AstroNova, Inc. (ALOT) Q3 2021 Earnings Call Transcript

AstroNova, Inc. (NASDAQ: ALOT) Q3 2021 earnings call dated Dec. 07, 2020

Corporate Participants:

David Calusdian — Investor Relations

Gregory A. Woods — President and Chief Executive Officer

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

Analysts:

Dick Ryan — Colliers Securities — Analyst

Presentation:

Operator

Good day, and welcome to the AstroNova’s Third Quarter Fiscal 2021 Financial Results Conference Call. [Operator Instructions]

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, sir.

David Calusdian — Investor Relations

Thank you. Good morning, everyone and thank you 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 facts 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, December 7, 2020.

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, earnings before interest, taxes, depreciation and amortization or EBITDA. AstroNova believes that the inclusion of this measure help investors gaining 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. And good morning, everyone. Thank you for joining us today. We performed in line with our expectations for the third quarter, particularly in light of the ongoing effects of COVID-19. In the Product Identification segment revenue and operating margin increased sequentially and year-on-year. While in Test and Measurement, our results continue to reflect the effects of the pandemic on the commercial aerospace industry.

Let me touch on each of these segments. On the Product Identification side, we’re seeing the benefits of our new and fully updated product offerings, combined with the expanding emphasis on digital sales and marketing. Our enhanced digital presence highlighted by our new website, astronovaproductid.com has been very well received.

Earlier this quarter, we launched the new site globally, which integrates our QuickLabel, TrojanLabel and GetLabel brands into one comprehensive site with state-of-the-art interactive capabilities. This site includes digital educational content; such as online demonstrations, eBooks, white papers and blogs to help customers make and form decisions. The response from the user community to all of the newly added digital thought leadership content has been very positive across the board.

Product Identification revenue in the quarter of $22.9 million, was up more than 5% year-over-year and nearly 6% on a sequential basis. Segment operating profit increased by 87%, the $3.5 million due to the higher revenue, as well as operating expense reductions. These results were driven by strong demand for our printers and suppliers.

Putting our new color label printers; such as the QL-120X and the QL-850, as well as the recent released wide format direct product and packaging printer, the T3-OPX, which continues to exceed our expectations. The rate of new customer acquisition was also favorable, which contributed to the segment’s strong performance in Q3. Innovations and Technology and applied marketing are cornerstones of our Product Identification growth strategy.

At the recent PACK EXPO Connects digital trade show, we demonstrated a range of advanced new products that enable customers to further increase productivity, reduce waste and drive those efficiencies to the bottom line. These new offerings include several new products that expand our reach into our customers’ Product Identification automation processes. For example, the LF-100 and LF-200 label finishers, compact all in one desktop finishing systems to that in line label elimination and die cutting, saving production time and lowering media expenses.

And the T2-C-based Print and Apply solution, a new downstream adjacency for us, that combines our label printing technology with high-speed automated robotic label placement. PACK EXPO Connects with our first large-scale virtual trade show. We hosted eight interactive seminars, as well as a broad range of video demo rooms, all were well received and well attended and our sales teams are now busy following up with those attendees.

Turning to Test and Measurement, not surprisingly the combination of COVID-19 and the 737 MAX grounding continue to adversely affect commercial printer deliveries in Q3. Segment revenue of $5.1 million was down about $6.4 million year-over-year and $900,000 sequentially. That being said in light of recent developments, we’re hopeful that the third quarter will represent the low point for our T&M segment, so we don’t have a crystal ball. The potential of approved coronavirus vaccines in the coming days and the FAA’s November decision of clearing the 737 MAX to return to service are positive signs for our commercial aerospace business as we move through fiscal 2022 and beyond.

The aviation industry works its way through what is expected to be a gradual recovery. We have restructured the commercial aerospace portion of our business to more closely align our operations with the current reduced production levels. Even, if these reduced operating levels, however, we have made sure to keep our core technical and support teams in place, so that we can rapidly ramp up productions as the current crisis abate.

In terms of recent highlights. During the third quarter, we announced the receipt of an exclusive multi-year commitment from the major North American carrier, which is deploying our narrow formats ToughWriter printers in its Boeing 737 aircraft. As I noted on the Q2 call, this will likely result in more than 200 printer orders during the term of that agreement.

