AstroNova, Inc. (NASDAQ:ALOT) Q3 2021 Results Conference Call December 7, 2020 9:00 AM ET

Company Participants

David Calusdian - Investor Relations, Sharon Merrill Associates
Greg Woods - President and Chief Executive Officer
David Smith - Chief Financial Officer

Conference Call Participants

Dick Ryan - Colliers

Operator

Good day and welcome to the AstroNova's Third Quarter Fiscal 2021 Financial Results Conference Call. Today's conference is being recorded.

I would now like to turn the call over to David Calusdian, of the Company’s Investor Relations firm, Sharon Merrill Associates. Please go ahead, sir.

David Calusdian

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 make a few comments 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 historical 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 including risks being concerning to the non-GAAP financial measure earnings before interest, taxes, depreciation and amortization, or even EBITDA. AstroNova believes that the inclusion of this measure helps 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 more directly compatible GAAP measure is available in today's earnings release.

And with that, I'll turn the car over to Greg.

Greg Woods

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 & 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 at 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 to make informed 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, nearly 6% on a sequential basis. Segment operating profit increased by 87% to $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 through our new color label printers such as the QL-120X and the QL-850, as well as their recent release 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 in 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 customer's Product Identification automation processes.

For example, the LF-100 and LF-200 label finishers unpack all-in-one desktop finishing systems that add in line label lamination and dye cutting, saving production time and lowering video expenses; and the QTC based print and apply solution, a new downstream adjacency for us, that combines our label printing technology with high-speed automated robotic label placements. PACK EXPO Connects with our first large scale virtual trade show. We held 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 & 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 as the third quarter represents a low point for our T&M segments. Though we don't have a crystal ball, the potential of approved Coronavirus vaccines in the coming days and the FAA's November decision clearing the 737 MAX for return to service are positive signs for our commercial aerospace business as we move through fiscal 2022 and beyond.

As 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 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 production as the current crises abate. In terms of recent highlights, during the third quarter, we announced the receipt of an exclusive multiyear commitment from a major North American carrier, which is deploying our narrow formats top-rated 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 customers in this segment while traditionally a much smaller component of revenues in commercial is growing and trending positively, in my last fall, I mentioned the receipt of a printer contract for military transport aircraft, and 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 at several U.S. 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 Smith

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 Q3we 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 imposed across the board freeze on all other employee compensation in 2019 levels and reduced the host of expenses in professional and other services, travel and tradeshow expenses, and so forth. For fiscal 2021, we're still targeting in 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 reduction is an uptick in COVID cases that is effective so that 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 expense line, we've reported expensive 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 with 13.5 billion excluding the 4.4 million Payroll Protection Program loans, which we still expect will be forgiven. During the quarter, we paid down 2 million on a revolving credit debt and amortized another 800,000 in our term loan thus reducing our total debt by 2.8 million from the period ending August 1st.

We now 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 that 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 outstandings are constant and other quality metrics are good.

Another note because it comes up, we continue to pay the guaranteed minimum royalties 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 volume, we had no excess royalty payments in the third quarter.

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

Greg Woods

Thanks David. Looking ahead, we're optimistic that the third quarter momentum in our Product Identification business will continue in Q4, an exciting growing base of new customers and the ongoing ramp up of new products. On the Test & 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'd be happy to take your questions. Operator?

Question-and-Answer Session

Operator

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

Dick Ryan

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

Greg Woods

Sure. It's really pretty widespread, quite frankly, I mean, we still have some sectors like retail are not feeling well, but a lot of our segments now seem to be doing fairly well. The new customers North America, Europe and Asia, all have a good contribution of new customers. It's partly driven by new product because it's in the new market areas, as I highlighted. For example, the T3-OPX, which instead of printing labels, we shouldn't apply to a product. You can print directly onto packages, bags, would hold a variety of things.

So that's opening up opportunities with, for example, commercial printers, as well as brand owners. So, they're new customer markets for us. And then even in the label business, we're getting more and more new customers as opposed that we always track percentage of upgrades, we were very high loyalty with our customer base, so that stays pretty consistent, but we keep a close eye on the actual new customers and new markets. One example I could try out there, which we pretty much see all across North America's CBD business. So, we're getting quite a few new customers there I think in a variety of states and territories.

Dick Ryan

Any COVID driven business creating opportunities for you?

Greg Woods

We're still seeing that in terms of the janitorial cleaning supplies, chemical products that is actually still ramping, as well as medical products. At recent, we have several kind of PPE-type customers and actually medical tests companies too where you can label business. And recently, we've got few new customers and kind of the eye care area, which I don't that's really COVID related, but just a better penetration overall for our business within the medical industry.

Dick Ryan

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

Greg Woods

Yes. So, with the Boeing 737 MAX, it's a bit of a mix. I mean, Boeing does keep some inventory, but they don't keep a lot. It's mainly customer purchase printers, which we then directly shipped to Boeing for their aircraft assembly as is coming on the production line. And as you know, as we started, but it's kind of in the single digit type of numbers as far as installing aircraft production, but we are seeing increases and then we'll mention the extra 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 get until next fiscal year, but it's a good sign that moving in the right direction. So, what I'd say is, it's a mix of a slow uptick in the commercial business versus the head that going in the other way. And then, we do have a few of these different defense contracts that are due to shift in actually December and January that should give us a bit of a bump here in the fourth quarter.

Dick Ryan

Okay, what does the Honeywell handoff? And I mean, obviously, it's you've got the COVID issues, but how much longer do you anticipate that impacting margins?

Greg Woods

We're hopeful to wrap that 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 at other -- both at Airbus and Honeywell as well as our own organization. So that a little 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, that will -- the impact will start pretty much immediately from there.

Operator

Thank you. [Operator Instructions] At this time, I am showing no further questions. I would now like to turn the call back over to Mr. Woods for closing remarks.

Greg Woods

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

Thank you, ladies and gentlemen. This concludes today's call. Thank you for your participation. You may now disconnect.