AstroNova Inc. (ALOT) Q4 2021 Earnings Call Transcript

AstroNova Inc.  (NASDAQ: ALOT) Q4 2021 earnings call dated Mar. 25, 2021

Corporate Participants:

David C. Calusdian — President, Sharon Merrill Associates

Gregory A. Woods — President and Chief Executive Officer

David S. Smith — Vice President, Treasurer and Chief Financial Officer

Analysts:

Samir Patel — Askeladden Capital — Analyst

Dick Ryan — Colliers Securities — Analyst

George Melas — MKH Management — Analyst

Presentation:

Operator

Good day, and welcome to the AstroNova Fiscal Fourth Quarter and Full Year 2021 Financial Results Conference Call. Today’s conference is being recorded. I would now like to turn the conference over to David Calusdian of the Company’s Investor Relations firm, Sharon Merrill Associates. Please go ahead.

David C. Calusdian — President, Sharon Merrill Associates

Thank you. Good morning, everyone, and thanks for joining us. Hosting this morning’s call are Greg Woods, AstroNova’s President and CEO; and David Smith, the Company’s Chief Financial Officer. Greg will discuss the Company’s operating results. David will comment on the financials. Greg will make concluding comments, and then management will be happy to take your questions. By now, you should have received a copy of the earnings release that was issued today. If you do not have a copy, please go to the Investors section of the AstroNova website, www.astronovainc.com.

Please note that statements made during today’s call that are not statements of historical fact are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1934. These forward-looking statements are based on a number of assumptions that could involve risks and uncertainties. Accordingly, actual results could differ materially, except as required by law. Any forward-looking statements speak only as of today, March 25, 2021. The Company undertakes no obligation to update these forward-looking statements. For further information regarding the forward-looking statements and the factors that may cause differences, please see the Risk Factors in AstroNova’s annual report on Form 10-K and the other filings the Company makes with the Securities and Exchange Commission.

On today’s call, management will be referring to the non-GAAP financial measure, adjusted earnings before interest, taxes, depreciation, amortization and share-based compensation, or adjusted EBITDA. AstroNova believes that the inclusion of this measure helps investors gain a meaningful understanding of the changes in the Company’s core operating results and also can help investors who wish to make comparisons between AstroNova and other companies on both a GAAP and non-GAAP basis. A reconciliation of this non-GAAP measure to its most directly comparable GAAP measure is available in today’s earnings release.

And with that, I’ll turn the call over to Greg.

Gregory A. Woods — President and Chief Executive Officer

Thank you, David. Good morning, everyone, and thank you for joining us. Overall, the AstroNova team performed well in fiscal 2021 in spite of the significant challenges created by COVID-19 and the grounding of the Boeing 737 MAX aircraft. Amid these unprecedented challenges, we remained focused on the areas within our control. We moved quickly to realign our workforce, reduce costs and increase liquidity to ensure that we continue to make progress on our long-term strategic objectives.

In our Product Identification segment, we adapted rapidly and launched a comprehensive digital marketing initiative with new interactive content and other tools to accommodate the new virtual environment in which our customers suddenly found themselves. The pandemic and the MAX grounding caused a nearly $20 million revenue drop in our strong gross margin Test & Measurement business. However, through a combination of focused expense reduction and increase efficiencies on a total Company basis, AstroNova was able to post full-year operating income of $2.4 million, which is actually level with fiscal 2020 despite a 13% our $17.4 million overall decrease in revenue on a year-over-year basis.

On the bottom line, we reported full-year net income of $1.3 million, down $475,000 from a year earlier. However, adjusted EBITDA increased by $825,000 year-over-year.

Now, turning to the segmental results. Product Identification turned in another strong quarter with revenue increasing more than 13% to $23.4 million and double-digit percentage growth across the board in hardware, supplies and our services compared to last year’s Q4. Full year segmental revenue came in at $90.3 million, marketing eight straight years of year-over-year growth. Product Identification hardware revenue notched record highs for both the fourth quarter and fiscal year. And we shipped the highest number of color printers in over two years, driven in part by continued strong demand for the T3-OPX printer. With just launched last year, T3-OPX opened up the adjacent Product Identification market known as direct-to-product printing. Its ability to print in full color on surfaces from folded boxes to paper bags, to wooden planks and many others, the T3-OPX is the ideal product to meet the demand for a high-performance overprinting solution for brand owners and other customers across a range of end-markets. Our printer sales drive our supplies business. So the record hardware sales we saw in fiscal 2021 portends well for our supplies business moving forward.

