AstroNova, Inc. (ALOT) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Astro-Med, Inc. Second Quarter Fiscal Year 2014 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to our host, Mr. Stan Berger. Please go ahead, sir.

Thank you, Danielle. 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 second 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 states 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 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; Greg Woods, President and COO -- and Chief Operating Officer; 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, and thank you for joining our conference call. I will make some brief opening remarks and then Joe O'Connell will provide detailed financial results, Greg Woods will provide a recap of operations and then we'll take your questions. So during our last conference call covering our first quarter results, I said, "We continue to remain optimistic on our sales growth and return to profitability in the second quarter and beyond." Well, as you read in our press release yesterday, our second quarter was indeed profitable and successful on several fronts. Both sales and new order bookings for the quarter were up by high double-digits over last year at 17.3% and 20.5%, respectively. The double-digit sales growth came from both our domestic as well as our international markets. And as a result of the Lean initiatives we instituted, we drove up our profit margins as well as our operating margins both ahead of last year's second quarter. Our growth drivers are the ruggedized printers, our color label printers and the consumables that these printers generate daily. During the quarter, we received several new rugged printer contracts, some of which we announced already and others which will be announced later. Currently, our contracts in hand total $199 million and our contracts in a negotiation total over $100 million. Sales of the Kiaro! color label printer continue to grow aggressively. In the quarter, we sold 50% more units than in the first quarter and more than any other quarter to date. As you may recall, this exciting new product first began shipping 1 year ago in July 2012. Customers love the product. It produces the highest-quality labels at very high speeds and is easy to operate. We invite you to go to our QuickLabel Systems website and look at 1 or 2 of the unscripted customer testimonial videos of typical applications for this product. You will be impressed. We have been diligently deploying our strategic plan at all levels of the company with positive results. This includes our investment in research and development to introduce several new products each year to foster our organic growth. For example, on Monday and Tuesday of this week, we held a North American sales meeting for our QuickLabel Systems group where we introduced 3 new products. One of which is a new model in the Kiaro! family featuring 8-inch wide-label printing. Later in the year, we will introduce 2 more new products, one in the ruggedized family and one on the data acquisition field. We are also making progress to add growth by acquisition, as we have mentioned on these calls in the past. We have identified and met with several targets and are being extremely selective to assure not only the proper fit but also accretive financial results from the start. As of today, we are on the way into our third quarter -- we are 1/3 of the way, I'm sorry, we are 1/3 of the way into our third quarter, and we are confident of our continued growth and profitability for the balance of this fiscal year and beyond. The company has commanding positions in both color label printers as well as rugged printers. Now Greg will present more color and details on my comments, but first, Joe will present the financials. Joe?

