AstroNova, Inc. (NASDAQ:ALOT) Q2 2024 Earnings Call Transcript
AstroNova, Inc. (NASDAQ:ALOT) Q2 2024 Earnings Call Transcript September 6, 2023
Operator: Good day and welcome to the AstroNova's Fiscal Second Quarter 2024 Financial Results Conference Call. Today's conference is being recorded. I would now like to turn the conference over to Scott Solomon of the company's Investor Relations firm, Sharon Merrill Associates. Please go ahead, sir.
Scott Solomon: Thank you, Carla. Good morning, everyone, and thanks for joining us on our fiscal second quarter 2024 earnings call. Hosting this morning's call are Greg Woods, AstroNova's President and Chief Executive Officer; and David Smith, Vice President and Chief Financial Officer. Greg will discuss the company's operating highlights. David will take you through the financials at a high level. 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 this morning. If you don't have a copy, please go to the Investors page of the AstroNova website, www.astronovainc.com. Please note that statements made on 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 1995.
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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, September 06, 2023. AstroNova 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 other filings the company makes with the Securities and Exchange Commission. On today's call, management will be referring to non-GAAP financial measures. AstroNova believes that the inclusion of these financial measures helps investors gain a meaningful understanding of the changes in the company's core operating results.
It also helps investors who wish to make comparisons between AstroNova and other companies on both a GAAP and a non-GAAP basis. A reconciliation of the non-GAAP financial measures to their most directly comparable GAAP measures is available in today's earnings release. And with that, I'll turn the call over to Greg.
Gregory Woods: Thank you, Scott. Good morning, everyone, and thank you for joining us. At the beginning of August, we announced the strategic realignment of our Product Identification segment and an initiative designed to further capitalize on the synergies of last year's acquisition of Astro Machine. That restructuring is reflected in the second quarter financial results that we reported this morning. As a reminder, the specific actions we have taken to realign the segment include; first, transitioning more of our PI printer manufacturing from Asia and our headquarters in West Warwick, Rhode Island, for our Astro Machine plant in Elk Grove Village, Illinois. Second, rationalizing our combined AstroNova and Astro Machine PI Product Portfolio by exiting certain lower margin or low volume label printers to concentrate on higher margin product lines with advanced functionality and greater demand.
And third, consolidating our international PI sales and distribution facilities and streamlining our global channel partner network. These actions enable us to concentrate the segment's manufacturing, marketing and sales resources on the highest return opportunities. This in turn will provide the best products and services to our customers. Although the realignment had a negative effect on our GAAP performance in the second quarter, it puts us in a position to achieve an anticipated annualized cost savings of $2.4 million and create a stronger, more resilient business in the quarters to come. Beyond the restructuring, in fact, during the second quarter, we continue to make operating efficiency improvements and we posted double-digit year-over-year top line growth.
The key growth drivers for Astro Machine, which we acquired in the fiscal Q3 of last year and the continued momentum of the commercial aviation industry, which is served by our aerospace product line within our testing measurement segment. Looking at our performance by segment, Product Identification revenue was up 10% in the quarter, and excluding the restructuring charges, segment operating profit improved by 80%. Over the past several quarters, the performance of the PI segment has been tamped down as we work through our program to retrofit a large number of high volume printers, guidelines due to a supplier's ink quality issue. As an integral part of our restructuring effort to improve the PI segment, we've established a reserve to account for the cost of an accelerated effort to rapidly repair or replace effective printers in the field, so they can more quickly be returned to full service.
We expect to complete this retrofit program by the end of the current fiscal year. Product development continues to be and represents an important part for the growth engine for the PI business, enabling us to increase the breadth of our solutions for brand owners, OEMs and commercial printers. This quarter, we plan to introduce four innovative new products to the market for applications, including labeling, direct-to-package over-printing and high-speed mailing and addressing. Earlier this year, we introduced the QL-900, a high-speed high-performance label printer, printing at speeds of up to 12 inches per second, the QL-900 print vibrant wide format color labels at a resolution of 1,600 dots per inch, making it a robust solution for the most demanding applications.
