AstroNova (NASDAQ:ALOT) Q2 2020 Earnings Call

0:01 Please stand by. We're about to begin. Good day and welcome to the AstroNova's second quarter fiscal 2020 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Scott Solomon from the company's investor relations firm, Sharon Merrill Associates. Sir, you may go ahead.

0:24 Thank you, Rochelle. 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 take you through the financials. Greg will make some 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 today during today's call that are not statements of historical fact are considered forward-looking statements within 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.

1:13 Accordingly, actual results could differ materially except as required by law. Any forward-looking statements speak only as of today, August 28, 2019. 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. I'll now turn the call over to Greg.

1:41 Thank you, Scott. Good morning, everyone. Thank you for joining us on the call today. As outlined in this morning's earnings release, a confluence of short-term headwinds affected both our product identification and test and measurement segments. adversely impacting our expectations for revenue and margins in the quarter. These headwinds, however, do not alter our perspective on our overall growth strategy or the fundamentals of our strong positions in our served markets. In test and measurement, the ongoing grounding of the 737 MAX had a more pronounced effect than we had anticipated on revenue and margin mix in the quarter. In addition to lower revenue on new installs, The grounding is having repercussions on our aftermarket business as well. Retrofit printer upgrades and optional maintenance on older model aircraft are being delayed so those planes can be brought back into service to fill the gaps created by the grounding.

2:37 The other dynamic at play in test and measurement during the quarter was an order release pushout related to a multi-year upgrade contract we were awarded for military flight deck printers and related networking gear. We now expect to fill that order in the second half of this year. Results in our product identification segment were mixed. Revenue increased in the quarter, but only modestly, due primarily to a few customer-specific issues in Asia that we associate partly with the macroeconomic climate in that region. From a global perspective, we were especially pleased with the continued growth of our Quick Label QL300 and Trojan Label T2C products throughout the second quarter. In addition to the ramp-up of those products, Our development investments have built up a strong pipeline of new products to ensure we maintain and extend our leadership position in our PI markets.

3:30 Right at the end of the second quarter, we launched another significant new product, the QL120X. This is the first tabletop digital color label printer with a best-in-industry two-year warranty. Equipped with next-generation printed technology, the QL120X enables users to print three times more labels while using up to 35% less ink, making it fast, convenient, and cost-effective for virtually any production environment. We also continue to expand our global presence of our Quick Label and Trojan Label brands during the quarter with the opening of our ninth Innovation Technology Center in Kuala Lumpur, Malaysia. We now have ITCs in seven countries across four continents. During the second quarter, we exhibited our products at more than 25 trade shows worldwide.

4:18 and in September, we will participate in the most significant events of the season, Pack Expo in Las Vegas, Label Expo Europe in Brussels, and FockPock in Germany. Historically, we've generated a very high level of leads and favorable customer response from these large-scale events. We're particularly looking forward to this show season because we will be launching some significant new additions to our product identification lineup at these shows. You'll be seeing announcements on those new offerings in the coming weeks. Turning to operational improvements, we made good progress on several fronts during the quarter. Our global IT upgrade program has now moved into the hardware upgrade phase where we have started replacing a substantial portion of our hardware infrastructure.

5:03 We completed a record number of Kaizen improvement projects during the quarter as our AOS operational excellence initiatives drive down deeper into the company's various business units. On the organizational side, We've recently hired several key executives from the aerospace industry to further strengthen that portion of our business. We've still got a couple of spots we'd like to fill, but overall, this puts the right team in place to deliver high-quality, sustainable growth for the years ahead. Before I turn it over to David, let me reiterate something I said in this morning's earnings release, and that is that the temporary challenges we encountered in Q2 do not affect our positive long-term view are the strong underlying fundamentals of our business. We are managing the business for the long term.

5:48 We are confident that we have the right strategy and processes in place to continue to deliver value to our shareholders. Now let me turn it over to David for the financial review.

5:59 Thanks, Greg, and good morning, everyone. While revenue was lower for the quarter, we continued to do a good job managing operating expenses, which decreased by 90 basis points year over year to 32.3% of revenue. Reflecting the lower revenue and less favorable mix, gross profit margin was down 380 basis points to 35.8%, while operating margin came in at 3.5% compared to 6.4% in the prior year. Year to date, gross profit and operating profit were both up in dollars and slightly down as a percentage of revenue. Earnings per diluted share for the quarter were $0.13, down from $0.17 in last year's second quarter through the first half of the current fiscal year.

