AstroNova, Inc. (ALOT) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Astro-Med First Quarter Fiscal Year 2015 Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded today, and I will now turn the call over to David Calusdian of Sharon Merrill.

Thank you, Calvin, and good afternoon, everyone. Hosting today's call are Astro-Med's Chief Executive Officer, Greg Woods; and Chief Financial Officer, Joe O'Connell. Greg will begin today's call by reviewing the company's operating highlights and business outlook. Joe will then take you through the financials. Greg will make some closing comments. And then, management will be happy to take your questions. By now, you should have received a copy of the news release, which was issued earlier today. If you have not received a copy, please go to the Investors section of the company's website, www.Astro-MedInc.com. Before we begin, please note that any statements during this call that are not statements of historical fact are forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These forward-looking statements are based on a number of assumptions that could involve risks and uncertainties. Accordingly, actual results could differ materially. Such forward-looking statements speak only as of the date made. Except as required by law, the company 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 company's risk factors in the company's annual report on Form 10-K and other filings Astro-Med makes with the Securities and Exchange Commission. With that, I will turn the call over to Greg Woods.

Thank you, David, and welcome to our first quarter fiscal 2015 conference call. Even though we're only 1/3 of the way through our 3-year strategic plan, results we obtained in the first quarter demonstrate the excellent progress we have already achieved in growing the top line and strengthening the day-to-day operations of the company. Orders received in the first quarter came in at a record $23.5 million, more than 42% higher than last year's first quarter, with both the QuickLabel Systems and Test & Measurement segments reporting strong double-digit increases. I'm also pleased to report that we exited the quarter with a backlog of $16.2 million. This is more than $2 million higher than our backlog at the end of the fourth quarter, which was also a record. Astro-Med posted double-digit organic growth for the quarter and net sales increase of 34% on robust demand in both segments of our businesses. QuickLabel Systems segment grew 26.6%. Our QLS printers, particularly the Kiaro! series color label printeries, are benefiting from a targeted marketing program that is continuing to attract new customers across a broad array of end markets and geographies. In recent weeks, we have attended a number of industry trade shows including interpack 2014 in Düsseldorf, Germany. Interpack is always one of the packaging technology industry's premier events, and this year was no different. The show drew an estimated 175,000 visitors representing 120 nations. Interestingly, a record 66% of the attendees were from outside Germany, underscoring the global interest in this market. With our complete lineup of Kiaro! printers on hand, including our new wide format, Kiaro! 200, we had a terrific presence at the interpack and a high volume of traffic in our booth throughout the event. It was exciting to hear so many current and prospective Kiaro! customers talk about how impressed they are with the speed of the printer and the color fidelity of the labels. In my conversations with customers, one of the consistent themes is the degree to which our products add value. Whether the labels are for food and beverage, chemicals, plumbing products, pharmaceuticals or scores of other applications, the Kiaro! inkjet family is an ideal solution for businesses that are seeking an in-house, on-demand solution that enables an extraordinarily high level of product customization. We're also experiencing excellent growth in our Test & Measurement segment, which posted a sales increase of more than 55% in the quarter. A portion of that growth can be attributed to our acquisition of the Miltope ruggedized aerospace printer business this January. But we also saw solid demand for our ToughWriter aerospace printers and our high-speed data acquisition systems, our TMX and TMX-18 products in particular. Test & Measurement represented about 31% of net sales for the quarter compared with 26% for the first quarter of 2014 fiscal year. Our integration of the Miltope product line remains on plan. Production is still on schedule to fully transition from Alabama to our manufacturing line here in West Warwick in the third quarter of fiscal 2015. Consolidating the manufacturing here will create synergies that we believe will enable us to grow the business efficiently and profitably, particularly in light of our Lean transformation program. We continue to advance our operational excellence initiatives. In recent weeks, we conducted additional Kaizen events focusing primarily on improving processes associated with the production of labels and other consumables we use in our printers. On the distribution front, we continue to focus on expanding our global sales channel to complement our direct sales in the United States, Canada and Western Europe. In the first quarter, we added sales people in both North America and Europe. We kicked off our direct foreign office expansion initiative last year, with the opening of our office in Monterrey, Mexico, which will concentrate primarily on sales to Mexico and Latin America. This year, our plan calls for us to establish a direct presence in Asia, where we'll significantly improve our opportunities for growth in that region. A few weeks ago, I visited China to meet with a number of new customers, especially those that we gained through the Miltope acquisition and to explore expansion opportunity. We expect to have an office up and running by the end of the fiscal year to serve customers in China and Southeast Asia. And finally, before turning it over to Joe for the financial details, I wanted to let you know that this morning, our Board of Directors declared a regular quarterly cash dividend of $0.07 per common share or $0.28 per share on an annualized basis. The dividend, which is payable July 1, 2014, to shareholders of record as of June 13, is the company's 91st consecutive dividend dating back to 1992. Now let me turn the call over to Joe for the financial review.

