AstroNova, Inc. (ALOT) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Astro-Med, Inc. First Quarter Fiscal Year 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, May 22, 2013. I would now like to turn the conference over to Stan Berger. Please go ahead, sir.

Thank you, Chris. On behalf of the management of Astro-Med, we are extremely pleased that you have taken the time to participate in our conference call. Thank you for joining us to discuss the company's fiscal 2014 first quarter 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 act of 1934. The 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 risk and uncertainties. Actual results may differ materially from those discussed here. More information on these risks 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 after the market closed. 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; Gregory Woods, Executive Vice President and Chief Operating Officer; and Joe O'Connell, Senior Vice President, Treasurer and Chief Financial 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. I will make some brief opening remarks, and then Joe O'Connell will provide financial results. Greg Woods will provide a recap of operations, and then we will take your questions. The good news is that the new order bookings were up 10% over the first quarter of last year and net sales grew 8% over the first quarter of last year. Unfortunately, our earnings were impacted by a number of onetime first quarter events that will not be present in the second quarter and beyond. Here are some details. First, we had to take a reserve to address a noncompliant component that our vendor used in power supplies that we purchased for use in our ToughWriter printers. We uncovered this defect early in April and placed all production of the affected printers on hold while we, in parallel, notified all of our customers, as well as the particular vendor involved. As a result, this had a negative impact on gross profit margins, as well as sales, for the quarter. The problem has been rectified by the vendor, and we have received shipments of new compliant power supplies and resumed shipments to customers late in April. Now since the vendor deviated from agreed-upon specifications while, at the same time, providing certificates of conformance to them, Astro-Med is seeking and expects to receive full recovery from the supplier for all costs and any other damages associated with this issue. Second, most of the quarter was impacted by the excess overhead that we were left with as a result of the Grass divestiture. That excess has now been eliminated and -- as of the second quarter and for the rest of the year. Third, we experienced a onetime charge associated with our investment in a new Lean/Sigma program. However, the Lean investment will improve profit margins going forward. And so to summarize, the onetime events that negatively impacted profits in the first quarter are behind us and will not repeat going forward. Other positive notes on the business. We had solid demand for the new Kiaro! color printer and the associated ink and label consumables that they generate, and we had several new contracts for rugged printers. Greg will provide more details on these in his presentation. Finally, we continue to remain optimistic on our sales growth and return to profitability in the second quarter and the balance of the year. And now I'll turn it over to Joe for the financial details. Joe?