The defense portion of our [Indecipherable] Test and Measurement segment, while traditionally a much smaller component of revenues and commercial is growing and trending positively. On our last call, I mentioned the receipt of a printer contract for military transport aircraft, when we continue to pursue similar airborne activities and opportunities. Additionally, we have received initial orders for our new data acquisition recorders and telemetry systems for evaluation of several US and foreign military ground facilities. These early successes bode well for this next generation equipment.

Now, let me turn the call over to David for his financial review. After which I’ll make some concluding remarks and then we’ll open the line for questions. David?

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

Thank you, Greg, and good morning everybody. Rather than repeating all the information on the earnings release, I’ll just highlight a couple of key points about our P&L and balance sheet.

In light of the ongoing economic impacts of COVID-19 and the 737 MAX impacts on us. In Q3, we again remain focused on cost control initiatives. As a result of actions that we’ve taken this year, including in the third quarter, operating expenses declined by about $2.5 million or 21% from the year earlier quarter through the first nine months of fiscal year ’21.

Operating expenses are down $5.3 million or nearly 16%, which is about the same as a revenue percentage drop over that period. As a reminder, in the second quarter, we reduced executive compensation and post across the board freeze on all other employee compensation at 2019 levels and reduce the host of expenses in professional and other services, travel and trade show expenses and so forth.

For fiscal 2021, we’re still targeting a more than $7 million reduction in operating expenses, compared with fiscal 2020. On a percentage basis, we’re aiming to have the expense reduction exceed the decrease in revenue. One potential risk that targeted rate — targeted reduction is an uptick in COVID cases that has affect us over the past month and could result in higher personnel expenses in Q4.

The operating margin in the quarter was 1.5%, up 20 basis points from the same period last year. As for non-cash charges, depreciation and amortization were $1.4 million and share-based compensation was $591,000.

EBITDA in the quarter was $1.7 million or 6.1% of revenue. Through the first nine months of the year EBITDA is $6.1 million or 7.1% of revenue. On the other — but expense line, we reported an expense of $436,000 in the quarter, which primarily reflects interest expense and also some foreign exchange losses.

Turning to the balance sheet. Cash and cash equivalents at the end of the quarter were $9.6 million, that was $17.9 million or $13.5 billion, excluding the $4.4 million Payroll Protection Program loan, which we still expect will be forgiven. During the quarter, we paid down $2 million of revolving credit debt in amortized and other $800,000 in our term loan, thus reducing our total debt by $2.8 million from the period ending August 1. We don’t have the full $10 million available under our revolving credit facility.

Our debt structure challenges earlier this year after the two black swan events of the 737 MAX and COVID have been resolved. We are and expect to remain in compliance with all bank covenants and plan to refinance or restructure our debt facility at some point in the coming quarters. We’re comfortable with our liquidity position relative to our operating requirements.

In terms of working capital, at quarter end the net of inventory and payables have declined about $1.2 million, compared to the end of the fiscal second quarter. Receivables were up $800,000, due to heavy shipments at the end of the quarter, but day sales outstanding’s are constant and other quality metrics are good.

Another note, because it comes up, we continue to pay the guaranteed minimum royalty to Honeywell under our asset purchase and license agreement and that guaranteed liability shows up in current long-term liabilities on the balance sheet. But as in the second quarter, due to decline in aerospace lion [Phonetic] we had no excess royalty payments in the third quarter.

With that, I’ll turn the call back over to Greg.

Gregory A. Woods — President and Chief Executive Officer

Thanks, David. Looking ahead, we’re optimistic that the third quarter momentum in our Product Identification business will continue in Q4. Aged [Phonetic] by a growing base of new customers and the ongoing ramp-up of new product. On the Test and Measurement side, we’re expecting fourth quarter revenue to be stronger than the third quarter based on anticipated contributions of shipments for defense applications.

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

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] Thank you. Our first question comes from Dick Ryan with Colliers.