Our customers will have the opportunity to see these and other products in action at several major industry events taking place in the coming weeks. These events include PACK EXPO in Las Vegas, Labelexpo Europe and Brussels, and the PRINTING United Expo in Atlanta. Turning to our Test & Measurement segment, revenue also increased 10% year-over-year in the second quarter, reflecting the continued strong performance of the aerospace market. Robust airline passenger traffic and increased aircraft deliveries, are driving stronger demand trends for our aerospace printers, supplies and services. Segment operating profit was down year-over-year, however, due primarily to a higher-than-normal adverse mix of older-generation product shipments in the quarter.
We continue to focus on upgrading and transitioning aerospace customers from these older-generation products to our newer, more advanced, ToughWriter family of printers. As we gradually consolidate our product offerings into fewer, high-volume skews, we expect the resulting manufacturing efficiencies will positively impact segment margins. With that, I'll hand over to David for the financial review.
David Smith: Thank you, Greg, and good morning, everybody. I'll start with an overview of the impact of the restructuring charges on our GAAP and non-GAAP results in the quarter. Restructuring expenses totalled $2.7 million in this quarter. It consisted of about $2 million for the write-off of certain PI inventory, $611,000 in severance cost spread across our geographic footprint, but concentrated primarily in the U.S. and EMEA and $48,000 in lease abandonment expenses. The inventory written off was for low-volume, lower-margin products. This action allows us to concentrate more efficiently on a small set of higher-margin products that cover all of the expected applications that our customers have. We closed a product showroom that was not being used.
In a closely related action, we recognized the liability for $852,000 in expenses in connection with the printer retrofit program that Greg described. The program is supported by a very detailed schedule of buy customer action steps and we're on track to complete it during this fiscal year. We've backed out both of these charges from our GAAP financials to give you a clear picture of the business on a non-GAAP basis as is presented in detail in the tables included in the press release. All of these details will be further discussed in our 10-Q when it is filed tomorrow. In sum, we delivered net income after tax of $1.1 million or $0.15 per diluted share in the second quarter on a non-GAAP basis. As Greg said, revenue in the quarter was up 10% to $35.5 million, driven by gains in both segments and the PI gains were attributable to the Astro Machine acquisition.
Compared to last year, operating expenses on a non-GAAP basis, excluding the restructuring charges on the retrofit program costs, were up only about $200,000 or 2% in the quarter from last year and that was prior to the addition of Astro Machine just a year ago, Astro Machine operating expenses exceeded that amount. Also, when excluding the non-GAAP charges in the quarter, adjusted EBITDA increased to $3.7 million or 10.3% of revenue, up from $2.2 million, or 6.7% of revenue in the same period last year. Looking at revenue by type, hardware revenue grew by 31% to $11.3 million. Supplies revenue increased 3% to $19.7 million, while the service and other category increased 2% to $4.6 million. In total, hardware revenue accounted for 32% of total revenue in the second quarter, up from 26% last year, supplies made up 55% of total revenue compared with 59% last year and service and other comprise the remaining 13% versus 15% in Q2 of fiscal '23.
From a geographic perspective, domestic revenue accounted for nearly 63% of total revenue, up from 59% in the second quarter last year and international revenue, the other 37% compared with 41% last year. In dollars, we saw double-digit revenue growth in the US, while Europe and Asia were down low single digits. At the end of the quarter, cash was $4.5 million, up $600,000 from the end of the fiscal year that ended on January 31. Total debt at the end of Q2 was $27.3 million, down $2.7 million from the end of the year. We're in compliance with all their debt cabinets and we have sufficient capacity to support all the operating needs of our business. We still plan to invest about $1.7 million in new capital equipment that will upgrade our hardware and supplies manufacturing equipment to improve efficiency and keep up with demand and we'll finance that through our bank outside of the capacity of our existing credit facilities.
Inventory investment declined modestly in the quarter before the effect of the inventory write-off for the products we're getting out of. We're still expecting some -- we're still experiencing some supply change troubles, primarily electronic components used in T&M products and in a few instances, we are still needing to maintain extra buffer stocks. However, there are clear signs that those supply chain issues in aggregate are abating and we still believe that our inventory levels will decline as we move through the year. Our current plan is to use any free cash flow to reduce debt. So now I'll turn the call back to Greg for closing comments.
