AstroNova, Inc. (ALOT) Q3 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Astro-Med, Inc. Third Quarter Financial Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Stan Berger. Please go ahead, sir.

Thank you, John. On behalf of the management of Astro-Med, we are extremely pleased that you've taken the time to participate in our conference call. Thank you for joining us to discuss the company's fiscal 2013 Third Quarter and 9-month financial results and business outlook. Before I introduce management, I would like to remind everyone that certain statements made during the course of this conference call, especially those that state management's intentions, hopes, beliefs, expectations or predictions for the future are forward-looking statements. During this conference call, we may make forward-looking statements within the meaning of the Securities Exchange Act of 1934. These statements are based on the company's present expectations and beliefs concerning future events, and are necessarily based on certain assumptions, which are subject to risks and uncertainties. Actual results may differ materially from those discussed here. More information on the risk factors is included in the company's filings with the Securities and Exchange Commission. By now, you should have received a copy of the news release, which was issued yesterday. If you have not received a copy, please go to our website at www.astro-medinc.com, where a copy of the press release can be downloaded from the Investing Section of our homepage. Hosting the call today are Everett Pizzuti, President and Chief Executive Officer; Joe O'Connell, Senior Vice President, Treasurer and Chief Financial Officer; and Greg Woods, Executive Vice President and Chief Operating Officer. At this time, I will turn the call over to Mr. Pizzuti. Everett?

Thank you, Stan, and good morning, everyone, and thank you for joining our conference call. As Stan mentioned, in addition to Joe O'Connell, Greg Woods is with us for the first time and he will join us in responding to your questions. First, I would like to briefly summarize some of the many highlights of the successful third quarter that we announced yesterday in our press release. Records were set on many fronts including sales, new order bookings, gross profit margins, operating income and backlog. As you know, last year our financials included our North Carolina operations, which has since been divested. Nonetheless, when comparing new orders against last year's third quarter, we experienced double-digit growth of over 10% with, and over 17% without the North Carolina operations in the numbers. And on the sales side, our growth was over 5% with, and over 10% without the North Carolina operations as a comparison. Another point that we'd like to express is that our record third quarter does not represent a one-time spike. As you will have seen, each quarter of this fiscal year has been progressively better than the previous one, and we see this continuing into the fourth quarter. Looking at the sources of our growth, I will begin with QuickLabel Systems, where sales of both hardware and consumables were up over the prior year's quarter. Our color label printer sales were up substantially, led by the new Kiaro!. As a reminder, we introduced the Kiaro! at the tail end of Q2 and have gone on to sell a record number in the third quarter. The Kiaro! is the best high speed inkjet color label printer in the market. It produces beautiful color labels up to 4 inches wide at a speed of 8 inches per second and with unmatched clarity and reliability. And of course, every sale of a Kiaro! brings along ink and consumable -- and label consumable sales. In addition to the Kiaro!, sales of our other color label printers were also up. These printers include the Vivo! Touch, which prints labels up to 8 inches wide using electrophotographic technology; and the QLS-4100 series thermal transfer color printers. Another important driver of our sales, orders and backlog is our ruggedized products. During the quarter, we received notice of additional new contracts for both commercial and military-type aircraft, including large commercial planes as well as business-type jet aircraft. As we mentioned in previous calls, these contracts are not entered into our backlog until we receive release orders with scheduled shipments. Now in the third quarter, we received release orders for existing contracts that increased our printer backlog over 58% from year end. Our branch orders and sales were affected somewhat by timing, as we received an expected order of $500,000 worth of EEG machines right after the third quarter ended. Our sales of routine EEG products as well as long-term epilepsy monitors are increasing now more than our sleep systems as we take more and more market share from our competitors. Sleep monitoring systems sales are somewhat stalled and delayed as the health care insurers impose tighter controls requiring pre-approvals of all in-lab sleep testings. The insurers are moving toward the lower cost of home sleep studies. For the manufacturers, such as Grass, this means selling lower-cost sleep screeners for the home as opposed to the high-priced systems normally sold in hospitals and clinics. Our consumable sales for Grass however, were up by high double digits, with new order bookings up over 40% from the previous quarter. Finally, I will say a few words about the data acquisition products that fall under Test & Measurement along with our ruggedized products. We are quite pleased with the sales of our TMX series recorders, with growth in both orders and sales. Sales of our new Dash MX product have slowed due to continued problems with our supplier for this particular model. Now domestic sales as well as international are up over the prior year. As you know, we sell internationally through our branch offices in Europe and Canada, and through independent dealers in the Rest of the World. Our international sales from the branches were up over 12%, even though our third quarter includes August, a month when most of Europe is shut down for vacations. Our improved gross profit margins are a reflection of our continuous improvement process in manufacturing. We have ongoing programs to improve efficiencies in-house, as well as to reduce costs with outside vendors. Manufacturing and engineering work hand-in-hand to make changes to reduce both the labor as well as the material content of existing as well as new products. And now, Joe will present the detailed financial results after which I will provide guidance on the balance of the year. Joe?

