Note 3—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. (“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 consisted of an initial payment of $14.6 million in cash, paid at the closing of the transaction using borrowings from the Company’s revolving credit facility and guaranteed 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.

This transaction was evaluated under ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” and was accounted for as an asset acquisition.

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. During fiscal 2019, the Company paid $1.9 million of guaranteed minimum royalty payments. At January 31, 2019, the current portion of the outstanding guaranteed royalty obligation of $1.875 million is to be paid over the next twelve months and is reported as a current liability and the remainder of $9.9 million is reported as a long-term liability on the Company’s consolidated balance sheet at January 31, 2019. In addition to the guaranteed minimum royalty payments paid in fiscal 2019 and 2018, the Company incurred $2.8 million and $0.6 million, respectively, in excess royalty expense, which is included in cost of revenue in the Company’s consolidated statements of income for the years ended January 31, 2019 and 2018, respectively. A total of $1.3 million and $0.6 million of excess royalty is payable and reported as a current liability on the Company’s consolidated balance sheet at January 31, 2019 and 2018, respectively.

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. During fiscal 2019, the Company paid an additional $0.4 million to acquire another repair facility revenue stream in accordance with the terms of the TSA. The additional $0.4 million payment was included as part of the Honeywell Agreement purchase price and recorded as an increase to the related intangible asset.

Under the terms of the TSA, the Company is required to pay for certain expenses incurred by Honeywell during the period in which product manufacturing is transferred to the Company’s facilities. In the first quarter of fiscal 2019, a change in accounting estimates for product costs and operating expenses related to the TSA resulted in an increase of $1.0 million in operating income ($0.8 million net of tax or $0.12 per diluted share). Additionally, in the first quarter of fiscal 2019, a change in accounting estimates for revenue subject to customer rebates under the Honeywell Agreement increased operating income by $0.4 million ($0.3 million net of tax or $0.05 per diluted share). These changes in accounting estimates were the result of actual amounts billed and received differing from initial estimates.

Transaction costs incurred for this acquisition were $0.3 million and were included as part of the purchase price.

The assets acquired in connection with the acquisition were recorded by the Company at their estimated relative fair values as of the acquisition date as follows:


(In thousands)
Inventory	$	1,411
Identifiable Intangible Assets		27,243	*

Total Purchase Price	$	28,654

*	Includes additional $0.4 million related to the payment in fiscal 2019 in accordance with the terms of the TSA.

The purchase price, including the initial payment, minimum royalty payment obligation, transaction costs and subsequent additional TSA obligation payment, 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 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	$	27,243		10

Trojan Label

On February 1, 2017, the Company’s wholly-owned Danish subsidiary, ANI ApS, completed the acquisition of the issued and outstanding equity interests of TrojanLabel ApS (“TrojanLabel”). The acquisition of TrojanLabel 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 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. In the first quarter of fiscal 2019, the Company settled the post-closing adjustment with TrojanLabel and recovered approximately 891,000 Danish Krone (approximately $145,000) of the amount held in the escrow account, which was recognized as an adjustment to the allowance account for TrojanLabel receivables. The remaining escrow balance was retained by TrojanLabel.

Part of the purchase agreement included an additional contingent consideration to be paid to the sellers of TrojanLabel if 80% of specified earnings targets were achieved by the TrojanLabel business during the seven years following the closing. However, subsequent to the acquisition, the Company restructured the operating model for the TrojanLabel business such that most of the sales and some of the expenses of the business would be transferred to other legal entities of the Company. This caused the expected earnings targets in TrojanLabel, which was the basis upon which the contingent consideration was structured, to become unlikely to be met. As a result, during fiscal 2018, the estimated fair value of the contingent consideration was reduced resulting in the Company recognizing an additional $1.4 million of income for the year which is offset in general and administrative expense on the Company’s Consolidated Income Statement for the period ended January 31, 2018.

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 years ending January 31, 2018 and January 31, 2017, respectively.

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 (earnout) 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 is revalued every reporting period based on updated assumptions. Refer above and to Note 21 “Fair Value Measurements” 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
Distributor Relations		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 period ended January 31, 2019 and 2018 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 period ended January 31, 2017, as the acquisition was not considered a significant subsidiary.