The combination of higher revenue and cost efficiencies translated to gains in the PI segment operating profit margin for both the fourth quarter and the full year. Product margin for the fourth quarter was 13.2% compared with 2.5% in the fourth quarter of 2020. It’s worth noting that for the year, the segment posted an operating profit of 14.3%, which is a record for this segment.

Turning now to our Test & Measurement, revenue in the fourth quarter dropped to $6.1 million compared to $9.8 million in the same period of fiscal 2020 due to the adverse impacts of the continued grounding of the 737 MAX and the aerospace industry demand falloff due to the COVID-19 pandemic. However, in Q4, T&M revenue did increase 19% percent sequentially, quarter-over-quarter. That increase was in part due to a military aerospace shipment, but we are now seeing early signs of a pickup in the commercial aerospace business as well, especially in our repairs and supplies portion of that business.

There are two main drivers to this recovery. One factor is the MAX’s return to service in all major markets, except China, and we’re hopeful that China will come on board soon. And Boeing’s MAX production rates are forecast to ramp up from the current 10 per month to 30 per month in the next year. Early demand is moving in the right direction. The number of carriers placing MAX orders has been increasing in recent weeks, and there are at least 13 airlines flying the MAX. The other factor is the increasing number of passengers returning to the skies due to the rollout of several vaccines. For instance, in the US, over 20% of the population has already received at least one vaccine dose, according to health officials. While airlines are nowhere near returning to the pre-COVID levels yet, recent reports indicate that US air travel has reached its highest level since the pandemic began.

Now looking at geographic mix, domestic revenue accounted for approximately 56% of total revenue in the fourth quarter compared with 63% [Phonetic] for the same period in 2020. International revenue increased to 44% of total revenue in the fourth quarter of fiscal 2021, up from 37% a year earlier. We saw particular strength in EMEA, where we recently enhanced our marketing team. On a related note, we are also expanding our presence in China by opening an office in the southern port city of Guangzhou, complementing our location in Shanghai’s Pilot Free Trade Zone.

Before handing the call to David, I want to first thank our team members around the globe for their dedication and commitment in fiscal 2021. Because of the critical role we play for the aerospace and medical industries, AstroNova was deemed an essential business. All of our global facilities have remained fully operational throughout the pandemic, incorporating all of the necessary health and safety precautions. From the outset, we’ve had no severe COVID-related incidents. That is a credit to our entire team, which over the past year, has worked vigilantly to keep themselves and one another safe, allowing us to continue to meet the demands and requirements of our customers.

Now, let me turn the call over to David for the financial review.

David S. Smith — Vice President, Treasurer and Chief Financial Officer

Good morning, everyone. Thanks Greg. Greg provided a comprehensive review of our performance. So, I’m just going to highlight a few key points from the P&L and balance sheet to provide some context about the results and to reinforce Greg’s remarks.

The Test & Measurement segment revenue was off nearly $20 million with strong gross margin on [Phonetic] revenue. Virtually all of that is directly attributable to the two black swan events of the MAX grounding and the pandemic. The impact of a significant drop like that is very difficult to make up for on the operating income line, but we did it through a workforce realignment, reduction in outside services and other expenses, and through what I would call a digitization of the selling process in our Product Identification business, along with a number of other operational initiatives.

Consistent with the goals that we indicated on prior calls, for the year, we reduced operating expenses by $7.4 million or 16% from fiscal 2020. On a percentage basis, the expense reduction exceeded the decrease in revenue by 3 points. [Indecipherable] cost reductions that improved results that are seen at the gross profit line, for the full year, because of adverse mix, standard margins were down about 300 basis points, but gross margins were only down 90 basis points. But the trend within the year was better. And in the fourth course quarter comparisons, while mix was still a factor in standard margins, it was less so, and gross margins were up 370 basis points from the prior year. We expect a significant portion of the cost reduction initiatives to remain visible in the income statement in fiscal 2020 [Phonetic]. Others, for example, trade show expenses and travel, will likely increase in the future as the ability to travel returns, depending on the degree of our customers’ acceptance of the transition that we’ve made together with them to remote or virtual interaction, as opposed to in-person.

