AstroNova, Inc.
Q4 2015 Earnings Call Transcript

Published: 16 Mar 2016

[Operator:]

Good day and welcome to AstroNova’s Q4 Fiscal Year 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Scott Solomon. Please go ahead, sir.

[Scott Solomon:]

Thank you, Orlando, good morning everyone and thank you for joining us. Hosting this morning’s call are Greg Woods, AstroNova’s President and CEO; and Joe O’Connell, Senior Vice President and CFO. Greg will begin the call by reviewing the company’s operating highlights, business outlook. Joe will take you through the financials; Greg will make some concluding comments; and then, management will be happy to take your questions. Today’s earnings release and supplemental slides are posted on the Investors Relation section of our website at www.astronovainc.com. Please note that the statements made during today’s call that are not statements of historical fact are considered forward-looking statements within the meaning of the Securities and Exchange 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. Such forward-looking statements speak only as of the date made; except as required by law, 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 company’s risk factors in the annual report on Form 10-K and other filings the company makes with the Securities and Exchange Commission. To supplement its consolidated financial statements presented in accordance with GAAP, AstroNova uses non-GAAP net income, non-GAAP net income per diluted share and free cash flow. The company believes that the inclusion of these non-GAAP financial measures in this press release and on this conference call help investors gaining meaningful understanding of the changes and the company’s core operating results, it can also help investors to make comparisons between the company and other companies on both a GAAP and a non-GAAP basis. Management uses these non-GAAP measures, in addition to GAAP financial measures, as the basis for measuring its core operating performance and comparing such performance to that of prior periods and to the performance of its competitors. These measures are also used by management to assist with their financial and operating decision-making. For more information please see the GAAP to non-GAAP reconciliation tables in this morning’s earnings release. The tables have more details about the GAAP financial measures that are most directly comparable to the non-GAAP financial measures and the related reconciliations between those financial measures. Now I’ll hand the call over to Greg Woods.

[Greg Woods:]

