Q2 2024 AstroNova Inc Earnings Call
Participants
David S. Smith; VP, CFO & Treasurer; AstroNova, Inc.
Gregory A. Woods; President, CEO & Director; AstroNova, Inc.
Dennis J. Scannell; Principal, Lead Partner & Portfolio Manager; Rutabaga Capital Management LLC
Peter Thomas Sidoti; Founder, Chairman and CEO; Sidoti & Company, Inc.
Samir Patel; Founder & Portfolio Manager; Askeladden Capital Management LLC
Thomas Spiro
Unidentified Analyst
Scott M. Solomon; SVP; Sharon Merrill Associates, Inc.
Presentation
Operator
Good day and welcome to the AstroNova Fiscal Second Quarter 2023 (sic) [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 M. 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. These forward-looking statements are based on the 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 6, 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 A. 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, 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 portfolios 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 impact, during the second quarter, we continued 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 Test & 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 sidelined due to a supplier's ink quality issue. As an integral part of our restructuring effort to improve the PI segment, we established a reserve to account for the cost of an accelerated effort to rapidly repair or replace the ineffective printers in the field, so they can more quickly be returning to full service. We expect to complete this retrofit program by the end of the current fiscal year.
Product development continues to be and represent an important part of a 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 4 innovative new products to the market for applications, including labeling, direct-to-package overprinting and high-speed mailing and addressing. Earlier this year, we introduced the QL-900, a high-speed, high-performance label printer. Printing at speeds up to 12 digits per second, the QL-900 prints 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 in 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 SKUs, we expect the resulting manufacturing efficiencies will positively impact segment margins. And with that, I'll hand over to David for the financial review.
David S. 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 -- restructuring expenses totaled $2.7 million 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 in 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 a liability for $852,000 in expenses in connection with the printer retrofit program that Greg described. The program's supported by a very detailed schedule of [bi-customer] action steps, and we're on track to complete it during this fiscal year.
We 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 over -- 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 comprised 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 U.S., 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 our debt covenants, 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 chain struggles, 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 A. 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 4 new PI products to be unveiled in 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?
Question and Answer Session
Operator
Thank you. (Operator Instructions) We will now take our first question, which comes from Peter Sidoti from Sidoti & Co. Peter, your line is now open. Please go ahead.
Peter Thomas Sidoti
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?
Gregory A. Woods
Sure, I'll let David handle that one.
David S. Smith
Yes, 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're spending a little bit more on business systems, and that's behind us now. Traditionally, we've said that we'd spend about $2 million a year in maintenance CapEx. I don't think it's probably quite that high. I think it's probably more like $1 million to $1.5 million in 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 our 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 should help us in that direction. But we don't have any specific guidance.
Operator
Our next question comes from Samir Patel from Askeladden Capital.
Samir Patel
Hey Greg, hey David. First question is on the restructuring benefits, you quoted $2.4 million in cost savings. I wanted to understand, are those just direct costs, such as leases, manufacturing costs, labor? Or does that include any of the benefit from getting the printers retrofitted more quickly and kind of getting those units returning to consuming supplies? Or is that -- or would that be incremental for those restructuring benefits?
David S. Smith
That would be incremental.
Samir Patel
Okay. That makes sense. And then the second question is, I noticed that the bookings were down kind of fairly significantly when you talked about kind of 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 S. Smith
Yes. It's...
Gregory A. Woods
Yes, I can address that. So it's a combination of a few different factors, really. So it's -- when we get blanket orders, that tends to boost it up and then we kind of work those down. That happens more from the test and measurement side of the business, where you get kind of large blankets that come in a kind of a bulk way quarter-over-quarter disturbances. The PI business tends to be fairly steady. Although as I kind of mentioned in my notes there, with some of these printers off-line, the ink demand for the printers that are off-line does decrease. And the affected printers unfortunately tend to be our highest volume machine. But it's nothing (inaudible) out of the ordinary. Pardon?
Samir Patel
I said it's mostly on the Trojan label side?
Gregory A. Woods
On the -- for...
Samir Patel
The effect that...
Gregory A. Woods
For the bookings side?
Samir Patel
For the (inaudible).
Gregory A. Woods
Affected machines?