Good morning. Thank you, Everett. Good morning, everyone. I'm very pleased to present Astro-Med's financial results for the first quarter of fiscal year 2014. As you just heard in Everett's remarks, the company experienced double-digit demand in new customer orders during the quarter. And despite the interruptions in the preface, Astro-Med was still able to report net sales revenues of $15,485,000 for the first quarter, an 8% increment over the previous year. The company achieved sales growth in both our domestic markets as well as our international shipments, with exceptional double-digit growth reported by the company's international branches. First quarter sales by segment has QuickLabel Systems revenues at $11,396,000, representing a 10% increase over the prior year. The growth was spearheaded by sales of the QuickLabel Systems new Kiaro! color printer, as well as sustained growth from QuickLabel's line of consumable products, including labels, inks and toner supply. The Test & Measurement segment reported mixed results, with a measured growth from the company's new data acquisition product lines, the Dash MX and the TMX. However, healthy double-digit growth was reported for Astro-Med's line of ruggedized products. As an outgrowth of the strong bookings relative to the sales volume, our backlog of orders increased by 14% at the end of the quarter from the year-end balance. Gross profit dollars. The company's gross profit dollars in the quarter were $5,105,000. That's down from the prior year's gross profit dollars of $5,499,000. This quarter's lower margin is primarily traceable to the $672,000 reserve charge that was established to address the noncompliant component Astro-Med received from our supplier that was better used in the company's line of ruggedized printers. As Everett mentioned earlier, the company expects to fully recover from the supplier on this issue. On a non-GAAP basis, excluding the reserve charge that was on the cost of sales, the first quarter's gross profit would be $5,777,000. That's a 5% increase over the prior year's gross profit for the same period. On a non-GAAP basis, the first quarter's gross profit margin was 37.3%, slightly lower than prior year's gross profit margin of 38.4%, the lower margin being directly traceable to certain onetime costs related to the partial transition of the Grass manufacturing to Rhode Island from Massachusetts, as well as the disruption incurred as a result of the power supply issues. Secondary expenses in the quarter were $5,800,000, and the company incurred an operating loss of $722,000. On a non-GAAP basis, by excluding the reserve, the first quarter's operating loss is reduced to $50,000. On an after-tax basis and specifically on a loss-per-share metric, the first quarter's net loss of $449 million -- $449,000 translates into a loss per diluted share of $0.06, of which $0.05 is related to the reserve established for the noncompliant component. Moving quickly to the balance sheet. The company's cash and marketable securities balance at the end of the quarter stands at $32,291,000. The accounts receivable rose during the quarter to $9.6 million, with a turnover of 47 days sales outstanding. The inventory dollars also rose during the quarter to $15 million and represents 110 days on hand. Our capital expenditures during the quarter were low at $113,000, and the company paid cash dividends of $521,000 in the quarter at $0.07 per share. The company's book value at the end of the quarter was $8.50, and the employee population declined by 14% to 315 persons, and we improved on our sales per employee from $203,000 last year to $219,000 at the end of the first quarter. So that really concludes the financial review for the first quarter. Everett?

Thank you, Joe. And now Greg will provide an operations review. Greg?

Thank you, Everett. As we mentioned, during the first quarter, we achieved strong orders growth in both our QuickLabel Systems and Test & Measurement groups. Orders were up across nearly all of the market segments where we compete. In addition, we experienced solid growth from our international sales territories in Q1. For the past several quarters, we have been working aggressively to expand our geographic footprint, and we are now starting to see some positive impact from these investments. We have been adding to our branch offices, as well as our worldwide dealer network, with notable gains in Latin America and in Asia. In the first quarter, our percentage of international business grew from 25% to 29% on a year-over-year basis. We will continue to build our channels throughout the year to bring Astro-Med's high-quality sales and customer support to a much broader range of customers. Turning now to the individual business segments. In our QuickLabel Systems segment, we continue to see strong growth in our color label printing business at both small and large accounts. The Kiaro! printer, combined with our end-to-end full customer support, is winning over a broad range of customers to our high-speed digital color label printing solutions. Orders were strong in both the fast-moving consumer goods segments, as well as in the industrial segments. We were extremely pleased to book a record number of multi-unit sales during the quarter. Many of these orders were at large multinational firms where they are integrating our label printers and software with their own corporate IT systems for high-speed on-demand label printing. Our sales and marketing teams have been demonstrating the Kiaro! at numerous events around the world, and our full-solution approach has received a very enthusiastic response. We are actually receiving an exceptionally high rate of orders right on the show floor. Turning now to the ruggedized business. In our airborne printer business, there were several positive elements that helped further establish our leadership position in this marketplace. We won contracts for 3 new programs, and although we are not yet authorized to divulge the customer names, I can say that one was a military aircraft and the other 2 were for business jets. In addition to these Q1 wins, we just announced a very substantial long-term partnership agreement with Honeywell for our ToughWriter 5 printers. Under the agreement, Honeywell will make the Astro-Med ToughWriter 5 ruggedized cockpit printer available for Honeywell's business aviation and regional air transport cockpits, including the Primus Epic cockpit. As a matter of fact, Honeywell is debuting the ToughWriter 5 this week in their booth at EBACE aviation show in Geneva, Switzerland. This new agreement builds on our existing partnership with Honeywell for larger commercial aircraft and opens up a significant new source of business for us. The ToughWriter 5 will soon be available for retrofit and forward fit on Honeywell's Primus Epic-equipped Embraer 170 and 190 aircraft; the Gulfstream GIV and GV; and the Dassault Falcon F900, F2000 and the F7X aircraft, as well as retrofit on Gulfstream 450 and 550 aircraft subject to regulatory certification. To support the record growth of the ruggedized printer business, we have taken a number of steps to scale up [ph] our operations accordingly, including a significant expansion of our manufacturing and test areas, as well as additions to our international sales and technical support teams. We have also undergone the parts manufacturing approval, PMA, process for our cockpit printer and were awarded PMA approval from the Federal Aviation Administration in April for our ToughWriter 4 printer. PMA is a combined design and production approval for modification and replacement articles. PMA was awarded to us after an intensive audit of Astro-Med's quality management system, focused on how Astro-Med designs, manufactures and installs replacement or modified ToughWriter 4 ruggedized airborne printers. Finally, let me close with a quick update on our Lean transformation. During Q1, all employees received initial training on our Astro-Med Lean tools, and several Kaizen events were held throughout the company. Initial events have focused on the manufacturing layout and a few select product lines where we feel we can realize rapid improvement in our quality, delivery and productivity. We have already seen a number of operational improvements due to the Lean events, and we will continue this process throughout the year. Thank you, and now I'll turn it back over to Everett.

