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Acquisitions | 9 Months Ended
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Oct. 28, 2017
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Acquisitions | (4) Acquisitions Honeywell Asset Purchase and License Agreement On September 28, 2017, AstroNova, Inc. entered into an Asset Purchase and License Agreement (the “Honeywell Agreement”) with Honeywell International, Inc. 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. The purchase price consisted of an initial upfront payment of $14.6 million in cash. The Honeywell Agreement also provides for minimum royalty payments of $15.0 million, to be paid over the next 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 Company has evaluated this transaction under Accounting Standard Update (ASU) 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” and determined that this transaction should be accounted for as an asset acquisition. Refer to Note 15, “Recent Accounting Pronouncements,” for further details on ASU 2017-01. The initial upfront payment of $14.6 million was paid at the closing of this transaction using borrowings from the Company’s revolving credit facility under its amended Credit Agreement with Bank of America, N.A. Refer to Note 11, “Revolving Credit Facility” for further details. The 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. The current portion of the royalty obligation of $500,000 is reported as a current liability and the remainder of $8.2 million is reported as a long-term liability on the Company’s condensed consolidated balance sheet at October 28, 2017. Transaction costs incurred for this acquisition were $273,000 and have been included as part of the purchase price. In connection with the Honeywell Agreement, the Company also entered into a Transition Services Agreement (TSA) with Honeywell related to the transfer of the manufacturing and repair of the licensed printers from their current locations to AstroNova’s plant in West Warwick, Rhode Island. Subject to the completion of the terms of the TSA by Honeywell International, the Company may make an additional payment of $400,000. The assets acquired in connection with the acquisition were recorded by the Company at their estimated fair values as of the acquisition date as follows:
(In thousands) |  |  |
Inventory |  | $ | 1,411 |
Identifiable Intangible Assets |  |  | 22,162 |
Total Purchase Price |  | $ | 23,573 |
The purchase price, including the initial payment, the minimum royalty payment obligation and the transaction costs, was allocated based on the relative fair value of the assets acquired. The fair value of the intangible assets acquired was estimated by applying the income approach. These fair value measurements are based on significant inputs that are not observable in the market and therefore represent a Level 3 measurement as defined in Accounting Standards Codification (ASC) 820, “Fair Value Measurement and Disclosure.” Key assumptions in estimating the fair value of the intangibles include (1) the remaining life of the intangibles based on the term of the Honeywell Asset Purchase and License Agreement of 10 years, (2) a range of annual earnings projections from $3.9 million – $5.4 million and (3) the Company’s internal rate of return of 21.0%. The acquired identifiable intangible assets are as follows:.
(In thousands) |  | Fair Value |  |  | Useful Life (Years) |
Customer Contract Relationships |  | $ | 22,162 |  |  |  | 10 |
Trojan Label On February 1, 2017, our newly-formed wholly-owned Danish subsidiary, ANI ApS, completed the acquisition of the issued and outstanding equity interests of TrojanLabel ApS (TrojanLabel), a Danish private limited liability company, pursuant to the terms of a Share Purchase Agreement dated January 7, 2017. Based in Copenhagen, Denmark, TrojanLabel is a manufacturer of products including digital color label presses and specialty printing systems for a broad range of end markets. Upon consummation of the acquisition, TrojanLabel became an indirect wholly-owned subsidiary of AstroNova. The purchase price of this acquisition was 62.9 million Danish Krone (approximately $9.1 million), net of cash acquired of 976,000 Danish Krone (approximately $0.1 million), of which 6.4 million Danish Krone (approximately $0.9 million) was placed in escrow to secure certain post-closing working capital adjustments and indemnification obligations of the sellers. The acquisition was funded using available cash and investment securities. The sellers of TrojanLabel may be entitled to additional contingent consideration if 80% of specified earnings targets are achieved by TrojanLabel during the seven years following the closing, subject to certain