Beginning with this fourth quarter of fiscal 2021, we’re reporting adjusted EBITDA, which is EBITDA further adjusted only for share-based compensation. As we said at the outset of the call here, a reconciliation of adjusted EBITDA to net income is included in the press release, and it differs only very slightly from the calculations that are used in our debt covenants. Adjusted EBITDA was $3.2 million in the fourth quarter of fiscal ’21, or 10.7% of revenue, compared to $42,000 in the same period of fiscal 2020. For the full year, adjusted EBITDA was $10.9 million, or 9.4% of revenue, compared with $10.1 million or 7.6% of revenue in fiscal ’20.

Turning to the balance sheet, our liquidity profile has improved dramatically. Cash and equivalents at year-end 2021 were $11.4 million. Cash and equivalents at the end of the prior year totaled only $4.2 million. Debt at the end of the fourth quarter, excluding the PPP loan, was $12.4 million, which is down from $19.8 million at the end of fiscal 2020 and $24.8 million at the end of the first quarter of fiscal 2021.

As we announced in this morning’s earnings release and which appears in the 8-K filing this morning with more of the details, we just entered into an amendment to our bank credit agreement, which significantly increases our credit availability and improves the term. The agreement, which runs 4.5 years through September 2025, provides for a $10 million term loan, in addition to a $22.5 million revolving credit facility. It also provides for substantially reduced amortization payments and fewer better-structured covenants and other restrictions and some other structural improvements. At closing, our bank term loan debt was $10 million, down $2.4 million from the end of fiscal 2021 [Phonetic], and we have nothing outstanding on the revolving credit facility. The facility also includes a $10 million so-called increase or accordion function built within it, which, while uncommitted, enables streamlined and accelerated access to additional bank financing, should such a need arise.

With that, let me turn the call back to Greg for closing comments.

Gregory A. Woods — President and Chief Executive Officer

Thanks David. We navigated the challenging fiscal 2021 by focusing on the things within our control. The external headwinds of the past year have not disrupted our investment in innovation, the growth engine of our business. We remain on pace to launch at least one major new product per year, coupled with a range of technology innovations and ancillary products.

Now, David and I will be happy to take your questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] Thank you. Our first question comes from Samir Patel with Askeladden Capital.

Samir Patel — Askeladden Capital — Analyst

Hey, guys. Congrats on a great year, all things considered.

Gregory A. Woods — President and Chief Executive Officer

Yeah. Thanks Samir.

Samir Patel — Askeladden Capital — Analyst

So, I guess the first question, I didn’t see the actual credit agreement in the 8-K. Maybe it will be filed. But once you get the PPP loan paid off, are there any remaining restrictions on your ability to allocate capital?

Gregory A. Woods — President and Chief Executive Officer

Nothing significant.

Samir Patel — Askeladden Capital — Analyst

Okay. And so, with that, that’s a pretty big — it seems like you’ve built in some pretty big capacity there. So, you’re looking at M&A opportunities? Or kind of what are you thinking as you come out the other side of COVID?

David S. Smith — Vice President, Treasurer and Chief Financial Officer

I’ll take a crack at that, and then Greg can chime in as well. Clearly, the first thing we want to do is make sure that we have enough capacity to support ongoing operations. At some point, we’re going to start to grow again. We’ll need working capital to support the business that’s the number one requirement. And there is a level of capital that needs to be reinvested in the business, and that will also be critical. Then, beyond that, of course, if there are other external growth opportunities, we’ll have some capacity to handle those. Greg?