Okay. Thank you, Greg. And now, Chris, we're ready for questions.

[Operator Instructions] And our first question comes from the line of Joe Furst with Furst Associates.

I've got several questions, but I'll ask one and then get back in the queue. Where do you stand as far as acquisitions are concerned? You sold your most profitable vision, saying you've got a lot of money for that, in order to make acquisitions. You've said months and months ago, you were close to making an acquisition. And in light of the -- assuming very low profitability in the rest of your business so far, what's going on with this? I mean, are you actually trying to make an acquisition? Are you close? Or what's the status?

Joe, what we've been telling you right along is absolutely correct, and we're in the process. We have a specific active program. We've even engaged outside the help to assist in this process, and we expect to close a deal during this calendar year.

And our next question comes from the line of Steve Busch with Everglade.

So would you -- just a couple of questions. First one, since you were expanding overseas, how are we dealing with currency fluctuations, in the yen or the euro or pound? Are we dealing dollars?

Well, in terms of the European, we are local currency, Steve, in terms of the France and Germany and then, obviously, the pound in the U.K. We are actually in the process of establishing certain contracts for some protection on the currency with the uncertainties there. In the case of the Japanese yen, we are buying the product in U.S. dollars at this point. We are looking at the possibility of doing something very similar to -- in terms of the purchase of anything that relies to the Japanese operation.

All right. Okay, that's good to know. So would you say the -- maybe this is for Joe, the decrease in profitability this quarter was more due to the fact that we don't have Grass anymore or maybe would have made up for a temporary blip in the manufacturing issue?

Well, I think it's a good question, Steve. I think, certainly, Grass was a contributor. There's no question, as we see it from the segment reporting last year. But -- and we did set expectations for this year, but the reason why we were not evenly able to match last year's numbers really was because of some onetime expenses that we did incur during the quarter.

Steve, I think you may have missed the first part of the call when I made a little presentation defining some of the impact of these onetime events.

No, no. I heard that, but I just was wondering, given the -- I just went back and looked at last year, maybe, I guess, we had these expenses but kind of that would have been made up for more, just from the business profitability side and maybe Grass was the driver last year versus...

Well, it's a good question. I think what we tried to do, and you'll see that on the press release, the financials, we have done a restatement, so you're looking at the financials on an apples-to-apples basis. As you know, the way we report the Grass operation is a discontinued operation. It's kind of a 1 line item, if you will, on the statement of income. But -- so -- you almost got to compare now the restated fiscal 2013 to the '14, and the reason why we're lower, as I mentioned earlier, is we did take some shots in the first quarter that we think are behind us here, and so the expectations are very positive going forward.