Thanks, Everett. Good morning, everyone. I'm very pleased to share with you Astro-Med's financial results for the third quarter and for the 9 months ended October 27, 2012. As you've heard from Everett, and perhaps maybe saw in yesterday's press release, Astro-Med did experience a record quarter in its new orders and its shipments. Our net sales in the quarter reached $20,562,000, which represents a 5.1% increment over the prior year's third quarter revenues, as well as a 5% increase over the current fiscal year's second quarter sales. If we do exclude the sales volume from the divested North Carolina label business from the prior year's sales, the year-over-year growth rate is greater than 10%. Sales through Astro-Med's domestic channels were $14,642,000, representing 73% of our total sales and posted an increase of approximately 4% over the previous year's third quarter domestic sales. This growth rate more than doubled when you exclude the divested North Carolina business from the prior year numbers. International shipments were $5,920,000 in the quarter and was approximately 9% ahead of the prior year's third quarter international sales and almost 13% better if you exclude the unfavorable foreign exchange impact that we experienced in the third quarter. The company experienced healthy growth from its Test & Measurement segment, where sales of $5,359,000 were reported, and a growth rate of approximately 24% was realized. The prime contributors here was the company's product lines of ruggedized products and the recorder line of TMX products. QuickLabel Systems reported sales in the quarter of $10,679,000. That's a year-over-year increase of 3%. And however, if you exclude the prior year North Carolina divested business, the growth is greater than 13% year-over-year. The prime drivers, as you've heard, in terms of the growth of the QuickLabel Systems is really the volume of color printer shipments that we have made during the quarter in both our domestic and our international channels. Grass Technologies product group of neurophysiological recording instruments, including their consumable product lines, posted sales of $4,524,000 in the third quarter. This sales volume is below the prior year by approximately 7%. The company's gross profits in the quarter were $8,838,000. It's a very healthy improvement over the prior year by some 10%, and reflects a gross profit margin of 43% against the prior year's 41%. Operating expenses were lower in the current fiscal third quarter than last year at $6,745,000 as our selling, marketing and R&D spending ran behind the prior year's expense level. Outgrowth of the record sales and the related profitability, was Astro-Med's operating income in the third quarter would reach $2,094,000. This result reflects an operating margin of 10.2% against the prior year's operating margin of 6.1%. Other income in the quarter was $46,000 and compares against the operating -- other expense of $69,000 experienced in the prior year. The improvement is traceable to favorable foreign exchange in the third quarter. Income taxes in the quarter were $832,000, projecting an effective tax rate of 39% and compares to the prior year's effective tax rate of 29%. The prior year rate does reflect a tax benefit of $113,000 from favorable adjustment in the filing of the prior year tax return. Astro-Med earned $1,308,000 in net income for the third quarter and improving over the previous year's net income by approximately 64%. This quarter's earnings translates into a per share EPS of $0.18 per diluted share and compares to the prior year's EPS of $0.11 per diluted share. Prior to reviewing the company's balance sheet at the end of the third quarter, commenting on Astro-Med's 9-month results are as follows: The company has realized net sales of $58,559,000 through the first 3 quarters of fiscal 2013. This level of revenue is slightly behind the prior year's level of sales of $58,764,000 on a comparable period. Unfavorable foreign exchange lowered this year's volume by approximately $872,000 or 1.5%. If we exclude the divested label business from the prior year numbers, this year's growth is approximately 5% year-over-year. This year's domestic sales volume was $41,394,000 and up over the prior year in reportings representing 71% of our total sales. International shipments were $17,165,000 and were behind the prior year's volume by approximately 4%. The composition of this year's sales by segment has QuickLabel Systems at $31,851,000, representing 54% of our total sales; Grass Technologies at $13,521,000; and the Test & Measurement product group at $13,187,000, each represent approximately 23% of our total sales for this year. Astro-Med has achieved gross profit dollars for the 9-months of $24,508,000. It's a 5% improvement over the previous year, and reflects a margin of 41.9%, representing a 210-basis-point increase over the prior year's gross profit margin of 39.8%. This year's operating income reached $4,658,000, a 57% increase over the prior year's operating income and reporting an operating margin of 8% against the prior year's operating margin of 5%. This year's effective tax rate is 32% and matches the prior year's effective tax rate of 32%. Astro-Med has earned in net income $3,131,000 year-to-date this current fiscal year. This result compares favorably to the prior year's net income of approximately -- improving by approximately 38% and translates into an earnings per diluted share of $0.42 versus the $0.31 per diluted share reported in the prior period. On a non-GAAP basis, this year's net income does on an EPS basis reflects an EPS of $0.38 per diluted share against the comparable number for the prior year of $0.25 per diluted share. Just quickly commenting on the balance sheet, our assets at the end of the third quarter were $66,937,000. Our equity position was $56,757,000 as we have improved nicely in terms of the book value per share from $7.37 at the end of the year to $7.74 at the end of the quarter. Cash and marketable securities were just below $23 million. During the quarter, we did buyback 110,000 shares as part of our buyback program for 770,000, but the company still has authorizations to purchase another 390,000 shares in the open market. Accounts receivables at the end of the quarter were $11,804,000 representing some 46 days outstanding, a nice improvement from the 50 days outstanding that we experienced at the end of the year. Our inventory levels were $14,487,000, slight increase from the year end but improvement in the days on hand to 111 days comparing to 124 days that we experienced at year end. Capital expenditures for the current year were $527,000, and primarily were confined to information technology, tools, dyes, building improvements and machinery and equipment. In dividends, we paid $1,559,000 at $0.07 per share per quarter. This payment -- the current quarter payment will take place on December 27 of -- shareholders of records as of December 7. The employee population at the end of the third quarter was 365 employees. That's down some 7 folks from the year end balances. And our sales per employee has improved nicely to $216,000 and compares against the prior reference of $187,000 per employee. Overall, it's a great, fine quarter for the company. That's my financial report. Everett?