Thank you, Greg. Good afternoon, everyone. I'm delighted to share with you Astro-Med's first quarter fiscal 2015 financial results. Net sales in the quarter, as you heard, had reached $20.8 million. That's an increase of 34.2% from the first quarter of a year ago. Sales to our domestic customers increased 36.7% from the prior year to $14.6 million, while sales in our international customers grew 28.4% year-over-year to $6.2 million. Turning to the business segments. The company's QuickLabel Systems product group with monochrome and color printer systems reported sales of $14.4 million, marking a new record in quarterly revenue and exceeding the prior year's first quarter by 26.6%. Our Test & Measurement product group of ruggedized products and data acquisition systems posted sales of $6.4 million in the quarter, representing a 55.3% increase from a year earlier. Profiling the first quarter by product, consumables were at $10.8 million, that's up 21.7% from the first quarter of fiscal 2014, while hardware sales increased 51.8% from a year ago to $8.6 million, while our service, parts, repairs contributed another $1.4 million in quarterly sales, that being up 45.3% from the prior year first quarter. First quarter sales generated $8.6 million in gross profit dollars. That's up some 69.1% from the prior year's first quarter. Our gross profit margins of 41.6% compared favorably with 33.0% in the first quarter of fiscal 2014. The increase in gross margin from a year ago was primarily attributable to the higher revenues, the improved product mix and the ongoing success of Astro-Med's Lean manufacturing initiatives. However, if we exclude the reserve established in the prior year to address the noncompliant components and the limited population of ruggedized printers, the prior year's non-GAAP gross profit margin was 37.3%. Our operating expenses totaled $6.9 million in the quarter or 33.4% of net sales. That's down as a percentage of sales from the last year's first quarter, but up about $1 million from the prior year actual dollars. The increase is primarily related or traceable to targeted marketing programs and additional research and development investments aimed at continuing to grow the business. Operating income in the quarter was $1.7 million or an operating margin of 8.2% compared with an operating loss in the prior year's first quarter of $722,000. Regarding the segment operating profit during the quarter, QuickLabel Systems earned $2.2 million in segment operating profit with a margin of 15.2%, while our T&M segment had operating income of $700,000, with a corresponding margin of 10.9%. Our federal, state, foreign tax provision in the quarter was $449,000, representing an effective tax rate of 28.5%. First quarter net income was $1.1 million or representing some $0.14 per diluted share. That compares with a net loss of $449,000 or $0.06 per diluted share in the year ago quarter. Turning to the balance sheet. Our total assets at the end of May 1 -- May 3, rather, 2014, were $78.3 million. Our equity balance was $68.1 million, representing a book value of $8.87 per share. Our cash and marketable security position was $28.6 million compared to $27.1 million at the end of fiscal 2014. Our accounts receivable from continuing operations were $13.9 million. That represents some 51 days sales outstanding. That's a slight decline from the year end day sales outstanding of 54 days. Inventory levels at the end of the year were $17.5 million, representing 120 days. That compares nicely with the slight increase in the number of days from the year end number of days on hand of 113 days. Our capital expenditures for the quarter were $292,000. Our spending was primarily related to investment technology, machinery and equipment and building and improvements. Our dividends in the first quarter of fiscal 2015 were $533,000, representing $0.07 per share. Our employee population at the end of the quarter was 316 folks. That represents an increase of approximately 12 folks from the year end fiscal 2014. We made improvements in our sales per employee. It increased to $232,000 from $219,000 on a year-over-year basis. With strong customers demand and a healthy $16.2 million backlog to start the second quarter, Astro-Med remains extremely well positioned for continued growth in fiscal 2015. Now let me turn it back to Greg for closing comments.