No, I have no problem with it. You're going to grow the business, and it looks like you're doing well, I'm pretty happy. Will you buy back any shares this quarter by any chance?

We haven't at this point. We did not buy back any shares.

Next, we have a follow-up from the line of Joe Furst with Furst Associates.

Can you give some idea of the effect of this PMA approval for cockpit printers that you've got from the government? And so what additional type of business would that enable you to get that you haven't gotten before? I don't have a picture on that.

Joe, this is Greg Woods speaking. So the PMA opens up a new channel for us really. PMA is required by any manufacturer who's going to deliver a component directly to the aircraft. So whereas, we can sell through Honeywell or direct to Boeing, for example, they would hold PMA in those cases. This now gives us the ability to go direct to an airline to, let's say, retrofit a printer in one of their aircraft. So whether it's a business jet or a commercial jet, they can elect to take out an old printer or a manufacturer with an inferior printer and put an upgrade to our printer. So we can do that directly without having to go through a third party.

And another question, if I could. As it's been pointed out before, the overall profitability of your business, even after the onetime [ph] charges seems to be quite low. Can you give us some guideline on what your goals are as far as what percent of revenue you want to be able to carry down to the bottom line or some insight into that?

Well, I think the guidance that was given at the beginning of the year is still appropriate, Joe, as to what we think the top line and the bottom line is going to be. I think we still -- as I said, I think we hit a little bit of a bump in the road here on this first quarter. But a lot of the programs that we talked about at the beginning of the year when we closed out fiscal 2013 are still in effect, and we do expect to be able to recover for some of the issues that we experienced in this first quarter. We're not sure whether we're going to recover everything in this fiscal year, but certainly, from a dollar standpoint, the company will be able to recover any of the reserves that we set up.

[Operator Instructions] And our next question comes from the line of Dennis Scannell with Rutabaga Capital.

Just a couple of quick things. We can see the reserve for the power supply issue. Can you quantify how much of a hit -- kind of the unabsorbed overhead with winding down Grass and the investments in the launch of the Lean Six Sigma?

Good question, Dennis. I think we've done a preliminary estimate. We're probably talking a couple of hundred thousand, maybe between $200,000 and $250,000 we've taken as an expense in this first quarter.

And that's -- the $200,000 to $250,000, is that both?

Yes, it's a combination of both. I guess, I'd roll all 3 of them together, Dennis. It's a combination of the integration -- the move of Massachusetts operations here, as well as the onetime shot, the expenses we took with the Lean program, as well as the disruption associated with the power supply issue.

Excellent, excellent. Okay. So the -- okay, that's good. That's very helpful. So we would have been solidly profitable?

That's the point exactly.

Terrific. And then, just drill in on the noncompliance issue. How long -- how many of the printers that were already shipped did you have to go and replace the power supplies for because they were noncompliant?

Yes. Well, there's a number of printers that were shipped that have the noncompliant power supply, and we've been in touch with every one of the customers who received them to sort them out and to tell them which is which. And what we're going to be doing with most of them, and we've begun the process, is make these changes on what they call an attrition basis, that is customers will return printers to us -- when they return printers to us for any kind of repair, at that time, we'll make the change to the power supply. So we'll see this over a long period of months. And some customers have elected to send some printers back, and we are changing them here as we go. So that's all factored into that reserve. And in some cases, we will -- it will be a relatively modest change to the printer. And this does not affect -- by the way, it does not affect the TW 5 series because the TW 5 series uses a power supply that we ourselves designed in, not a purchased component.

Excellent, got it. Okay, terrific. And just to ask the obvious, this hasn't damaged your relations or -- with your customers or diminished your customers' views of Astro-Med as a supplier?