Thank you, Everett. Good morning, everyone. I'm very pleased to share with you Astro-Med's financial results for the second quarter of fiscal 2014. As you heard from -- or and perhaps read, the company really achieved a very strong second quarter. Double-digit growth in both our orders received as well as our net sales. Our customer bookings in the quarter reached $18,241,000, representing a 20.5% increase over the prior year's second quarter. And we received strong demand from our domestic customers at $13,200,000. That represents an increment of 23.3% over the prior year, or as the international customers added another $5 million of new orders, are an increase of 13.5% over the prior year's second quarter orders from international. The double-digit growth was also evident in Astro-Med's 2 segments: Test & Measurement, including our ruggedized products; and QuickLabel Systems, including our digital color printer product lines. New orders were up 11.3% in the Test & Measurement segment, while QuickLabel Systems orders were up 25% over the prior year's second quarter orders. The company's net sales growth in the second quarter was similar to the orders received. Net sales were $17,194,000, an increase of 17.3% over the prior year's sales of a similar quarter. Domestic sales were $12,074,000, were up 11.7% over the previous year, whereas international shipments of $5,120,000 representing 30% of our total second quarter sales were up 33% over the prior year. The sales by product group were also very strong. QuickLabel Systems reported sales of $12,194,000 in the quarter. That's a record level of sales on a quarterly basis for QuickLabel Systems and achieved a growth rate of 12.8% over the prior year. The Test & Measurement segment reported sales of $4,999,000 and increased 29.6% over the previous year. The second quarter also generated improved profitability on the sales. Gross profit in the quarter was $6,923,000. That's a 24.4% -- 24.6% improvement over the prior year's second quarter gross profit and generated a margin of 40.3% against the prior year's margin of 37.9%. Operating expenses on the quarter were just a little over $6 million, representing an increment from the prior year, and consumed $0.35 above the second quarter's sales dollars. The result of operating income for the second quarter was $887,000. That's an increase of 57.3% over the operating income in the second quarter of the prior year and provided an operating margin of 5.2% as compared to the prior year's 3.8%. Our federal state and foreign income taxes provision in the quarter represents an effective tax rate of 38%, down slightly from the prior year's 39% for the same timeframe. The company also realized a -- in the quarter a positive contribution from its discontinued Grass Technologies operation where we have a contract manufacturing arrangement with the buyer. Now the contribution on a net after-tax basis was $165,000. The resulting net income for the company in the second quarter was $696,000 or $0.09 per diluted share. The company reported net income of $987,000 or $0.13 per diluted share in the previous year's second quarter. However, in profiling the second quarter's earnings per share between Astro-Med's continuing operations and discontinued operations, as our earnings per share of $0.07 per diluted share for the continuing operation a significant improvement over the prior year's earnings per share from the continuing operations of $0.04 per diluted share, while the second quarter earnings per share from the discontinued operations was $0.02 per diluted share lower than the prior year's earnings per share of discontinued operations of $0.09 per diluted share. Prior to a review of the balance sheet, a quick recap of Astro-Med's 6-month results are as follows. Our net sales for the 6-month period of $32,679,000, that's a growth rate of 12.7%. QuickLabel Systems sales in the same timeframe are $23,591,000, up 11.4% over the prior year; whereas the Test & Measurement sales of $9,088,000 have increased 16.1% over the last year. The company earned gross profits on a GAAP basis in -- for the first 6 months of $12,027,000, a mark -- or representing a margin of 36.8%. However, this result does include a product replacement reserve that we took in the first quarter of $672,000 established to address a noncompliant component received from a vendor. Excluding the reserve, the non-GAAP gross profit for the first 6 months is $12,699,000 or a margin of 38.9% and compares favorably to the prior year's gross profit margin of 38.1% for the same -- for a similar 6-month period. On a GAAP basis, the net income for the first 6 months of fiscal 2014 was $247,000 or $0.03 per diluted share. However, on a non-GAAP basis, by excluding the noncompliant component reserve mentioned earlier, the net income for the first 6-months period is $670,000 equal to $0.09 per diluted share. The prior year's net income for the 6-month period was $1,824,000, representing some $0.24 per diluted share. Quickly looking at the balance sheet. Out assets at the end of the second quarter was $75,782,000. Our equity balance at $63,600,000 represented a book value per share of $8.52. Our cash position continue to remain strong at $32,583,000. Our working capital balances of accounts receivable at $9,700,000, representing some 52 days outstanding, and inventory on a continuing operations basis at $12,500,000 represents 110 days on hand, up slightly from the year end. We spent on capital expenditures for the first 6 months, $374,000, primarily associated with machinery and equipment and information technology. And we paid dividends for the first and the second quarter at the rate of $0.07 per share per quarter of $1,047,000. Our employee population at the end of the quarter was 323 folks. That's down 18 folks from the year end, and we improved nicely on our sales per employee to $219,000, representing a 12-month trailing average as compared to a comparable period previously of $207,000 per employee. That concludes the financial review of Astro-Med's second quarter. Everett?

Okay. Thanks, Joe, and now Greg will present a view of operations.

