annual meeting, on February 1, 2019, each non-employee director was granted shares of restricted stock with a fair market value of $18,000. Other than the shares granted on February 1, 2019, which will vest on June 1, 2019, shares of restricted stock granted under the New Program will become vested on the first anniversary of the date of grant, conditioned upon the recipient’s continued service on the Board through that date.

Share-based compensation expense was recognized as follows:

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The weighted average fair value per share for options granted during the three months ended April 28, 2018 was $6.80.

Aggregated information regarding stock option activity for the three months ended May 4, 2019, is summarized below:

Set forth below is a summary of options outstanding at May 4, 2019:

As of May 4, 2019, there was approximately $1,232,000 of unrecognized compensation expense related to stock options which is expected to be recognized over a weighted average period of approximately 2.2 years.

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As of May 4, 2019, there was approximately $2,961,000 of unrecognized compensation expense related to RSUs and RSAs which is expected to be recognized over a weighted average period of 2.2 years.

Employee Stock Purchase Plan

AstroNova has an Employee Stock Purchase Plan allowing eligible employees to purchase shares of common stock at a 15% discount from fair value on the first or last day of an offering period, whichever is less. A total of 247,500 shares were reserved for issuance under this plan. During the three months ended May 4, 2019 and April 28, 2018, there were 1,571 and 1,216 shares, respectively, purchased under this plan. As of May 4, 2019, 32,282 shares remain available.

Note 14 - Income Taxes

The Company’s effective tax rates for the period are as follows:

The Company determines its estimated annual effective tax rate at the end of each interim period based on full-year forecasted pre-tax income and facts known at that time. The estimated annual effective tax rate is applied to the year-to-date pre-tax income at the end of each interim period with the cumulative effect of any changes in the estimated annual effective tax rate being recorded in the fiscal quarter in which the change is determined. The tax effect of significant unusual items is reflected in the period in which they occur.

During the three months ended May 4, 2019, the Company recognized an income tax expense of approximately $400,000. The effective tax rate in this period was directly impacted by a $53,000 tax benefit related to the expiration of the statute of limitations on a previously uncertain tax position and a $97,000 tax benefit arising from windfall tax benefits related to the Company’s stock. During the three months ended April 28, 2018, the Company recognized an income tax expense of approximately $181,000. The effective tax rate in this period was directly impacted by a $78,000 tax benefit related to the expiration of the statute of limitations on a previously uncertain tax position and a $30,000 tax benefit arising from windfall tax benefits related to the Company’s stock.

The Company maintains a valuation allowance on some of its deferred tax assets in certain jurisdictions. A valuation allowance is required when, based upon an assessment of various factors, including recent operating loss history, anticipated future earnings, and prudent and reasonable tax planning strategies, it is more likely than not that some portion of the deferred tax assets will not be realized.

Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial reporting purposes. As of May 4, 2019, the Company’s cumulative unrecognized tax benefits totaled $592,000 compared to $618,000 as of January 31, 2019. Besides the expiration of the statute of limitations on a previously uncertain tax position, there were no other developments affecting unrecognized tax benefits during the quarter ended May 4, 2019.

Note 15 - Segment Information

AstroNova reports two segments: Product Identification and Test & Measurement (T&M). The Company evaluates segment performance based on the segment profit before corporate expenses.

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

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We use the market approach to measure fair value of our derivative instruments. Derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates and foreign exchange rates, and are classified as Level 2 because they are over-the-counter contracts with a bank counterparty that are not traded in an active market.

The fair value of the earnout liability incurred in connection with the Company’s acquisition of TrojanLabel was determined using the option approach methodology, which includes using significant inputs that are not observable in the market and therefore classified as Level 3. Key assumptions in estimating the fair value of the contingent consideration liability included (1) the estimated earnout targets over the next seven years of $0.5 million-$1.4 million, (2) the probability of success (achievement of the various contingent events) from 0.0%-0.9% and (3) a risk-adjusted discount rate of approximately 2.68%-4.9% used to adjust the probability-weighted earnout payments to their present value. At each reporting period, the contingent consideration liability is recorded at its fair value with changes reflected in general and administrative expense in the condensed consolidated statements of operations. There was no change in the fair value of the earnout liability for the quarter ended May 4, 2019.