Thank you, Scott. Good morning everyone. We kept a successful and profitable year with a healthy fourth quarter, highlighted by 15% growth in our domestic business and double-digit percentage gains in orders and backlog. We continue to execute against the strategy built on expanding our geographic reach, growing our recurring revenue stream and creating a culture of operations excellence resulting in greater efficiency across both manufacturing and product development. The improved efficiency is evident in the $4.7 million of free cash flow generated in fiscal 2016. Supporting that efficiency of course is the AstroNova operating system. This is the foundation of our drive toward continuous improvement in product innovation, quality, delivery, cost and growth. Now let me take a moment to briefly review our financial results. Q4 was a company’s 14th consecutive quarter of year-over-year revenue growth. This result was paced by our domestic channel, which grew 14.9% over the same period of fiscal 2015. Fourth quarter revenue of $23.8 million increased 7.7%, while bookings grew 19.7% to $24.9 million. On the international front, our revenue declined 8.3% on a U.S. dollar basis from the fourth quarter of last year but was down only about 1% in constant currency. Once again in the fourth quarter, our growing export dealer channel performed very well, reflecting the contributions from the new direct sales locations we opened in Asia and Latin America over the past year. Looking at our business segments, QuickLabel Systems accounted for approximately 70% of the revenue in both the fourth quarter and full year for fiscal 2016. Global demand for our Kiaro! brand color label printers and consumables remains very strong. Thanks in large measure to the quality of our products, service and support. As some of you know during fiscal 2016, we transitioned our consumables plant here in West Warwick to a three shift operation to accommodate the increased demand. We also began replacing our decades old production equipment with fully automated state-of-the-art systems. Our first new converting machine came online at the end of fiscal 2016. And we're already seeing significant productivity improvements as a result. Other new systems are slated to follow in the coming quarters. Turning to our Test & Measurement segment, orders were up 38% for the fourth quarter and 18% for the full year. Our fourth quarter sales were down slightly from the same period in fiscal 2015 and down 3.6% for the full year. As we've discussed previously, the offset between orders and shipments has been driven by some aerospace customers extending deliveries into future quarters. Fiscal 2016 was also an important year for the company from an M&A perspective. In June, we acquired RITEC aerospace printer product line for civil and commercial aircraft, expanding our leadership in these markets. The transition of the RITEC business to our manufacturing facility in West Warwick is nearly complete. That will occur upon received a final regulatory approvals, which is expect to have in Q2. Until then RITEC continues to manufacture the printers under contract with AstroNova. RITEC is our second acquisition in the aerospace business in the past two years. In January 2014, we acquired the Miltope product line adding new printer models to our line-up. In addition, we significantly expanded our airline customer base both domestically and internationally. Orders – order trends rather, within the global aerospace business remain positive. We believe that the industry demand drivers continue to bode well for us. The other product group in our T&M segment is data acquisition. During the second half of fiscal 2016 we launched the first of our next generation to access data acquisition products. The Daxus products including array of high-performance features, that deliver increased accuracy and wide ranging connectivity in a compact portable design. The Daxus products include our industry-leading graphical set up and analysis software, that lets users install a system and begin collecting data in just minutes. The first Daxus model has been well received as we have rolled it out around the globe. Look for additional members in the Daxus product line to be released as we move through the year. Before turning it over to Joe for his finance review, let me add that I’m extremely proud of the success that our global AstroNova team has achieved. Over the past three years we have grown our top line by a compound annual rate of 16%, in large measure because we have significantly transformed the way we do business. We have implemented a number of operational excellence initiatives and a rigorous product development system that are both empowering our employees and benefiting our customers. By converting over a third of our operations, the cellular manufacturing for example, we have not only saved floor space, but shorten the time it takes to assemble, test and package our products. Another initiative, we kicked off a new inventory reduction program in the second half of fiscal 2016, and has already reduced the inventory on hand by more than 5%. These ongoing efforts will continue to create opportunities for margin expansion and improved cash flow. From an IT perspective, the most significant accomplishment of fiscal 2016 was the conversion of our Enterprise Resource Planning system to the new Oracle E1 platform. In addition to the new E1 software, this required a complete upgrade of our computing and networking hardware systems. It will take time of course to fully realize all the benefits of this new platform. But we’re confident that the scalability and versatility of the new ERP system gives us the strong data integration analysis foundation. We need to support the global integration phase of our IT upgrade program. With the E1 platform now in place, we will begin the process of integrating the many stand-alone subsystems throughout the company, such as CRM and PLM with our new E1 environment. Once completed in fiscal 2018, we will have a very powerful integrated global information system to support our continued growth for many years to come. Finally, one of the most visible initiatives in 2016 was our worldwide corporate rebranding to AstroNova. The new brand reflects our traditional strengths in aerospace, complemented by a larger presence in Test & Measurement, Product Identification and other markets where our data visualization technology gives a strong competitive advantage. Now let me turn the call over to Joe, for his financial review.

[Joe O’Connell:]