Thank you, Everett. As you heard, it was another strong quarter of orders growth here at QuickLabel Systems and in the Test & Measurement groups at Astro-Med. Orders improved in nearly all of the market segments where we compete. The Test & Measurement group had strong bookings of airborne printers throughout the quarter and was further helped by a nice ramp-up in portable data acquisition recorders during the latter half of the quarter. At our QuickLabel Systems group, sales of the new Kiaro! printer continue to accelerate and deliveries are hitting an all-time pace this quarter. Astro-Med sales were strong both domestically and internationally, with our branch offices turning in an exceptionally strong quarter. To keep our sales force armed with innovative new products, we implemented a stage-gate product development process at the start of this year. Through this process, we have been able to focus our development efforts and reduce our overall product development cycle time. These changes will enable us to launch several new products during the second half of this fiscal year. These planned launches for the second half of the year include a portable data recorder, a new breakthrough product in the Kiaro! product line along with several new accessories, and new versions of our ToughWriter 5 airborne printers. Now let me give you a little more detail on the individual business segments. As I noted in our QuickLabel Systems business, we shipped a record number of color label printers during the quarter. We saw good demand across the product line, with the sharpest increase coming from the new Kiaro! inkjet printer line. Our full solution Kiaro! offering is so compelling that our average sales cycle for this printer and consumable package is much shorter than our historical sales cycles have been. During the quarter, we continued to expand our sales and marketing efforts to grow in our traditional markets as well as in a number of new markets that the Kiaro! has opened up for us. The new market penetration was aided by a series of targeted niche marketing campaigns that have so far shown great success. In preparing for the big fall show season, we held our North American sales meeting this week, where we introduced several new products to our sales teams in advance of their public launch next month. The new QLS products are all geared toward expanding the direct digital color label printing business that enables our customers to print high-quality color labels in-house on a just-in-time basis. To accommodate the growing demand for our printers, we continue to expand our direct sales and support teams, and to add to our worldwide rep and dealer network. Now switching to our Test & Measurement group. During the second quarter, we expanded our penetration of the flight deck printer market as our industry-leading ToughWriter 5 printer continue to outperform the competition. We won several new negotiations, including our first contract with Embraer. This contract is for a flight deck printer on the new Embraer KC-390 military transport aircraft from the Embraer defense and security division. We also won another contract with Rockwell Collins that we announced at the Paris Air Show in June. This contract is for flight deck printers to be installed on Bombardier Global 7000 and Global 8000 business jet aircraft. And in July, we won the flight deck printer contract for Transavia Airlines' fleet of Boeing 737-700 and 737-800 aircraft. Transavia is part of the Air France-KLM Group. The Transavia contract represents a significant milestone for Astro-Med in that this was our first airline direct contract. Over the past several years, we have made significant inroads with the airframers like Boeing and Airbus, Embraer as well as the Tier 1 avionics companies like Rockwell and Honeywell. But prior to this year, we did not have any airline direct business. To me, this is one of our top strategic objectives for the year, to add this third leg of the stool to our business. These contracts and others that we are not at liberty to discuss have built our airborne printer backlog up to nearly $200 million. We also made good progress on our Lean transformation during the second quarter. Over the summer, we completed the reorganization of our main manufacturing facility here in West Warwick, Rhode Island, that optimized our materials distribution and freed up valuable floor space to accommodate future growth. Additionally, we implemented a visual management system that allows employees and managers alike to easily monitor how we are doing with respect to quality, delivery and productivity. These metrics are reviewed by the teams in each area on a daily basis, enabling us to rapidly apply problem-solving techniques to the most important elements of our business in a very timely manner. We have a number of additional events that are lined up for this quarter and beyond, and I'll update you on those in our next call. Thank you, and I'll turn it back over to Everett.

Okay. Thanks, Greg. And now, Danielle, we're ready to take questions.

[Operator Instructions] Our first question comes from the line of Steve Busch.

So this airborne printers are $199 million now, plus, Everett, I think you said there's $100 million more in negotiations, is that correct?

Yes, that's right on, Steve.

So of that approximate $300 million, what's our plan for -- what's our expectations as to which part will be 2000 -- the rest of fiscal year '14, '15 and over how many years, is it like 20 years?

Yes, well, I would say the average length of the contract is at least around 10 years. And so, some of these contracts we've already had now for 5, 6, 7 or 8 years, and so some are going to go up and some are coming on. So we say around 10 years. Although, most contracts initially are for 15 years. And so you could spread the $200,000 that we already -- $200 million that we already have on over 10 years, roughly. But there are others coming in at various periods of time. And the other thing is, although those are contracts at hand, we don't put them in our backlog until we get release orders from the airlines or the contractors.