Gregory A. Woods — President and Chief Executive Officer

Yeah. Maybe I’ll just answer a little — in a simpler manner. If we take a look at capital allocation and where is the best return on investment going to be, looking at — there are obviously some short-term things we’re typically looking at a medium to long term horizon for that. And as you know, in our past, we have done a number of acquisitions. We do have an active pipeline that — where you [Indecipherable] acquisitions, and that is part of our growth strategy, along with product development and organic growth of the business. So, it will be a combination. And we’re always looking for where is the best place to invest that capital. But the great thing about this agreement — it’s with our existing bank, we were able to renegotiate this agreement. And I think it gives us plenty of firepower if we find a good acquisition or a good investment opportunity to further accelerate the growth of the business.

Samir Patel — Askeladden Capital — Analyst

Great. And then, on the cost reductions, you actually kind of discussed a little bit saying that some of that’s going to stick and obviously some of that may come back. Any more color there? For example, Spirit has talked about being able to get back to sort of prior margins at rate 42 [Phonetic] on the MAX, as opposed to where MAX rates were before. So, I’m just kind of curious like when you guys think that you’ll — how your profits will evolve as kind of — as the aerospace part ramps back up?

Gregory A. Woods — President and Chief Executive Officer

Yeah. So, the aerospace part of it, that doesn’t drive a big part of the cost. We had to keep kind of a critical mass of people in place, and it’s a very specialized business. So, more of the cost reductions happen kind of in the general business, as well as Product Identification side of it. So, I think what you will see is, probably not in the first half very much, but the trade shows will open up again, travel opportunities will open up again. So, those two spending categories have been dramatically reduced for us for obvious reasons.

On the aerospace side, it is a high margin business in some areas, some places. It depends on which product and which opportunities. But in general, we’re kind of under-utilizing our resources right now with respect to facilities. So, as that ramps up, we’ll see some nice margin improvements in that segment of our business as well. And I think it’s pretty well known what that curve is. It looks like a little more hopeful than what people predicted back at the end of last year. So, we’ll keep a close eye on it. But the fact that in the US, they’re posting higher and higher records of passenger travel, that’s a good sign with respect to the MAX. They’ve now got, I think, about 13 airlines around the world that are flying that plane, and Boeing is building back their backlog again, which is good to see.

Samir Patel — Askeladden Capital — Analyst

Yeah. Congrats. And then, the last question, you mentioned major new product introductions. You usually talk about those a little bit more. Anything specific you want to call out for 2021? Or are you going to give us posted?

Gregory A. Woods — President and Chief Executive Officer

I’m probably going to keep you a little bit in the dark for right now. But if it works anything like it has in the past years, we typically have one of those, I should say, Product Identification releases in the fall trade show season. So, I’d say keep a look out for that. Maybe at PACK EXPO, maybe a little bit later, but that’s — there’s things like that in the works.

Samir Patel — Askeladden Capital — Analyst

Understood. Thanks. Appreciate it.

Gregory A. Woods — President and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from Dick Ryan with Colliers.

Dick Ryan — Colliers Securities — Analyst

Thank you. Hey, Greg. You mentioned military shipment for aero in Q4. Can you give us kind of an order of magnitude of that? And is it still ongoing? Or was it completed?

Gregory A. Woods — President and Chief Executive Officer

Yeah. As far as the order of magnitude, I don’t want to comment on that specifically. It’s a good size order, but it certainly wasn’t a lion’s share of what shipped out. It is part of an ongoing contract that we have. It’s a multi-year contract. I think I mentioned in earlier calls, we picked up some of these during the course of the year last year. And there are multi-year agreements. It’s a little bit unpredictable exactly when they give us the releases. So, it’s hard to call which quarter they’re going to hit in. But on an annual basis, we have a fairly good idea of how that’s going to drop in. And we’re working on some other ones as well. So, hopefully, we can add to that.

Dick Ryan — Colliers Securities — Analyst

Okay. It just has been a little bit more time on the aero side. Obviously, with the Airbus, your standard offering there, the MAX it’s a kind of airline decision, any sense of if Boeing had inventory of your printers? Or are you starting to ship with kind of a clean inventory slate from them?