Thank you, Greg, good morning everyone. Let’s start with the income statement – excuse me, the net sales in the fourth quarter were nearly 7.7% – up 7.7% to $23.8 million. Our domestic sales which you heard earlier were up 14.9% in the fourth quarter over fiscal 2015 to $17.4 million. Our international business, our foreign currency headwinds resulted in a decline of 8.3%. However on a constant currency basis, sales would have been basically lower by only maybe 1%. Looking at our business segment, QuickLabel Systems posted sales of $16.6 million, that’s 12% ahead of the fourth quarter of fiscal 2015. We continue to see strong demand for our Kiaro! family of products, particularly our inks, labels and other consumables. Sales in the Test & Measurement segment which includes ruggedized products for the aerospace market in data acquisition systems totaled $7.1 million for the fourth quarter, it’s down 1% from the same period of fiscal 2015. As mentioned in our Q3 call, orders from some aerospace customers have been extended into future quarters. Looking at the sales by product category, our consumables saw another quarter of strong double-digit growth, increasing 17.8% year-over-year to $12.8 million and representing 54% of our total quarterly sales. Our media plant West Warwick continues to operate a third shift, which has enabled us to increase the capacity of our facility as well as shorten our customer lead times. Hardware sales were down approximately 5% from a year earlier to $9.1 million in the quarter, due primarily to the timing of orders from some aerospace customers. We expect to see an uptick in hardware revenues as orders are placed in subsequent quarters. Sales from our service, parts and repairs totaled $1.9 million in the quarter, that’s a 14.8% increase from the same period of fiscal 2015. Gross profit for fiscal 2016 fourth quarter increased to $9.1 million from $8.6 million in the same quarter of the prior year. Our gross margins in the quarter were 38.4% versus 39% in the fourth quarter of fiscal 2015. The variance in gross margin related largely to product mix, cost associated with the product line integrations and absorption in our manufacturing operation. Operating expenses in the quarter increased 6.8% to $8.3 million, from $7.8 million for the same period of a year ago. The increase is largely from discrete costs associated with the RITEC transaction and our rebranding initiative. Operating income in the fourth quarter was unchanged at $793,000 with an operating margin of 3.3% and that compares with an operating margin of 3.6% for the same period of fiscal 2015. Turning to the segment operating profit, QuickLabel Systems generated $1.7 million in segment operating profits with a margin of 10.2%, where as Test & Measurement, at operating income of approximately $1 million with a corresponding margin of 14%. Our federal, state and foreign tax provision in the quarter was $352,000 representing an effective tax rate of 29.8% and that compares against last year's 6.2% in the fourth quarter of fiscal 2015. Fourth quarter net income was $828,000 or $0.11 per diluted share, compared with $543,000 or $0.07 per diluted share in the fourth quarter of fiscal 2015. On a non-GAAP basis excluding the expenses associated with the RITEC acquisition, rebranding initiative, et cetera, our net income for the fourth quarter was $1.3 million or $0.17 per diluted share. This compares with $758,000 or $0.10 per diluted share in the fourth quarter of 2015, which includes the share buyback costs and the write-down of an asset held for sale. For the 12 months ended January 31, 2016, we reported revenue of $94.7 million, that's an increase of 7.1% compared to the $88.3 million reported for the same period of fiscal 2015. On a constant currency basis, full year revenue would have increased 10.5% to $97.7 million, the difference being of course the foreign exchange rate of about $3 million. GAAP net income was $4.5 million or $0.61 per diluted share, compares with net income of $4.7 million or $0.60 per diluted share in fiscal 2015. On an adjusted basis excluding the items listed in the reconciliation table in our earnings release, non-GAAP net income was $0.77 per share in fiscal 2016, that’s 18.5% higher than the $0.65 reported for 2015. Our balance sheet remains healthy. Total assets at the end of the fourth quarter were $78 million. Our equity balance for the same time frame was $67.3 million, representing a book value of $9.18 per share, and that’s up from the prior year end of $8.76 per share. Our cash and marketable securities at the end of fiscal 2016 were $20.4 million, compared with $23.1 million for the end of fiscal 2015. Accounts receivable at the end of the quarter were $15.3 million, representing some 50 days sales outstanding. This compares to the 52 days sales outstanding at the end of fiscal 2015. Inventory levels at the end of the quarter – at the end of the year were $14.9 million, representing 92 days of inventory on hand. This compares favorably to inventories of $15.6 million at the end of fiscal 2015, representing 104 days on hand. Our capital expenditures in the quarter were $888,000 primarily related to information technology, building improvements machinery equipment tools and dyes. The company returned $514,000 to shareholders in the fourth quarter in the form of cash dividends representing $0.07 per share. Our employee population is stood at 329 folks at the end of the fourth quarter that’s down some 12 employees from the prior year. Our sales per employee increased to $286,000 up approximately 7% from the $267,000 per employee at the end of the prior year. Orders received in the fourth quarter increased 19.7% to $24.9 million reflecting a strong demand for all of our products. We exited the fourth quarter with a backlog of $16.6 million approximately 38% higher than the end of the previous fiscal year. The strength of our liquidity is also evident in the $4.7 million in free cash flow generated in fiscal 2016. Let me conclude by saying that on March 31, Greg and I will be presenting at the Sidoti Spring 2016 Emerging Growth Convention in New York City. Then in mid-April will be meeting with investors in Boston and New York, as part of an investor road show. To schedule a one-on-one please contact Sharon Merrill Associates at 617-542-5300. Now let me turn the call back over to Greg.