closing working capital adjustments and potential offsets to satisfy the sellers’ indemnification obligations. The contingent consideration consists of potential earn-out payments to the sellers of between 32.5 million Danish Krone (approximately $5.0 million) if 80% of the specified earnings targets are achieved, 40.6 million Danish Krone (approximately $5.8 million) if 100% of the specified earnings targets are achieved, and a maximum of 48.7 million Danish Krone (approximately $7 million) if 120% of the specified earnings targets are achieved. The fair value of contingent consideration is re-evaluated each reporting period and charges are adjusted through earnings. Total acquisition-related costs were approximately $0.7 million, of which $0.1 million and $0.6 million are included in the general and administrative expenses in the Company’s consolidated statements of income for the periods ending October 28, 2017 and January 31, 2017, respectively. The acquisition was accounted for as a purchase of a business under the acquisition method in accordance with the guidance provided by FASB ASC 805, “Business Combinations.” The US dollar purchase price of the acquisition has been allocated on the basis of fair value as follows:
(In thousands) |  |  |
Accounts Receivable |  | $ | 1,322 |
Inventory |  |  | 796 |
Other Current Assets |  |  | 166 |
Property, Plant and Equipment |  |  | 15 |
Identifiable Intangible Assets |  |  | 3,264 |
Goodwill |  |  | 7,388 |
Accounts Payable and Other Current Liabilities |  |  | (1,821 | )
Other Liability |  |  | (114 | )
Contingent Liability (Earnout) |  |  | (1,314 | )
Deferred Tax Liability |  |  | (695 | )
Total Purchase Price |  | $ | 9,007 |
The fair value of the intangible assets acquired was estimated by applying the income approach, and the fair value of the contingent consideration liability was estimated by applying the real options method. These fair value measurements are based on significant inputs that are not observable in the market and therefore represent a Level 3 measurement as defined in ASC 820, “Fair Value Measurement and Disclosure.” Key assumptions in estimating the fair value of the intangibles include (1) remaining life of existing technology acquired based on estimate of percentage of revenue from 0% – 100% for each product, (2) the Company’s internal rate of return of 19.0% and (3) a range of earnings projections from $121,000 – $1,070,000. Key assumptions in estimating the fair value of the contingent consideration liability include (1) the estimated earnout targets over the next seven years of $407,000–$1,280,000, (2) the probability of success (achievement of the various contingent events) from 1.6%–87.2% and (3) a risk-adjusted discount rate of approximately 1.77%–3.35% used to adjust the probability-weighted earnout payments to their present value. The fair value of the contingent liability will be revalued every reporting period based on updated assumptions. Refer to Note 17 “Fair Value” for further details. Goodwill of $7.4 million, which is not deductible for tax purposes, represents the excess of the purchase price over the estimated fair value assigned to the tangible and identifiable intangible assets acquired and liabilities assumed from TrojanLabel. The goodwill recognized is attributable to synergies which are expected to enhance and expand the Company’s overall product portfolio and opportunities in new and existing markets, future technologies that have yet to be determined and TrojanLabel’s assembled work force. The carrying amount of the goodwill was allocated to the Product Identification segment of the Company. The following table reflects the fair value of the acquired identifiable intangible assets and related estimated useful lives:
(In thousands) |  | Fair Value |  |  | Useful Life (Years) |
Existing Technology |  | $ | 2,327 |  |  |  | 7 |
Non-Competition Agreement |  |  | 937 |  |  |  | 10 |
Total |  | $ | 3,264 |  |  |  |  |
The Existing Technology intangible asset acquired represents the various technologies TrojanLabel has developed related to its series of printing presses, including hardware components of the presses and the software utilized to optimize their performance. Beginning February 1, 2017, the results of operations for TrojanLabel have been included in the Company’s statement of income for the three and nine month periods ended October 28, 2017 and are reported as part of the Product Identification segment. Assuming the acquisition of TrojanLabel had occurred on February 1, 2016, the impact would not have had a material effect on the Company’s results for the three and nine month periods ended October 29, 2016.

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