Gregory Woods: Thanks David. With the strategic realignment of the PI business behind us, we entered the second half of 2024, well positioned for accelerated revenue growth and margin improvement. We are very excited about the four new PI products to be unveiled at the coming weeks and expect our T&M segment to continue benefiting from the strong demand environment we are seeing in the commercial aviation market. With that, David and I will be happy to take your questions. Operator?
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Q&A Session
Operator: [Operator instructions] We'll now take our first question, which comes from Pete Sidoti from Sidoti & Co. Pete, your line is now open. Please go ahead.
Peter Sidoti: Good morning, gentlemen. Just a quick question. Can you talk about your capital spending for this year and next? And with these adjustments, can you talk about the free cash flow you'll be freeing up?
David Smith: Peter, we're going to spend probably right around $2 million this year, which traditionally would have been pretty consistent. We had a period where we were spending a little bit more on business systems and that's behind us now. Traditionally, we've said that we've spent about $2 million a year and maybe it's CapEx. I don't think it's probably quite that high. I think it's probably more like $1 million to $1.5 million and maintenance CapEx, but about $2 million this year as we make those investments. I think the critical issue on the free cash flow side is working capital management and I mentioned that a little bit during my remarks where the focus is on reducing inventory and improving terms, converting more of our earnings to free cash and utilizing the balance sheet more efficiently and clearly streamlining the product line, which should help us in that direction, but we don't have any specific guidance.
Peter Sidoti: Okay. Thank you, gentlemen.
Operator: Thanks Peter. Our next question comes from Samir Patel - Askeladden Capital. Samir, your line is now open. Please go ahead.
Samir Patel: Hey Greg. Hey David. First question is on the restructuring benefits, you quoted $2.4 million cost savings. I wanted to understand, are those just direct cost such as leases, manufacturing costs, labor or does that include any of the benefit from getting these printers retrofit more quickly and kind of getting those units returning to be rectified or is that -- or would that be incremental to those restructuring benefits?
Gregory Woods: That would be incremental.
Samir Patel: Okay. That makes sense and then the second question is I notice that the bookings were down kind of a fairly significant way that you talked about strong demand. Is that just related to some of that product realignment or some of the printer issues or maybe you could help me understand what's going on there?
David Smith: Maybe I can address that. So, it's a combination of two different factors really. So when we get blanket orders, that tends to boost if up and then we kind of work those down. That happens more from the test and measurement side of the business, where we have kind of large blankets that come out from a bulk way quarter to quarter disturbances. On the PI business, tends to be fairly steady. Although, as I kind of mentioned in my notes there with some of these printers offline, the ink demand for the printers that are offline, those decreased and effective printers unfortunately tend to be our highest volume machine, but it's nothing out of the ordinary. Pardon.
Samir Patel: I said it's mostly on a Trojan-label side for the machines.
Gregory Woods: Yes, the effective machines or Trojan machines.
Samir Patel: Got you. So your summary say that it's not any sort of a -- there is not really structural issue. It's more addressed kind of the timing of some of the lumpier orders.
Gregory Woods: Correct.
David Smith: Yes, keep in mind that the backlog in the aerospace business is very lumpy and it's not necessarily a great indicator of revenues in the short term. The PI business is a little bit more short cycle, although as Greg discussed, we could get quite a few blanket orders for labels on that side of the business as well. So it's an interesting metric, but it can't be used effectively I don’t think to predict short term revenues. It's important obviously to have a lot of bookings, but it will fluctuate.
Samir Patel: All right. Understood. I'll turn it back over, thanks.
Operator: [Operator instructions] Our next question is from Tom Spiro from Spiro Capital. Tom, your line is now open. Please go ahead.
Thomas Spiro: Good morning, Greg. Good morning, Dave. Hey, first on the restructuring and retrofit initiatives, with respect to retrofit, the charge I see is $852,000. My recollection is that a month or so ago, you folks estimated that it's $600,000. If I'm recalling correctly, can you explain the difference?