No, I understand that. So but -- so do we have -- do you -- so you think it's just kind of an average over the 10 years? You're not going to be more weighted to 2015?

No, no, no. This is going to -- the pace is going to ramp up. I'd say you're going to see it go up somewhat next year, and the following year, which would be our fiscal 2016, is going to have a very aggressive ramp-up as a number of these contracts go into production at the same time.

Okay. Well, that's good to know. Well, yes, okay. That's great. I mean, you can clearly see it going up. It's nice to know. So the -- when you say bookings, is that the same as you're saying, or is that backlog?

No, that's -- Steve, that's orders received coming in. We make the distinction. In terms of the bookings, it's business that's been written, but may or may not have been sold in that particular period. So we kind of make that -- that reflects the demand, precise demand that we're getting from customers.

All right. So that would be the same as backlog?

Well, with respect to the contracts that I just mentioned, the $200 million contract, sorry, that is not a booking. We have those contracts in hand, but we don't book them until we get release orders.

Right, yes. I'm a little confused with the different words. Okay. No, I understand completely. And I guess maybe this is for Greg. Kiaro! -- who are Kiaro!'s main competitors, and what's our market share in the total addressable market? And then I'll hop off.

Sure. Well, the main competitors, quite frankly, is flexographic printers. And that's where we're getting most of our business. So the majority of these customers today, before they get the Kiaro! in hand, were going out to outside printers to have their labels printed at a print shop. So the advantage of Kiaro! is you can imagine if you're -- I mean, typically -- a lot of our customers are in the food and beverage business. Let's say you're a coffee manufacturer, you might have 40 types of coffee that you send out to a variety of customers. You might have 100 or more different labels. Some go out of production, some are coming in, you may not have the right label at the right time. So the whole advantage of the Kiaro! is they can print exactly what they need, when they need it. And prior to the Kiaro!, the resolution speed of the printers in the marketplace just weren't there, even the ones that we have.

Right. So at least -- I'm trying to wrap my head around it. So if I'm -- assuming, I'm a small vineyard and I have this wine production, am I buying my own automated system that's going to be sending it through the -- sending the wine bottles through the printers? Or am I making the printers with Kiaro! and then making that labels and then sending them to the guy who puts the bottles in the rack and sends it through?

Yes, it depends really on how many wine bottles you're making for a month, or you're bottling for a month. So the labels are produced at the rate of 8 inches a second. The higher-volume customers -- we have a rewinder that actually takes those, puts them on a reel and then they're put on an automatic applicator, which will go right onto a bottling line. Yes, so that's if you’re a high-volume wine producer. If you're a medium-volume wine producer doing hundreds of cases instead of thousands, in that case, there's a little hand-apply system that they can buy from a variety of the company.

But they do that all in-house, the vineyards, they do that all in-house. They print -- yes, they print the label and they apply them in their factory, in their vineyard.

So we don't sell any of the line stuff that -- where they're sending the bottles through the line?

That's right. We don't sell any of the conveyors or the applicator systems. Although, we're beginning to partner with some manufacturers of out-label applicators, so that they can combine our color printer with their applicator and sell the entire system. That's something new that we're beginning to work on.

[Operator Instructions] Our next question comes from the line of Sam Rebotsky.

You seem to be in line to change the direction of the company more so. How do we look at sales going forward to sort of get a handle what the sale -- I mean, we have a substantial backlog which has been larger than it's been as far as I could remember. How do we sort of relate to translate a future sales number? I don't understand how I could come up with the number going forward.

Well, we're not about to make any forecast of sales going forward at this time, Sam. But you're right. We are transforming ourselves somewhat into a printer company as we've said right along, especially now that we have divested the medical side of the business. So we're concentrating on these growth areas of printing, whether it be color printing or ruggedized printing for aircraft. That's the direction of the company, and we see the growth continuing in high double-digits.

Okay. So the growth will be in double digits high as you've indicated. Do you expect to come out with the earnings and sales forecast as you've done in the past, and when do you expect to do that if you do?