[Greg Woods:]

Thank you, Joe. Investments we’re making in new products, processes and infrastructure positioned AstroNova for growth in fiscal 2017 and beyond. We will continue to support that growth through focused, carefully planned strategies, designed to advance our leadership in data visualization technology. Now Joe and I will be happy to take your questions. Operator?

[Operator:]

Thank you. [Operator Instructions] We’ll take our first question from Tom Spiro with Spiro Capital.

[Tom Spiro:]

Tom Spiro, Spiro Capital, good morning.

[Greg Wood:]

Good morning, Tom.

[Joe O’Connell:]

Hi, Tom.

[Tom Spiro:]

Hey, so I had a couple of questions, number one on QLS, it looks like QLS may have struggled a little bit in the quarter as compared to the prior quarter or two. I know you went to the third shift for your consumables, can you give us a little bit of color on how QLS faired [ph]?

[Greg Woods:]

Well, actually – I think we did pretty well, Tom. I think the overall especially driven by the Kiaro! line we’re continuing to be up double-digit in that growth area. But as you know as we’ve talked about this before you have a real mix of products within the QLS, because you’ve got some historical products okay that perhaps are not are declining. But the Kiaro! line, which we are very impressed with have done quite well. I think we’re quite pleased with the overall performance of QuickLabel Systems. And you’ll continue to see that growth going forward.

[Tom Spiro:]

Well, I notice the operating income in fourth quarter was down more than a million dollars in the third quarter and sales were down modestly operating income was down more sharply is there anything that we need to be thinking about is there manufacturing issue or some kind?

[Greg Woods:]

I don’t think so Tom, I think the goal for us was to get that over 15% as you know historically if you look at that it’s been almost a single-digit. So and that’s really going to be driven by the growth of the line. Obviously we put a new press during the fourth quarter, this is the new press that state-of-the-art die-cutting press that we’ve installed that just going to improve and increase our capacity. But there’s some obviously reduction to practice issues associated with that. But I think we’re very comfortable that the trend we see with QuickLabel will continue to show improvements in the operating margins.

[Tom Spiro:]

I’m sorry, go ahead.

[Joe O’Connell:]

So I’m just going to add that – significant impact I believe in the fourth quarter but there are several new product development efforts going sort of the R&D spending is up within the QLS group as well.

[Tom Spiro:]

As you transition to the new manufacturing equipment, I would imagine there are some kind of a learning curve associated with that and perhaps – some period of time that your efficiency declined?

[Greg Woods:]

It could be Tom. I think that’s – the good news which as you say with any kind of a transition like that this is really a very significant change in terms of our manufacturing capabilities from the old rotary presses that we have. So, yes you’re absolutely right that we have transitioned but I have to say we’re very impressed at the speed in which people are coming up the learning curve.

[Tom Spiro:]

Have you had the new equipment? Sorry.

[Joe O’Connell:]

I was going to say in terms of both going into the third shift and the new equipment, you’re enough having an overlap where you’re training people. So of course we didn’t have a third shift before. So we have to have extra people that you are training, you have to bring online there so there is a bit of a conversion there.

[Tom Spiro:]

And have you use the new equipment long enough now to conclude that it’s worth adding to it, buying more of them or are you still in a testing phase?

[Joe O’Connell:]

Obviously, it’s running in – I’d say it’s not full production because we’re in a new automatic packing there as well but we’re probably at 90% of full production with the first machine we have and the numbers are actually much better than we expected. So we budget – I won’t say what the numbers are, just kind of help our competitors too much. But we had a certain percentage that we expected the improvement and its probably 50% better delta than we thought it was going to be.

[Tom Spiro:]

We plan on buying more than this fiscal year.

[Greg Woods:]

The expectations I think we have that planned in the capital budget, yes.

[Tom Spiro:]

What is the CapEx budget for this year?

[Greg Woods:]

It's about $2.3 million.

[Tom Spiro:]

I see. Thanks. Over on the aerospace side, I know for the last two or three quarters we discussed the delays from some of the manufacturers to I guess to release production. Can you give us an update on that where all that stands?