Dick Ryan — Colliers Securities — Analyst

Thank you. Hey, Greg you mentioned on the Product ID side some new customer acquisitions. Can you again — can you give us a sense of how many new customers have come in? Or maybe just from a geographic standpoint where you’re seeing strength and weakness in the Product ID side with your new marketing initiatives?

Gregory A. Woods — President and Chief Executive Officer

Sure. It’s really — it’s pretty widespread quite frankly, I mean, we still have some sectors like retail are not doing well, but a lot of our segments are extremely doing fairly well. The new customers, you know, in North America, Europe and Asia, all have a good contribution of new customers. It was partly driven by new products to get us into new market areas, as I highlighted. For example the T3-OPX, which instead of printing labels, we should then apply to a product, you can print directly onto packages, bags, wood, whole variety of things, so that’s opening up opportunities with, for example commercial printers, as well as brand owners, so the new customer markets for us.

And then even in the label business, we’re getting more and more new customers as opposed to — that we always track their percentage of upgrades, we were very high loyalty with our customer base. So let’s say it’s pretty consistent, but we keep a closed eye on the actual new customers and new markets. One example, I could throw out there, which — would pretty much see all across the North America is the CBD business, so we’re getting quite a few new customers there in variety of states and territories.

Dick Ryan — Colliers Securities — Analyst

Any COVID-driven business creating opportunities for you?

Gregory A. Woods — President and Chief Executive Officer

We’re still seeing that in terms of the janitorial cleaning supplies, chemical products that is actually still ramping, as well as medical products, though we said we have several, kind of, PPE type customers and actually medical test companies too, where they can label business. And recently we got a few new customers and kind of the eye care area, which benefits really COVID-related or not, but just a better penetration overall for our business within the medical industry.

Dick Ryan — Colliers Securities — Analyst

Okay. On the T&M side, the sequential increase anticipated for the aero side. Is that pretty much driven by the new military contract? And maybe a bigger perspective on the 737 MAX issue? Is there other printers in inventory that have to be worked through as their production ramps, kind of, slowly improve? Or is that, kind of, a book and ship business with our level of production?

Gregory A. Woods — President and Chief Executive Officer

Yes. So with the Boeing 737 MAX, it’s a bit of a mix and Boeing does keep some inventory, but they don’t keep a lot, it’s mainly customer purchased printers, which we then directly shipped to Boeing for their aircraft assemblies is coming on the production line. And as you know it’s — it has restarted, but it’s, kind of, in the single-digit type of numbers as far as the Boeing aircraft production. But we are seeing increases in — Aero mentioned the actual aircraft models, but there are some of them that we went through a dry spell of very low to no orders for several months, we have started to see those orders come into. A good chunk of those won’t hit until next fiscal year, but it’s a good sign that’s moving in the right direction. So what I’d say is — it’s a mix of a slow uptick in the commercial business versus it had been going in the other way. And then we do have a few of these different defense contracts that are due to shipped in — actually December and January, but it should give us a bit of a bump here in the fourth quarter.

Dick Ryan — Colliers Securities — Analyst

Okay. What does the Honeywell hand-off and I mean, obviously it’s — you’ve got the COVID issues, but how much longer do you anticipate that impacting margins?

Gregory A. Woods — President and Chief Executive Officer

No, we’re hopeful to wrap it up this quarter. I know, we’ve been trying to get it done for a few quarters here, but COVID did have some impacts in terms of restructuring it other — both at Airbus and Honeywell, as well as our own organization, so that’s a little bit of disruption to the contract negotiations, but we’re certainly in the final stages right now. I would say very high probability that we’ll have it done in Q4. And then get that will — the impact will start pretty much immediately from there.

Dick Ryan — Colliers Securities — Analyst

Yes, okay. Okay, great. Thank you.

Gregory A. Woods — President and Chief Executive Officer

Okay, Dick. Thanks.

Operator

Thank you. [Operator Instructions] At this time, I’m showing no further questions. 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. Well thank you all for joining us here this morning. And on behalf of everyone at AstroNova. Have a wonderful safe and healthy holiday season. And we look forward to keeping you informed and updated on our progress. Goodbye.

Operator

[Operator Closing Remarks]