David Smith: Yeah, I can give it kind of a high level on that. As I mentioned in my comments, we wanted to get this done and make sure we get it done as fast as possible. So, that involves more direct travel to customer sites as opposed to, sending the unit in, checking it and validating and then updating it and sending it back out. So, for certain customers, more of the high volume ones, we're actually going to go on site and do it that way. So, that's more expensive, but it gets it done quicker.
Thomas Spiro: And this process will be complete by the end of the fiscal year.
David Smith: Yeah, we've got a very systematic process on that. There could be a few stragglers, but, by and large, well over 90% and we expect if it follows our plan, it will be over 100% -- at 100%.
Thomas Spiro: Okay. That's very much. There is some low volume and low margin products that we were withdrawing from. We're streamlining channel partners etcetera, etcetera. Roughly speaking, how much by way of sales we'll be walking away from those these initiatives?
David Smith: It's very little on the sales front and part of the -- it's still some overlap in products between the AstroNova products, pre Astro Machine acquisition and post. We've done a little line up and in some cases, the AstroNova product is going to win out or has won out and in other cases, it's the Astro Machine product. So we're kind of just the bulk of what we're doing is kind of consolidating and rationalizing those product lines between the two. There is no point having two kind of products that are very similar, just with different branding to the box and there are some other products that they were decreasing in currently low revenue anyway and just to streamline operations, we've end of life those products that we can limit their manufacturing processes associated with those units.
Thomas Spiro: Thanks and on the streamlining of channel partners or reducing channel partners, are we doing that domestically primarily? Is that where that's occurring? Is that overseas? Is it both?
Gregory Woods: No, no. It's globally. So it's in all regions and it's really to get focus. There is some, whatever, -- we're keeping the best of the breed out there and making sure that we have channel partners that are totally aligned with our strategy and also where we have overlap again between Astro Machine distributors and AstroNova distributors, we're sorting that out as well. So it's really to make sure that within each given geographic region, we have a strong partner who is dedicated to AstroNova.
Thomas Spiro: I see. And on Astro Machine, as I recall, when we acquired it, its sales were running something like $21 million, $22 million, $23 million a year. And then I believe last quarter, it seemed kind of a little weak on a quarterly basis. Is it still running at that annual rate of $21 million, $22 million, $23 million ? Has it changed much?
Gregory Woods: It's off a bit from where it was running. But I don't know if we disclosed that. Is that in the Q, David?
David Smith: The amount of the current quarter was will be in the Q. And it's still running in the same range, slightly lower. But I think by the end of the year, we'll be in the range that you talked about.
Thomas Spiro: I see. So product -- I'm sorry, did I cut you off?
Gregory Woods: Just Greg, I was just going to highlight something I said last quarter as well is that the -- from what we've seen in the historical information from Astro Machine, their second half of the year tends to be stronger than the first half.
Thomas Spiro: I see. So if I were to look at the PI sales for the quarter of just under 26% and back out 5%-ish, PI is running well under where it was last year.
David Smith: It is running last year.
Gregory Woods: It's behind where it was, yes.
Thomas Spiro: Yes. Okay. All right. This is most helpful. Thanks very much and good luck.
Operator: Thanks Tom. Our next question comes from John Dasha [ph] from Pinnacle. John, your line is now open. Please go ahead.
Unidentified Analyst: Good morning. Just a quick question on the retrofit expense, $852,000. That seems to be a supplier-related issue and I'm just curious, are they sharing in any of the cost of retrofitting the machines? And do we have any recourse against them?
Gregory Woods: Yes and yes, and it's something that we actually announced that earlier. So there was a financial restructuring and there's also some pricing concessions as well.
Unidentified Analyst: Sorry, I must have missed that. Where was that disclosed?
Gregory Woods: It was a year and a half David, two years ago? I forgot exactly what quarter that came out in.
David Smith: I can't really...
Gregory Woods: Recognize what that was and there's a limitation of liability per event in that particular supplier's contract.
Unidentified Analyst: Limitation of liability. Okay.
Gregory Woods: Yes, to maximize the payouts on that. Go ahead.
Unidentified Analyst: Okay. I just got to say, so there's really no recourse at this point against the supplier?
Gregory Woods: No, not for the amount that we reserved, no. Yes.
Unidentified Analyst: Okay.