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The fair value of the Company’s long-term debt, including the current portion, is estimated by discounting the future cash flows using current interest rates at which similar loans with the same maturities would be made to borrowers with similar credit ratings and is classified as Level 3.

The first quarter of fiscal 2020 consisted of a 13-week period as compared to the first quarter of fiscal 2019 which consisted of a 12-week period.

Revenue for the first quarter of the current year was $36.2 million, representing a 14.9% increase compared to the previous year first quarter revenue of $31.5 million. Revenue through domestic channels for the current year first quarter was $22.0 million, an increase of 14.6% over the prior year’s first quarter. International revenue for the first quarter of the current year was $14.2 million, a 15.8% increase over the previous year first quarter, and represents 39.2% of AstroNova’s first quarter’s revenue. Current year first quarter international revenue includes an unfavorable foreign exchange rate impact of $0.6 million.

Hardware revenue in the current quarter was $12.9 million, an increase compared to prior year’s first quarter revenue of $12.0 million. The increase is attributable to both segments, as T&M hardware revenue increased 8.5% and PI hardware revenue increased 6.1% compared to the first quarter of the prior year. Supplies revenue in the current quarter was $19.7 million, an 18.1% increase over prior year’s first quarter supplies revenue of $16.7 million. The current quarter increase in supplies revenue compared to the first quarter of the prior year is primarily attributable to increases in revenue of both digital color printer supplies and label and tag products within the Product Identification segment.

Service and other revenues of $3.6 million in the current quarter increased 25.9% from prior year first quarter service and other revenues of $2.8 million, primarily due to an increase in parts revenue related to the aerospace printer product line acquired from Honeywell in fiscal 2018.

Current year first quarter gross profit was $14.2 million, a 17.6% increase compared to prior year first quarter gross profit of $12.1 million. The Company’s current quarter gross profit margin of 39.4% reflects a 0.9 percentage point increase from prior year first quarter gross profit margin of 38.5%. The higher gross profit and related profit margin for the current quarter compared to prior year’s first quarter is primarily attributable to increased sales and lower manufacturing variable costs.

Operating expenses for the current quarter were $11.8 million, an 8.5% increase compared to prior year first quarter operating expenses of $10.8 million. Specifically, selling and marketing expenses for the current quarter increased to $6.8 million compared to $6.5 million in the first quarter of the prior year due primarily to an increase in wages and commissions. Current quarter general and administrative expenses were $3.0 million, a slight increase compared to $2.7 million in the prior year’s first quarter, as the current quarter increase in outside services was tempered by decreases in wage and bonus expense for the current quarter. Research and development (“R&D”) expenses were $2.0 million in the current quarter, a slight increase compared to $1.7 million in the prior year’s first quarter primarily due to increases in wages and outside services. The R&D spending as a percentage of revenue for the current quarter is 5.5% compared to 5.4% for the same period of the prior year.

Other expense in the first quarter of fiscal 2020 was $0.4 million compared to $0.3 million in the prior year first quarter. Current quarter other expense includes interest expense on debt of $0.2 million and foreign exchange loss of $0.2 million. Other expense for the first quarter of fiscal 2019 consists primarily of interest expense on debt of $0.2 million and foreign exchange loss of $0.1 million.

The provision for federal, state and foreign income taxes for the first quarter of the current year was $0.4 million, which includes a benefit of $53 thousand related to the expiration of the statute of limitations on a previously uncertain tax position and a $97 thousand benefit related to windfall tax benefits related to the Company’s stock and reflects an effective tax rate of 19.0%. This compares to the prior year’s first quarter tax provision on income of $0.2 million, which included a benefit of $78 thousand related to the expiration of the statute of limitations on a previously uncertain tax position and a $30 thousand benefit related to windfall tax benefits related to the Company’s stock and reflected an effective tax rate of 18.2%.