[Greg Woods:]

Yes. So you'll start to see some of that kicking in now in fiscal 2017 now they’re into the 2017. It's – some of its new programs as well, which are actually coming online. So they tend to ramp up through the year. So we're looking at, I wouldn’t look for a step function change, but a nice gradual build up as these orders come online. There's a variety of accounts there isn’t like one order that goes from shifting zero to 100% type of thing. So we get several of those coming online that will stack up through the course of 2017.

[Tom Spiro:]

And the completion of the RITEC transaction seems to be taking a bit longer than we expected. What's going on there?

[Greg Woods:]

Yes. So we're done internally in terms of our production facilities are set up. We're ready to roll. We just need to have the regulatory guys give us the green light. So in the meantime, it was – printers are shipping out, but they're under contract. They're still being built by RITEC. Of course, we're building on those, but we have to pay them to build it for us.

[Tom Spiro:]

Why is the regulatory approval taking so long, longer than we expected?

[Greg Woods:]

That’s better how long it takes the FAA and some of the other parties that’s approved these things, yes.

[Tom Spiro:]

Okay. So no – but no issues have been raised is this a problem…

[Greg Woods:]

Yes. It just working through the bureaucracy, it’s not like there's an issue. We have to go back and redo things or however which is…

[Tom Spiro:]

I see, I see. Joe, just a couple of minor sort of a details here. You mentioned the CapEx. What are your thoughts about the tax rate for the new fiscal year?

[Joe O’Connell:]

But we're working on that Tom actually we’re trying to – I think historically we've looked at about 30 effective tax rate about 36%. We're trying to drop that. Obviously, we've got some plans that we're a little bit reluctant to go into right now, but obviously the goal is to get to continue to drive that down. For planning purposes I think we're probably looking at between 34% and 36% for fiscal 2017.

[Tom Spiro:]

I see. Greg, I think you mentioned in your opening comments the domestic sales were up nicely, but the international sales in constant currency were actually down slightly, which just surprise me. Since we've expanded our efforts overseas they hired more folks, opened up branches and such. What's going on there?

[Greg Woods:]

Well, it’s a blend, Tom. Let’s just say the truth, I can just comment on that…

[Tom Spiro:]

Yes, go ahead.

[Greg Woods:]

With multiple channels, we’re very pleased by the way with the expansion in Asia. Europe it’s a little bit of a challenge. I think the – so if you over and then there's dominant piece of the revenue stream that we have internationally. But I think we're expecting to see that improve during fiscal 2017, but certainly we’re very impressed with the growth that we’ve seen in the Far East in terms of brand new businesses.

[Joe O’Connell:]

I mean that’s pretty much, and I would just not throw all of Europe into the same bucket, so we have certain parts of Europe that are down, which – it was a counterweight to – we’ve got other regions in Europe, they’re doing very well actually. So, it’s a bit of an offset there.

[Tom Spiro:]

[Indiscernible] in Europe that are down or down in constant currency, or they’re not?

[Greg Wood:]

Not really, it’s some – as I say, it’s for the most parts I think it’s a case where the availability of products in being able to go ahead and meet the challenges in the marketplace. But, I think we’re – as I said before, I think we’re very comfortable, we’re going to see a nice improvement in the European, all three branches in Europe during fiscal 2017.

[Tom Spiro:]

I see. And lastly, we’ve talked on the last call or two about the challenge of the FX moves were presented. Is there anything we can do there, and sort of over the intermediate term – try to shift some of our costs into foreign currencies?

[Greg Wood:]

We’ve got a couple of things, see on the agenda, time to talk a little bit more, we’ll talk probably next year a little bit more specifics on that. But yes, that’s a focus in terms of trying to temper the impact of the foreign exchange.

[Tom Spiro:]

And then, about next year you mean fiscal 2018 or you mean later this year?

[Greg Wood:]

No, fiscal 2017. This is coming were to – yes, exactly next – this fiscal 2017 period.

[Tom Spiro:]

Thanks, very much.

[Greg Wood:]

Welcome.

[Operator:]

And we’ll take our next question from Steve Busch with Southpaw Investments.

[Steve Busch:]

Hi, guys, another great quarter.

[Joe O’Connell:]

Good morning, Steve.

[Greg Wood:]

Good morning, Steve. Thank you.