Gregory A. Woods — President and Chief Executive Officer

Yeah. Typically, they don’t keep a lot of inventory of our printers because that’s a buyer-furnished equipment. So, the airlines actually purchase the printers for us — for their particular aircraft that’s going into production, and we ship those Boeing so they can be installed on that airline’s production tail. So, we are starting to see the orders come back in from the airlines for us to ship to Boeing. We don’t get visibility on what they have for inventory. Obviously, they keep some for last minute emergencies and things like that, but they don’t typically keep a lot of inventory of our printers.

Dick Ryan — Colliers Securities — Analyst

Has COVID impacted how airlines are viewing either new printers or upgrading old printers that are already installed? Any sense of airlines making kind of different decisions post COVID?

Gregory A. Woods — President and Chief Executive Officer

We’re not 100% post-COVID yet. But where we’ll see the impact there — I mean, we had a couple announcements last year of airlines actually adopting our newer printers. We do expect that, that kind of upgrade program would continue. Our ToughWriter brand has the number of superior features and functions compared to some of the other brands that we acquired. So, I think we’ll see more migration to our ToughWriter. It’s a multi-year process. In the airline industry, things tend to move fairly slow, but we will see that. The other thing we can re-engage with a number of these airlines, we had several potential deals in the works prior to COVID. People upgrade their old printers to our newer printers. And one of the biggest things is, the weight is about half the weight of a typical competitive model. So we’re reengaging with some of those airlines now. As they get better financial footing, they are able to make those kind of decisions, and we’re seeing that with a few airlines already.

Dick Ryan — Colliers Securities — Analyst

Okay. On the supply chain side for both ends of the business, we hear of, obviously, electronic shortages. We hear of plastics. You’ve got some supply issues up and down the line. How has that impacted you guys? I didn’t see any boost in inventories. So you’re building kind of some stockpile there. But how are you seeing your supply chain?

Gregory A. Woods — President and Chief Executive Officer

We’re seeing things lengthen out in certain areas because of the — our supply chain is fairly long. Some aerospace products especially are 6 to 12-month delivery. The only good thing about that is things dropped off so quickly that we had a huge surplus. So, the surplus is actually, in this case, kind of a good thing because it’s cushioning some of these disruptions we’re seeing with transit times, things we ship by sea. I think in all the stories, ships are sitting out there trying to get into the docs, or they’re stuck in the canal somewhere. Those things haven’t been critical for us because we have a pretty big buffer. And we do that on purpose too. We don’t — didn’t want it quite as high as it was because of the downturn. But in this year, it’s actually turning out to be a good thing because we haven’t really seen things that are disrupting our operations in any significant way.

Dick Ryan — Colliers Securities — Analyst

Okay. Thank you.

Gregory A. Woods — President and Chief Executive Officer

Sure. Thanks Dick.

Operator

Thank you. Our next question comes from George Melas with MKH Management.

George Melas — MKH Management — Analyst

Hi, good morning, Greg and David. Congrats on a good year. Certainly an interesting year. I have sort of a follow-up question on aerospace. I think you guys noted that it was down $17 million year-over-year. Is there anything that makes you doubt whether you can go back, whether that business can go back to the revenue level of fiscal ’19 of fiscal ’20?

Gregory A. Woods — President and Chief Executive Officer

Yeah. Just one quick correction. I know, we went through a lot of numbers quickly there. So the Test & Measurement segment, which of course is largely aerospace, decreased by $19.6 million. So, that was the aerospace-related hit. Our overall AstroNova revenue was down $17.4 million year-over-year, just kind of clarifying that. But to your question there, we do expect that it’s going to grow back. But it depends who you listen to. Some people are saying two years. Between two and four years is what people are predicting to get back to those kind of levels. The one thing that we do know from a couple of points of view, there’s people switching to the ToughWriter, like I talked about. Our brand tends to be a higher volume product for us. This is our main brand. And the margins, therefore, are a little bit better on that. So, as more people switch to that brand, that’s an overall improvement to our bottom line. So, the other thing that’s going to help us is, you are having to reduce costs and be more efficient on things this past year. We’ve learned a few things as well. So, as we ramp back up, we’re fairly confident that you’re going to see higher margins on the way back up, as we get back to that level. So, whenever we get there, it’s hard to predict. But getting back to those kind of revenue numbers, you will see higher margins, if we can stick to the plan that we have in place right now.