The Company reported net income of $1.7 million or $0.23 per diluted share for the first quarter of the current year. On a comparable basis, net income for the prior year first quarter was $0.8 million or $0.12 per diluted share, which included after-tax income of $0.8 million, or $0.12 per diluted share, as a result of a change in accounting estimates for product cost and operating expenses related to a transition services agreement entered into as a part of the fiscal 2018 Honeywell licenses and product line acquisition. In addition, during the first quarter of fiscal 2019, a change in accounting estimate for revenue subject to customer rebates as part of the Honeywell licenses and product line acquisition increased net income by $0.3 million or $0.05 per diluted share. Return on revenue was 4.7% for the first quarter of fiscal 2020 compared to 2.6% for the first quarter of fiscal 2019.

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Product Identification

Revenue from the Product Identification segment increased 18.2% in the first quarter of the current year, with revenue of $23.6 million compared to $20.0 million in the same period of the prior year. The current quarter increase in revenue is primarily attributable to the increase in supplies revenue, specifically, labels and tag supplies revenue and inkjet supply revenue, both experiencing double digit growth as compared to the same period in the prior year. Also contributing to the increase in revenue for the current quarter was the 6.1% increase in hardware revenue as a result of the Company’s new five-color digital label printer, as well as an increase in sales of monochromatic printers. Hardware revenue increases were slightly tempered by lower sales of the Company’s other digital color printers within the product group. The current quarter also experienced growth in parts revenue compared to the same period in the prior year. Product Identification’s current quarter segment operating profit was $2.9 million, reflecting a profit margin of 12.2%. This compares to prior year’s first quarter segment profit of $1.7 million and related profit margin of 8.3%. The increase in Product Identification current year first quarter segment operating margin is primarily due to higher sales, product mix and lower manufacturing and period costs.

Test & Measurement—T&M

Revenue from the T&M products was $12.6 million for the first quarter of the current fiscal year, representing a 9.2% increase compared to revenue of $11.5 million for the same period in the prior year. The current quarter revenue increase is primarily due to the double digit growth in data acquisition hardware sales. Also contributing to the growth in revenue for the first quarter is the increase in parts revenue related to the aerospace printer product line acquired from Honeywell in fiscal 2018. T&M’s first quarter segment operating profit was $2.6 million, reflecting a profit margin of 20.5%, an increase compared to the prior year segment operating profit of $2.3 million and related operating margin of 19.6%. The increase in segment operating profit and related margin were due to higher sales revenue and favorable product mix.

Financial Condition and Liquidity

Overview

Generally, our primary sources of liquidity are cash generated from operating activities and borrowings. From time to time, we may also utilize amounts available under our revolving credit facility, as described below, to supplement cash generated from operating activities and to fund a portion of our capital expenditures, contractual contingent consideration obligations, and future acquisitions. We believe that our current level of cash and short-term financing capabilities along with future cash flows from operations will be sufficient to meet our operating and capital needs for at least the next 12 months.

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Our cash and cash equivalents at the end of the first quarter were $5.8 million and we had $8.5 million available under our revolving credit facility.

Indebtedness

In fiscal 2018, the Company and the Company’s wholly owned Danish subsidiaries, ANI ApS and TrojanLabel ApS, entered into a credit agreement with Bank of America, N.A. (the “Lender”), which, as amended, provides for a secured credit facility consisting of a term loan to ANI ApS in the principal amount of $9.2 million and a term loan to the Company in the principal amount of $15.0 million. The Credit Agreement also provides for a $10.0 million revolving credit facility for the Company.

Both term loans bear interest at a rate per annum equal to the LIBOR rate plus a margin that varies within a range of 1.0% to 1.5% based on the Company’s consolidated leverage ratio.

In connection with our entry into the Credit Agreement, ANI ApS entered into a hedging agreement to manage the variable interest rate risk and currency risk associated with its payments in respect to the term loan. Under this combined arrangement, payments of principal and interest with respect to approximately $8.9 million of the principal of the term loan will be made in Danish Krone, and interest on such principal amount will be payable at a fixed rate of 0.67% per annum for the entire term, subject only to potential changes based on the Company’s consolidated leverage ratio. Additionally, the Company entered into a hedging agreement to manage the variable interest rate risk associated with its payments with respect to the $15.0 million term loan. Under this combined arrangement, interest will be payable at a fixed rate of 2.04% per annum for the entire term, plus an incremental margin of 1.0% to 1.5%, based on the Company’s consolidated leverage ratio.