6:47 Earnings per share were $0.33 versus $0.29 a year earlier. Domestic revenue was $20.6 million and accounted for 61.7% of total sales. International revenue was $12.8 million or 38.3% of total revenue. Combined Q2 segment operating profits of 3.8 million or 11.3% was down from 5 million or 14.7 a year ago, all related to the headwinds Greg outlined from Asia and in our test and measurement segment. Year-to-date segment operating profit was 9.2 million or 13.3% versus 8.9 or 13.6% in Q2 last year. Non-hardware revenue accounted for 63% of total revenue in the second quarter, up about a percentage point from the same period last year.

7:42 Income tax provision in Q2 is only $29,000 for an effective tax rate of only 3% due to both lower income and certain discrete items. We're now expecting that the full-year tax rate will be around 19%. Looking at the balance sheet, we're still in good shape, having exited the quarter with approximately $8.9 million in debt, $4.5 million in cash, and a net debt to capital ratio of around 16%. The new ERP implementation project continues along the track we outlined last quarter. We still expect full-year capital expenditures in the range of $2 million, consistent with our historical levels. So our second half CapEx will be higher than the first half, which was only $524,000 because of the infrastructure spending on information technology that Greg referenced in the second half of this year.

8:41 In terms of non-cash charges for the quarter, depreciation was $1.059 million, amortization was $499,000, and stock-based compensation was $447,000. Before I turn the call back to Greg, Next Thursday, September 5th, we'll be presenting and hosting one-on-one meetings at the Doherty Institutional Investor Conference in Minneapolis. If you are attending, we look forward to seeing you there. Now I'll hand the call back to Greg for closing comments.

9:11 Thanks, David. We have a positive long-term outlook for our business and maintain our expectation for modest revenue growth in fiscal 2020. While the headwinds we encountered in Q2 are likely to impact our revenue and margin performance in the near term, We are confident in our strategy and the positive secular trends supporting our business. This confidence is underscored by our ongoing investments in new products, talent development, and geographic expansion to drive high-quality, sustainable growth and profitability. Now, David and I would be happy to take your questions. Operator? Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please press star followed by the digit 1. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, star 1, and we'll pause for just a moment.

10:11 And our first question, we'll hear from Dick Ryan with Daughtery.

10:17 Thank you. Greg, I think I missed your question. Comment, excuse me, about a military order that is pushed into the second half. I'm not sure if I heard that correctly, but could you kind of repeat what you were talking about?

10:35 Yeah, we have a relatively decent-sized contract that we were awarded about a year ago. It's a multi-year release schedule. We expected to have that release for this year kick in in the second quarter for various reasons. I think it has to do with some operational things on the customer side. That wasn't released in the second quarter. It's in the process of being released now, so we fully expect that to come through in the second half.

11:07 Okay, okay. On the integration of the Honeywell assets, where are you as far as the manufacturing has obviously been handed off, but working through the number of airline contracts, where are you in that process?

11:26 We're making pretty good progress on most of those fronts. We're almost completed with most of the Boeing customers. We're still working with the Airbus organization on that piece of it. That part of it is not completely transferred. We expect that to happen in the second half. Basically, the way it looks right now, probably early to late Q4 is our expectation to wrap that up. And I think, as I mentioned on earlier calls, in the meantime, we can manufacture the product. We ship it through Honeywell, and then Honeywell ships it on to the Airbus company. Okay.

12:07 And when you look at the performance of test and measurement in the quarter, you talked about new deliveries and upgrade pushes. Was that broad-based, or was it concentrated on a couple customers? Can you provide a little more color on that?

12:25 Yeah, it's pretty well broad-based. I mean, we have a number of things teed up, and relationships are good. People are ready to go. But once the 737 MAX situation occurred, that all got put on hold. And it's a variety. I mentioned in my comments there that a big part of it is people are trying to – actually, not people. The airline companies are trying to get as many planes flying as they can, and they're not interested in taking them offline to do upgrades right now. So that's a big part of it, and they're all – Thank you very much.

13:16 On the product ID side, you talked customer-specific issues in Asia. You previously made some organizational changes. How is Europe looking at this point?

13:30 The Europe is still undergoing. We've got two open positions we're trying to hire for right now, kind of key positions as far as that transformation. I'd say in the German area, that's actually running very well. Some of the areas we're still working on upgrades and some reorganization over there. But again, we expect to probably bring those people on board in Q3 and have it completed in Q4.

13:55 Okay, great. Thank you. Sure. And that will conclude today's call. We thank you for your participation. Thank you.