Okay. Thank you, Joe. Okay. Our guidance for the balance of the year remains at $78 million to $82 million for revenues. For earnings per share, however, we see an improvement. We had last reported guidance of $0.49 to $0.53. Our new guidance for the year is $0.56 to $0.60 per share. Of course, we remain cautious as we are sensitive to the continued uncertainty in the general economy, especially in Europe. And before we take your questions, and both Joe and Greg and I will participate in the questions, we just -- Joe might want to just clarify the fact that we're paying the dividend in December of this year instead of January as a token of recognition to our shareholders.

Exactly right. With the uncertainties in terms of the changes in the tax flow, we thought it would be most appropriate to make the payment. Normally, we'd make a payment usually about the 3rd of January. So we've moved it up to the 27th of December. I think that's a prudent position for the company to take.

Okay. And now, John, we'll open the microphone to questions.

[Operator Instructions] Your first question today comes from Mark Lanier with Pegasus Capital.

I have 2 questions. One has to do with the evolution of sleep studies and the fact that, that appears to be an increasingly interesting market even though there is a product shift and reimbursement shift going on. But would you describe that more and how you see an evolution of the market? And the second question has to do with international expansion and number of distributors and some more color on your thoughts about how that may progress over the next year or so. And also congratulations on buying back your stock. I'm very pleased to see that.

I will take a stab first at your sleep question. What has happened is the health care providers, people like United Health and Kaiser and the like, are all now telling the sleep labs that, "Before you can start a sleep study on a patient, you must get our pre-approval." And at that point, unless there's some serious issue, they're telling the sleep lab to use a home sleep screening device, where the reimbursement is about $120, versus doing an in-lab screening or an in-lab complete test, where the prices are $1,000 to $1,200 or more. So the insurers are really clamping down. Now and of course, the sleep labs are trying to contain the business and keep it in their house. But the move now to sleep screeners means that a company such as Astro-Med, and our competitors for that matter, instead of selling a $15,000 to $20,000 system for use in a hospital lab, we're now selling $2,500 sleep screeners for use in the home. Now it's true we may sell a few more sleep screeners than we do the full lab systems. But still, this means probably reduced revenues for a while on the sleep side of things, although our margins on screeners is probably almost as good as on the big systems. So we're working. We have a couple of models of sleep screener already in our line, but we're working on another model to add some additional features, to get better performance. And so we'll continue to do that going forward. Your second question had to do with international expansion. And we don't have any plans right now to add additional branches, but we are looking very seriously at adding additional dealers, especially in some of the countries where we're not covered, and especially in South America, where there are opportunities and we haven't done too much there yet. And this is one of the things that Greg Woods will be focusing on going forward, and that is adding additional distribution in some of these areas.