Well, we did provide guidance for this year, early in the year, before the year started, I guess. And I'd be glad to repeat the guidance that we gave you at the beginning. And that guidance was for this year, we were looking for revenues of $67 million to $70 million and earnings of $0.28 to $0.32 per share.

And we're still sticking with that guidance?

And we're still sticking with that guidance.

Okay. And as far as acquisitions that you're -- what kind of size are you looking at, were they in the $10 million range, or were they larger? Anything...

No, no. $10 million to $30 million, in that range.

Okay. And as far as do we expect to close something in the current year, or what's our thoughts there?

Well, certainly, that's our target and plan, and -- our target, our plan, our hope and our objective.

Okay, okay. Well, I guess, Everett, you're structured to increase significantly and to -- make an acquisition that would fit and go forward, and presumably, what is your plan as far as the exposure to the investment community? What are your expectations, your future presentations?

Yes, we would like to begin -- yes, I guess, it's been a while since we've gone on the road, if that's what you mean, Sam.

Yes, yes.

And we're hoping to do that again. We wanted to get some, a few consecutive quarters, positive quarters under our belt so that we can really explain our story better, and certainly now that we're solely or mainly a printer company, it will be much easier to comprehend from the various people that we talk to. So I would say probably in the spring, we'll begin another program.

[Operator Instructions] And we do have a follow-up question from Steve Busch.

So I mean, first of all, this looks great. You're my favorite kind of stock, personally, in the company. I love the balance sheet. You guys have been managing it very well like you said you're going to do. Our only real issue, I guess, still is liquidity. Are you considering stock dividends or anything like that as we've talked about in the past, Everett, especially, just to get more shares out there, given the volumes we see?

Yes. All I can say, Steve, is that topic is discussed in our various board meetings. We don't have any specific plans right now, but we always take it under consideration. Certainly, our shareholders, the welfare of our shareholders is first and foremost on our agenda and -- but right now, we don't have anything specific in that area.

Okay. And I guess, I always ask this question because you have such a broad base of customers. Are you seeing any changes in the overall economy in general, or does it seem to be steady for you?

Yes, well, right now, our business is very robust and -- on all fronts, and as we've mentioned domestically as well as internationally. So we're very pleased.

Our next question comes from the line of Charlie Doe [ph].

A couple of years ago, you had referred to the market potential for the ruggedized printers as something in the neighborhood of $400 million. But it seems like as the contracts have been closed recently and the magnitude of the ones currently being quoted on, it seems like the market potential is even greater than that. So I'm just wondering if you could update that.

Well, I suppose it is because we're getting into more areas of the ruggedized product market, not only with printers but with the people we're selling to. As Greg mentioned now, we're going directly to the airlines, a market we had never tapped before, and we did that for the first time this year. We're getting into more of the manufacturers. As Greg mentioned again, Embraer is added to the list. And I think next week, you're going to see a news release where we have gone with still another aircraft manufacturer that we've never sold to before. So we're really penetrating this market more and more and more aggressively, and we're capturing nearly every new contract that comes up for bid.

Right. But you don't have a current sense of like what the total market potential is at this point?

It's hard to say because we're also adding new product areas. In addition to the printers which are the main event, we also make ethernet switches and we're also exploring some other products that are used in aircraft to add. Those products fit within our capabilities. And so we're looking to add those. So that's going to add to that number.

And just to throw something else out there, if you want to go do some research or look it up. It's pretty easy to find out what the fleets of aircraft are out there for the airlines. It doesn't help you as much for the business, just that you can see how many they make per year. And then military, again, using pretty good information, that most of those planes have a printer on there. So there's also a retrofit market as well. That's why it's hard for us to exactly quantify it. We're just starting to get in some retrofit-type opportunities. But the new aircraft number for the existing accounts that we already sell to is a much smaller piece of the overall market than we had previously thought. So the overall market is actually much bigger.

[Operator Instructions] And gentlemen, I'm showing no further questions at this time. Please go ahead with any closing statements.

Okay. We want to thank you once again for participating in our call, and we'll talk to you again sometime in mid-November. Have a good day and a good weekend.

Ladies and gentlemen, this does conclude our conference call for today. Thank you for your participation. You may now disconnect.