No, it hasn't. Some of our customers have said to us, "We can understand. You would be surprised at how often this happens throughout the industry." So certainly, they were concerned but they were understanding, especially since we uncovered the defect and we reported it to them before they even heard of it. And of course, the other issue is this defect is not causing them any problems with the printers they have.

Excellent. In the commentary about the Test & Measurement performance, I wasn't sure I quite understood. Was it the data acquisition sales were down and ruggedized printers were up double digit or vice versa? How...

I think you're right. It's the -- the commentary, Dennis, was really focused on the new products. I think you know what I'm saying. We focused it because the MX and the TMX are growing, the good news, but some of the older -- the legacy products actually are down year-over-year. But to your point about the ruggedized is up significantly, double-digit growth year-over-year.

And that's -- we're talking sales there?

Absolutely right, sales and orders. I would [indiscernible].

Yes and orders were, too. Yes, okay, excellent. And then just a couple other quick things. So even with kind of getting off to a slow start at least on the -- from an earnings perspective in the first quarter, you're still roughly keeping -- you still think we'll hit the kind of $67 million to $70 million in revenues and earnings of, what was it, $0.28 to $0.32? Is that...

That was the guidance. At this point, there's no reason to change. We would expect to see that -- starting off with the second quarter, to see an improvement, obviously, aiming towards being able to achieve the guidance for the year.

Excellent. That would be great. And then cash did decline in the quarter about $7 million. It looks like most of that was working capital, but I can't quite back into the rest. Was that...

That's a good -- again, another good question. A good piece of that was the taxes on the sales. But the lion's share of that drop was related to the taxes we paid on the sale itself.

Fair enough. That's great, okay. Well, I'm glad to hear that we're still on track to deliver what I think should be pretty good earnings for fiscal '14 so that's good news.

That's correct, Dennis.

And then, again, Dennis, it excludes any acquisitions that would be made during this fiscal year.

And our next question is a follow-up from the line of Steve Busch with Everglade.

The Massachusetts facility, is there any action on selling them at this point? Is there any -- how long do you think that might take? And that's really my only question.

Yes. We've turn it over to a prominent real estate broker, and they haven't advertised on the market. They've already shown it to several potential acquirers. And so -- it is a good building. It's in a very good area that's a desirable area for such a plant. So we would expect to sell that off by the end of this year.

Okay. And do you know what it's listing at or around what you're hoping to get for it?

Yes, Steve, it's -- I think we're talking about $2.6 million, I think, maybe is the number. $2.6 million, is what I think, the list price is at this point.

And our next question comes from the line of Joe Furst with Furst Associates.

The previous question sort of fits into what I was going to ask. What's that building on the book for?

It's, I think, a couple of million.

Couple of million. So you would have a breakeven or a slight gain, if you sell?

That would be the hope, Joe.

Right. And then, overall, your other real estate and so on, what would you estimate that the market value is of that compared to its book cost?

Those -- it certainly is going to be a premium over the book costs. It's hard anticipate what the...

I think we've mentioned around $10 million.

The number we have quoted in the past is around $10 million, Joe, in terms of the real estate here in Rhode Island.

You mean it's worth $10 million more than on the books?

No, no, no. We think that the retail value -- market value, if that's to be appraised, would probably in the neighborhood of $10 million.

Got you. And what's that on the books for?

It's probably closer to $4 million.

It's about $6 million or so.

Yes. It's a healthy premium over the -- what we've got in our books.

So that's $0.70, $0.80 or so more than the stated book value, that's what I was trying to get at, what the real value would be.

Right.

And Mr. Berger, at this time, I'm showing no further questions.

Okay, if there are no further questions, then we'll sign off here. And say, we'll see you again in August.

Ladies and gentlemen, this concludes the Astro-Med, Inc. First Quarter Fiscal Year 2014 Financial Results Conference Call. If you would like to listen to a replay of today's conference, please dial 1 (303) 590-3030 or toll-free at 1 (800) 406-7325 and use access code 4617537. We thank you for your participation. You may now disconnect.