Everett, I might just add one point on that. In the short-term, where we actually have already kicked off -- as Everett mentioned, the Kiaro! is the best inkjet printer out there in its market niche, and we want to take advantage of that immediately. So we've actually added it to our dealer network as well as our direct sales force. We're trying to bring on additional people in that area right away because we're taking down a record number of orders for a new printer launch with the Kiaro!.

Your next question comes from Steve Busch with SouthPaw.

So I've got a bunch of questions. First of all, on the stock buyback, which I'm glad to see as well, was that from [indiscernible] or somewhere else?

No, it was from a shareholder who passed away -- a long-term investor, in fact, who passed away in June. His wife had to liquidate the estate, and that's how it came to pass.

Okay. And what was the average cost per share, do you know?

We bought it back at $7.

That's great. That's okay. And in terms of this release of cockpit printer contracts into the backlog, what portion of the backlog is cockpit printer related? And do you have any kind of guess or view as to the next year how much more of your contracts might be released?

Well, the ruggedized printers that we shipped at this quarter and continue to ship this year have been more and more every month and every quarter because we're getting additional releases against all of those contracts. We've got contracts that are different over the years, in 2006, 2007, 2008. And as those planes go into production, we get releases that pile upon the existing one. So it's only going to increase, continue to increase, going forward. So this 58% increase in backlog, those are all programmed shippable orders well into next year. And every day, not a day goes by that we don't get a release order from one of our contracts for shipment in February, March, April, May and so forth. So that will continue, and it's really on a nice growth path.

Right. Is there -- what percentage is organized printers of the actual backlog? Can you break that out or not?

Of the total backlog that we have right now?

Well, we -- yes. Well, the 58% -- all of the backlog is shippable. All of the ruggedized backlog that we speak of is shippable. It's all released for shipment.

Right.

No, no, I understand that. No, I'm just saying of your overall backlog number.

Oh, the overall, of all products. Okay. Joe, do you have that number?

Yes. It's actually more than 50%, Steve. It's significant. Normally, our backlog turns quickly. That's really -- this is really -- it's kind of a new phenomenon for us because we do have now opportunities for future, more than just the next month, if you will, in terms of demand. So it will continue to be, and we think it will continue to be a significant piece of the backlog that we report.

Right. That's what I was getting in. That's much clearer. So in terms of -- so the real thing, though, as you sell the consumable paper, so as we get more of these ruggedized printers in the air, we're selling a lot more paper. Are you seeing -- or what is the average turnaround for a roll of paper cost right now?

Yes, we're still studying that. We're getting more and more paper, let's put it that way, and we're also looking at selling paper for other brands of cockpit printer that have been out there before us. And so we have a greater opportunity. It's hard to put a handle on how much per aircraft or per flight. I mean, we've got a number of estimates here and there. All we can say is, we're increasing that business gradually. And it's not a significant number now, but we expect it to be later.

Okay. That's great. And now in terms of Grass, so we have these new home -- more home-focused systems. Do we still sell the consumables that are attached to those?

Yes, the consumables, the main consumables that we sell for Grass, the sensors and in particular the gold-copper electrodes. And when I've mentioned that the Grass consumable orders went up 40% over last year, that's primarily our -- the electrodes that we make in-house and the special cream that we sell that goes along with those electrodes. Those are our products and they're increasing very nicely. And we sell them, Steve, not only for use with Grass, our own EEG and sleep machines, but we also sell them to our competitors because they love -- because the Grass consumables, their electrodes are so good, they buy them and resell them with the Grass name on them. And so it's a very nice business.

Right. So I guess what I'm trying to drive at is if the reimbursement is driving towards home health, you maybe have more people at any given time utilizing these markering devices. Will they be using those Grass electrodes at home and therefore maybe we'll see an uptick in that?

Maybe, but there aren't as many electrodes used in the home sleep studies because the home sleep studies use screeners, where they may use just 3 to 6 channels or maybe even as many as 9 channels. Whereas in a lab, they use at least 20 to 25 channels. And each channel represents a sensor or an electrode, so it may not be as great as you think.

Okay. That's good. That's more color. And then, I'll hop back shortly so you can answer questions. But on the dividend, great that you're doing it earlier this year. If the tax rates change materially on the dividend side, do you have any plan in place? Or what's your -- what's the board's plan to either change the way the dividends are distributed, as a stock dividend or just more buyback, or just continue on?

Well, we have a discussion about the dividend at every board meeting. We had one this week. It's always -- the board first and foremost is the welfare of our shareholders. So we will do whatever is necessary, whenever we can, to satisfy and be fair to our shareholders. And so we don't have anything specific now, but I can assure you that we talk about the dividend at every board meeting.

Your next question comes from Sam Rebotsky with SER Asset Management.