George Melas — MKH Management — Analyst

Okay. And from a revenue perspective, from a market share perspective, with the airlines — with Airbus, is there any meaningful change in the last two or three years?

Gregory A. Woods — President and Chief Executive Officer

We picked up a little bit of market share. So, we have a substantial market share already. So, we kind of added to that a little bit. I don’t expect it to decrease, but you never know what’s going to happen out there. And going forward, really our game plan — and we’ve talked about this before — is like our networking products, adding other products to the mix since we’re a supplier right now to all of the major OEMs. Some 200 airlines, we’re a direct supplier to, and a lot of the tier 1 companies like the Honeywells and Thaleses of the world, for example. So, our focus really now is kind of on the upgrades and adding more products to the mix.

George Melas — MKH Management — Analyst

Okay, great. And then, a question for David. David, the cost came down quite — the opex came down significantly this coming — this year. I think sort of sequentially, they’re picking [Phonetic] back a little bit. What do you expect in the coming year from an opex perspective?

David S. Smith — Vice President, Treasurer and Chief Financial Officer

We are not going to give any specific guidance on our opex expectations. What we have said, and I’ll just reiterate, is that we do expect a fair portion of the operating expense reductions that we’ve been able to obtain to stick and to be available to us this coming year. We’ve been a little bit cautious in letting people know that there are some expenses that probably will tick back up. So, it’s going to be not 100% of what we’ve been able to reduce, we’ll get to keep. But it will be a substantial portion of it.

George Melas — MKH Management — Analyst

Okay. Thank you very much.

Operator

Thank you. Next, we have a follow-up from Samir Patel with Askeladden Capital.

Samir Patel — Askeladden Capital — Analyst

Hey, I just wanted to follow up on the aero side. I don’t know if you still disclose the breakdown of supplies and hardware in that business. But I was just curious kind of independent, you’ve two drivers. You’ve the production ramp of the MAX and then other aircraft back to pre-COVID levels over the next two to four years, as you said. And then you hopefully have sort of the shorter term, you talked about the pickup in US domestic travel, for example, on the supply side. So, I was curious if you have any thoughts there.

Gregory A. Woods — President and Chief Executive Officer

Yeah. We don’t disclose it down at the segment level. But what you see first is, the more the planes fly — [Indecipherable] comment before — the more the planes are flying, the more they use our supplies and the more they break printers or a cup of coffee gets dumped [Phonetic] in. Whatever happens [Indecipherable] over 20 years or 10 years, they — some they can wear out. So, our MRO portion of the business, we’ve seen that pick up faster than the new printer orders. And I would think that would be the case. That will tend to level off and get back — it’s not back to where it was. But it’s — that particular part of the business is probably about 40% back. And as the OEM picks up and more printers are out there, that kind of helps support that business as well. But it’s a smaller part of the overall aerospace contribution. So, it’s helped. It’s great to see that coming back, and that’s driven basically by passenger revenue mile. The more they fly, the more we see that business pick up. But on the new equipment, it’s really based on aircraft production, so kind of supplemented by upgrades.

Samir Patel — Askeladden Capital — Analyst

Understood. Sorry to be nitpicky, David. But you mentioned RPKs just now. Wouldn’t it be more driven just by flights like is it actually — I would assume the amount of paper used during a flight is kind of constant, whether the load factors like high percent or 95%. So, is it more the number of flights or actually the RPKs?

David S. Smith — Vice President, Treasurer and Chief Financial Officer

Yeah, it’s flight, but it’s also the distance of the flights too. So, it’s maybe a better measure [Speech Overlap].

Samir Patel — Askeladden Capital — Analyst

Okay, understood. Thanks. That’s all I have.

David S. Smith — Vice President, Treasurer and Chief Financial Officer

Sure.

Operator

Thank you. This concludes today’s Q&A. I would now like to turn the call back over to Mr. Woods for closing remarks.

Gregory A. Woods — President and Chief Executive Officer

Great. So, thank you, everyone, for joining us this morning, and we look forward to keeping you updated on our progress in the future. Have a good day.

Operator

[Operator Closing Remarks]