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Revolving credit loans may be borrowed, at the Company’s option, in U.S. Dollars or, subject to certain conditions, Euros, British Pounds, Canadian Dollars or Danish Krone. Amounts borrowed under the revolving credit facility bear interest at a rate per annum equal to, at the Company’s option, either (a) the LIBOR rate (or, in the case of revolving credit loans denominated in a currency other than U.S. Dollars, the applicable quoted rate), plus a margin that varies within a range of 1.0% to 1.5% based on the Company’s consolidated leverage ratio, or (b) a fluctuating reference rate equal to the highest of (i) the federal funds’ rate plus 0.50%, (ii) Bank of America’s publicly announced prime rate or (iii) the LIBOR rate plus 1.00%, plus a margin that varies within a range of 0.0% to 0.5% based on the Company’s consolidated leverage ratio. The Company is required to pay a commitment fee on the undrawn portion of the revolving credit facility at the rate of 0.25% per annum . Outstanding borrowings under the revolving credit line during fiscal 2020 bear interest at an annual rate of 5.75% and the Company has paid $19,000 of interest expense for revolving credit line borrowings for the quarter ended May 4, 2019.

The obligations of ANI ApS in respect of the $9.2 million term loan are guaranteed by the Company and TrojanLabel ApS. The Company’s obligations in respect of the $15.0 million term loan, revolving credit facility and its guarantee in respect of the ANI ApS term loan are secured by substantially all of the assets of the Company (including a pledge of a portion of the equity interests held by the Company in ANI ApS and the Company’s wholly owned German subsidiary, AstroNova GmbH), subject to certain exceptions.

The Lender is entitled to accelerate repayment of the loans and to terminate its revolving credit commitment under the Credit Agreement upon the occurrence of any of various customary events of default.

The Parties must comply with various customary financial and non-financial covenants under the Credit Agreement.

As of May 4, 2019, the Company believes it is in compliance with all of the covenants in the Credit Agreement.

Cash Flow

The Company’s statements of cash flows for the three months ended May 4, 2019 and April 28, 2018 are included on page 7 of this report. Net cash provided by operating activities was $1.0 million for the first quarter of fiscal 2020 compared to cash used by operating activities of $1.6 million for the same period of the previous year. The increase in net cash provided by operations for the current quarter is primarily due to the increase in net income and the decrease in cash used for working capital. The combination of changes in accounts receivable, inventory, accounts payable and accrued expenses decreased cash by $3.4 million for the first quarter of fiscal 2020, compared to a decrease of $4.5 million for the same period in fiscal 2019. The accounts receivable balance decreased to $22.0 million at the end of the first quarter compared to $23.5 million at year end and the collection cycle increased to 53 days compared to 49 days at year end. The inventory balance was $32.0 million at the end of the first quarter of fiscal 2020, compared to $30.2 million at year end and inventory days on hand increased to 131 days at the end of the current quarter from 120 days at the prior year end.

The decreased cash and investment position at May 4, 2019 primarily resulted from increased cash provided by in operations as discussed above, offset by principal payments of long-term debt of $1.6 million, principal payment of guaranteed royalty obligation of $0.4 million, dividends paid of $0.5 million and cash used to acquire property, plant and equipment of $0.6 million.

The Company’s backlog increased 30% from year-end to $33.3 million at the end of the first quarter of fiscal 2020.

Contractual Obligations, Commitments and Contingencies

There have been no material changes to our contractual obligations as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2019, other than those which occur in the ordinary course of business.

Critical Accounting Policies, Commitments and Certain Other Matters

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate.

While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. Except for the changes resulting from the adoption of the new lease accounting standard during the period, there have been no material changes to the application of critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2019. See Note 2, Summary of Significant Accounting Policy Update, in Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for an update on our lease accounting policy.

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Forward-Looking Statements