Does it appear to be something new that's happening the way you're doing your business so that the significant improvement currently will continue on a regular basis?

Well, we're just applying the good principles that we've always done, Sam. But as I've tried to mention in my brief remarks, this has not been a 1-quarter spike. If you look at every quarter of this year and the last quarter of last year, last couple of quarters of last year, every one has been a little bit better. So we're making good progress every single quarter, and we expect that to continue unless this economy goes down some place.

Okay. That's wonderful. Now was there anything in this current quarter that was deferred from the previous quarter?

I don't think so, Sam. Specifically, Sam?

Yes. I mean, was there any sales that we would have gotten into the last quarter but we couldn't and we -- and went into this quarter?

No.

No. I mean, we ship everything we can in every quarter, so there's no such thing as the deferral.

No, okay. Now as far as the dividend, even though you had a board discussion, I would suggest you have another discussion relative to possibly giving a little more of a dividend based on your cash, et cetera, unless you had a significant use for it, whether it's $0.50 to $1 in the current year based on expectation that the tax rate will go up. Definitely, it's up 4% and may go up, more so that is something should be discussed. Then as Steve mentioned, possibly a stock dividend next year instead of cash if that's appropriate.

We understand. We understand that, and we don't have to wait for the next board meeting to do that. If something should arise, we'll just call a special board meeting to discuss that subject only, Sam.

Okay. Now the other thing as far as your -- the pipeline. What is the pipeline compared to the pipeline at the previous quarter and the same time last year? Is it much more significantly increased?

When you refer to the pipeline, you mean of existing orders?

No, orders that have not become orders that you need commitments on from whether it's the federal government or...

Oh, you mean, okay, negotiations in progress?

Right. Exactly.

Yes, well, I can say we have a lot more ruggedized contracts that are in process. Although I mentioned we did get some this quarter, we have several significant ruggedized contracts that are in negotiation. And the rest of our business is kind of like daily, weekly business. They're not big contracts. So the main thing we can put our finger on is the ruggedized business. Everything else is more or less Wednesday, Tuesday business. Although we do have a few OEM accounts. We have a very nice -- we make special printers for a medical device company. It's an OEM account, and we've been doing business with them for over 10 years. This is a large medical device company. Well, I can tell you, it's a Beckman Coulter, a division of Danaher. And we've been selling to them for years, and we expect to get additional contracts from them as well. So those are the things -- the specifics we can put our hands on. Everything else, sales of color printers those are all Wednesday, Tuesday daily affairs. And similarly with Grass, there are a few large Grass contracts that are in negotiation. When I say large, they're on the order of $0.5 million or more. Those are typically the big epilepsy centers. And we have a number of those that are in negotiation as we speak, too. So in general, the pipeline always has a pretty good fill.

[Operator Instructions] Your next question is a follow-up from Steve Busch with SouthPaw.

I know I ask this question every time, so I might as well ask it again. In the label business, are you seeing a broad-based purchaser of your labels from just a general economy standpoint?

Yes, I can jump in on that one a little bit. This is Greg speaking. Really, it's been the label business, as I mentioned, the Kiaro! is taking off, and that's really in all of our market areas. So we're seeing that broad spectrum from the Shenzhen [ph] market, the nutraceuticals, consumer products, pretty much any flavor. And really we're seeing it both domestically and internationally. So I can't point to any one specific industry that I'd say, hey this one's taking off, but we also don't see any pullback, if that's part of your question. So I see it as increasing [indiscernible]. We see it increasing in each of the market segments that we track.

Well, that's great. So maybe, Everett, you kind of mentioned cautiously, optimistic, and then also kind of upped the guidance. Could you kind of add any more color as to what your concern on the cautious part is as opposed to the optimistic?

Concerned on which part? I missed that, Steve.

On the cautious part versus the optimistic part? What gets you cautious and what makes you optimistic?

Yes. Well, in general right now, the orders and contracts we have in hand that are bringing us through this quarter and into the next year are solid and in hand and look good. As I say, the rest of our business is basically comes in daily. And if the economy holds, we should be okay just like everyone else, and we'll continue with increased, a bigger quarter in the fourth quarter here as well as next year. So the caution is mainly with respect to the economy, not any products that we have, not that we have any problems anywhere. It's primarily the economy.

And we seem to have no further questions at this time. Please continue.

Okay. Then we want to thank you for everything. And I guess our next conversation will be in March, when we discuss our year end. Thank you very much and happy Thanksgiving to all.

Happy Thanksgiving, folks.

Happy Thanksgiving. Bye now.

Bye now.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation. You may now disconnect your lines.