Samir Patel
Okay.
David S. Smith
Yeah, the affected machines are -- charging machines.
Samir Patel
Got you. So your summary, you'd say that it's not any sort of a -- there's not really a structural demand issue. It's more just kind of the timing of some of the lumpier orders?
Gregory A. Woods
Correct.
David S. Smith
Yes. Keep in mind that the backlog in the aerospace business is very lumpy and is 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 do 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, you have a lot of bookings, but it will fluctuate.
Operator
(Operator Instructions) Our next question is from Tom Spiro from Spiro Capital.
Thomas Spiro
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 at $600,000. If I'm recalling correctly, can you explain the difference?
Gregory A. Woods
Yes, I can give it kind of the high level on that. Is 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?
Gregory A. Woods
Yes, we've got a very systematic process on that. I mean, 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% -- I mean, at 100%.
Thomas Spiro
I see. Okay. That's very helpful. There's some low-volume and low-margin products that we're withdrawing from. We're streamlining channel partners, et cetera, et cetera. Roughly speaking, how much by way of sales will be -- will we be walking away from through these initiatives?
Gregory A. Woods
It's very little on the sales front. And part of it -- it's really some overlap in products between the AstroNova products pre-Astro Machine acquisition and post. And we kind of did a lineup. 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 -- that's the bulk of what we're doing, is kind of consolidating and rationalizing those product lines between the 2. There's no point having 2 kind of products that are very similar, just with different brand names in the box. And there are some other products that they were decreasing and fairly low revenue anyway. And just to streamline operations, we've [end-of-lifed] those products so we can eliminate those manufacturing processes associated with those units.
Thomas Spiro
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 A. Woods
No, no. It's globally. So it's in all regions. And it's really to get more focus. There's 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 kind of sorting that out as well. So it's really just 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 A. 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 S. Smith
The amount of the current quarter was in -- 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. I see. So product -- I'm sorry, did I cut you off?
Gregory A. Woods
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 S. Smith
It is running (inaudible) last year.
Gregory A. Woods
It's behind where it was, yes.
Thomas Spiro
Yes. Okay. All right. This is most helpful.
Gregory A. Woods
Thanks, Tom.
Operator
Our next question comes from [John Dasha] from Pinnacle.
Unidentified Analyst
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 A. Woods
Yes and yes, and it's something that we -- we really -- 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 A. Woods
That was -- was it 1.5 years, David, 2 years ago? I forgot exactly what quarter that came out in.
David S. Smith
I can't really recall.
Gregory A. Woods
(inaudible) 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 A. Woods
Yes, to maximize the payouts on that (inaudible). Go ahead.
Unidentified Analyst
Okay. I just got to say, so there's really no recourse at this point against the supplier?
Gregory A. Woods
No, not for the amount that we reserved, no. Yes.
Unidentified Analyst
Okay.
Gregory A. Woods
Separate from that, (inaudible) longer term...
David S. Smith
The amount that we...
Unidentified Analyst
Go ahead.
David S. Smith
The amount that we have on the income statement is that we reported. This is the amount that will hit us.
Gregory A. Woods
Correct.
Unidentified Analyst
Okay.
David S. 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 A. 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 2 of them.
Unidentified Analyst
Okay.
Gregory A. Woods
But we're going to probably disclose what we're reserving for.
Operator
Our next question comes from Dennis Scannell from Rutabaga Capital Management. Please go ahead.
Dennis J. Scannell
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 A. 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 J. Scannell
Right. Yes. So annualized, full benefit in fiscal '25, then? Is that your January '25 fiscal year?
David S. Smith
Certainly but (inaudible). Yes.
Gregory A. Woods
Probably also in the next 4 quarters. Yes.
Operator
We now have a follow-up question from Samir Patel from Askeladden Capital Market (sic) [Management]
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 A. 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 -- we 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, I mean, 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. I mean, 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 A. Woods
Yes. We haven't given guidance on that. I mean, what I can tell you is the two 2Cs 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 S. 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. I mean, it's a good economic decision to do it. The faster we do it, we're faster, we'll get the money back. So -- 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
At this time, we have no further questions registered. So with that, I will hand back to Greg Woods for final remarks.
Gregory A. 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.