Gregory Woods: Separate from that, longer term...
David Smith: The amount that we...
Unidentified Analyst: Go ahead.
David Smith: The amount that we have on the income statement is that we reported. This is the amount that will hit us.
Unidentified Analyst: Okay.
David Smith: If that's helpful. If that's helpful.
Unidentified Analyst: Well, I guess what I'm trying to understand, is the supplier matching that obligation? Or who's on the hook primarily here, you or the supplier?
Gregory Woods: Well, it's a shared amount, but we're not -- because of the negotiations, we don't release the exact dollar amounts between the two of them.
Unidentified Analyst: Okay.
Gregory Woods: But we're going to probably disclose what we're reserving for.
Unidentified Analyst: All right. Thanks very much.
Operator: Thanks John. Our next question comes from Dennis Scannell from Rutabaga Capital Management. Dennis, your line is now open. Please go ahead.
Dennis Scannell: Yes. Good morning. Most of my questions have been answered. Just real quick, though. Maybe could you talk a little bit about the timing of the $2.4 million in savings, kind of how that will leg in over the next few quarters and kind of when you expect to be realizing the full benefit of the realignment actions?
Gregory Woods: Yes. So as far as the $2.4 million, that's what we expect to get on an annualized basis, but it will take a little bit of time to ramp up. So it will ramp, but it's not really back-end loaded. It's just that there's kind of a startup going in Q3 and Q4 to get to the full amount. But we fully expect to hit it within the 12-month period in the fourth quarter. And then it's an ongoing benefit, of course.
Dennis Scannell: Right. Yes. So annualized full benefit in fiscal '25, then? Is that your January '25 fiscal year?
David Smith: Certainly. Yes.
Gregory Woods: Probably also in the next four quarters.
Operator: Thanks, Dennis. We now have a follow-up question from Samir Patel from Askeladden Capital. Please go ahead when you're ready.
Samir Patel: A couple of follow-ups. One is you didn't talk, unless I missed it, about the e-commerce site, just kind of any early briefings there?
Gregory Woods: Sure. Yes. So we continue to add customers there. So that's -- I don't if you've been on it and off, but there's more and more things getting added to it and linked into it. So that's growing. We'd like to see it grow a bit faster, but it's more an uptake, and we've got our customer service people, whenever they're talking to our customers, we encourage them to use it. But we also picked up a fair number of third party -- call them third-party customers, where they bought a printer from somebody else, but they're buying label material from us via the e-commerce site. The other benefit, Samir, from that is we're seeing a nice uptick in our Internet marketing results, getting higher up in search and a higher number of inquiries.
Samir Patel: Got it. And then I know we've talked about this before, is there -- with where you are right now with the retrofits, do you have any sort of sizing around how much of an impact those issues are to your revenue in the PI segment? Put differently, like, you did $26 million this quarter, give or take. Where would you see that figure once you get those retrofits done, kind of based on the supply of the printers that are offline and the supplies that you're not selling?
Gregory Woods: Yes. We haven't given guidance on that. What I can tell you is the two-two Cs that are primarily the ones that have the highest volume that are impacted by that. They typically generate in the neighborhood of $20,000 a year in revenue. And there's roughly -- I think we're about halfway through that upgrade program. So as far as units that are touched. So one thing to keep in mind, too, is once we upgrade it, then they need to use the ink supplies and/or label supplies that they have in-house before they buy more. So there's a bit of a ramp-up in that process.
David Smith: Yes. And Samir, it's David. I'll just comment that, obviously, to take a step like this, where we are moving rapidly to spend all this money, we are expecting a return on that. It's a good economic decision to do it. The faster we do it, we're faster, we'll get the money back and I think it's pretty high -- we think it's a pretty high-return endeavor from a cash flow perspective.
Samir Patel: Okay. That makes sense. That's helpful.
Operator: Thanks, Samir. At this time, we have no further questions registered. So with that, I will hand back to Greg Woods for final remarks.
Gregory Woods: Great. Well, thank you, everyone, for joining us here this morning, and we look forward to keeping you updated on our progress. Have a good rest of the day. Bye now.
Operator: This concludes today's call. Thank you for your participation. You may now disconnect your lines.