[Steve Busch:]

Yes. So, I don’t really have much to add, last caller went over quite a few things. So, your sales are pretty lumpy, quarter-over-quarter, but year-over-year you’re basically saying, you’ve got growth ahead.

[Greg Wood:]

Probably, I mean, the only thing that we see, the aviation business can tend to be a bit lumpy, but we do see a little bit of a trend that we’ve seen actually, we’ve been watching at the last three years or so. Q3 tends to be a bit higher than Q4. So the last three years is kind of been the case. We’ve been pinned down exactly why is not dramatic, but we do see that trend there may have to do with holidays and things like that. So we haven’t nailed down exactly. But yes, on a year-over-year basis and like I said in a few other times and calls, we don’t really try to manage to rush orders in or out to make a particular quarter’s number. We would like to have a nice steady pace, it’s more efficient for manufacturing, and certainly want to get things to customers when they want them not ahead a time and not late certainly.

[Steve Busch:]

Right, I appreciate that. It doesn’t bother me quarter-to-quarter. So two questions, I guess. What’s your biggest concern Greg that isn’t out there right now, but that you worry about that could derail QLS growth over the next year?

[Greg Wood:]

We don’t have – yes, we tend to look at all of the competitive threats, and what now – we have a raft of – there’s always competitors out there, we don’t see those going away. Maybe they could be a dark horse competitor may jump in there. But if you look at the installed base in the channel that we have, no one else has a channel anything like what we have. So even if something like that would emerge, would take many years for someone to tie and replicate or compete with us on what we’re doing. And of course, we’re not sitting still either. So I kind of mentioned a little bit earlier in the call here that QLS has some higher expenses in the R&D area. So you should look for new products coming out, from us this year, which will keep us ahead of the competition. And beyond that you’ve got a kind of a nice tail of consumable business that’s built up amongst the thousands and thousands of printers that we have out there. We have many, many very happy customers that finding new and better ways to actually use their products, they kind of start out it kind of one – one will say, hey, this – these are my I thought, I’m going to extend my brand now into new areas, it’s easier to do, I can take on some smaller customers, they wouldn’t otherwise have been able to justify kind of on-demand basis. So we think it looks – yes, the trend should continue. We don’t see why it should change dramatically.

[Steve Busch:]

Okay. So pretty much buying a complete macro-meltdown, you looking good?

[Greg Woods:]

Yes, even in that area, hopefully we don’t see that. But the nice things about the QLS business, it’s very diversified across markets and lot of them are kind of in the consumer goods – fast moving consumer goods area. So not the recession improved per se, but you’ll get food products and household items, those chemicals, those things tend to move unless – they may drop down a bit, but not as much as a capital type market.

[Steve Busch:]

Right, right. That’s why I love it. Okay. And then so I guess on the food side. Is there anything out there that we haven’t really talked about on these calls or that could drive Test & Measurement all of a sudden is there – what’s out there that could actually all of a sudden help us on the T&M side?

[Greg Woods:]

Yes, like I’ve mentioned in the call here that Daxus product line that we just released the end of fiscal 2016 is the first major product that we’ve had and it’s a whole new platform such as a product. So it’s really, nothing has been done like that here in about five years I guess it was the last time we did it five or six years ago. So it’s been a few years in the making, but what you should see from us now is a steady release of additions to that family. So it’s a whole family we have planned out over the next three years of products. So that will get us into both new markets and strengthen our presence in existing markets. So it takes – it isn’t like you walk into an application there, a lot of its transportation whether it’s rapid rail or aerospace or automotive and they change overnight. But we’re getting those seeds planted with our existing customers and I think the new product is going to be a big part of that driver.

[Steve Busch:]

Okay. Great. Well listen, keep up the good work. I’m quite happy.

[Greg Woods:]

Thank you.

[Joe O’Connell:]

Thank you.

[Operator:]

I’ll now turn the call back over to Mr. Greg Woods for any additional or closing remarks.

[Greg Woods:]

Very good. Thank you. As far as closing that's pretty much what we had. Glad to handle your questions here for you today. Thanks for joining us and have a great day.

[Operator:]

And ladies and gentlemen, that does conclude our conference for today. We thank you for your participation.