Thank you, Joe. In the year ahead, Astro-Med will focus on continuing to gain market share in each of its 3 product growth engines: Color label printers and supplies, ruggedized printers for the aviation market and data acquisition systems. We expect to accomplish this growth both organically and through strategic add-on acquisitions. The M&A market remains very active, and we continue to evaluate several opportunities. While investing in R&D and new product development play a key role in our strategy, our focus is on continuing to generate strong cash flow to support our growth objectives. With a strong balance sheet and a healthy backlog, we believe that we are well positioned for the future. We will continue to execute on our growth strategy and focus on growing shareholder value. Finally, turning to guidance for fiscal year 2015. We expect net sales in the range of $80 million to $85 million, which, at the midpoint of our forecast, represents a year-over-year growth of 20%. And on the bottom line, we expect a full year EPS of $0.55 to $0.60 per share. And with that, Joe and I will be happy take your questions. Operator?

[Operator Instructions] And our first question comes from the line of Anya Shelekhin with Sidoti & Company.

So first of all, could you talk a little bit more about the -- your international growth? And where are you seeing the best opportunities right now?

Sure. So it's really coming from a wide variety of areas in international for us versus outside the U.S. So our traditional areas of -- where we've been for many years, Canada and Western Europe, continued to be strong. And we expanded that by adding sales people in both of those regions. And then, beyond that, we opened up the office, really, only a few months ago, in Mexico. And that's -- even in those few months, we're starting to see some nice breakthroughs. Really from having -- it's -- from the distributor that's already in those areas, they're kind of reinvigorated because we've got a direct native speaker in the area, so showing more focus there. So even the distributors we have there were seeing a nice upturn in business from them. And of course, we'll continue with the direct results as well there. And then, beyond that, we're expanding that dealer channel in the other countries of the world.

Interesting thing -- Anya, we're seeing the double-digit growth both in -- from our branch operations which really employs the [indiscernible] as well as from our dealer population. So the receipt of -- the reception of the products has been very positive.

Okay. And what percent of total sales did international sales make up this quarter?

They're basically -- of the total, they're basically about.

Close to $30 million.

Yes, it's a little less than that. I think we're closer to...

It was what, sorry?

No, it's about $29.6 million.

Sorry. I said $30 million, sorry.

Okay. And where are you this point in your talks with Miltope's airline customers to sell directly to them? How are those going?

It's going well. So I've been out to visit most of the major customers, and Tom Carl, who's General Manager of that business unit, has seen many of the others. So we haven't got a chance to see all of them yet, but we've seen the lion's share of them at this point. I mean, I think they're all happy with the progress we're making. We're obviously in communications with them, as well as the FAA and the regulatory bodies that might be involved in the transition. And that all is going fairly smoothly. So we still expect, as I said, to have that acquisition fully integrated on schedule.

Okay. And are seeing those -- the talks with the airline customers, are you seeing those concentrated in any specific region? Or is that across -- you mentioned China in the call.

Yes. So it -- that's unique in the sense that we didn't have direct airline customers with our own Astro-Med business. The acquisition kind of gave us that channel. So we acquired customers in China as part of that acquisition. So that's really kind of a new piece for us just to have those direct customers there. And then, as I mentioned, we'll be opening up an office there as soon we can you find the right people. We have the location. So that's a matter of making the right hires there to have the direct presence.

All right. And why did the tax rate improved this quarter? And could you provide any guidance for your tax rate going forward?

Sure. We had this -- an opportunity for some, what they call FIN 42. As a result of certain provisions we have put away a couple of years ago, the statute of limitations expired on those, so we were able to bring those back into the first quarter. For purposes of going forward, I think we're probably looking at 36% as an effective tax rate for fiscal 2015.

[Operator Instructions] And our next question comes from the line of Steve Busch with Southpaw Investments.

So a few questions for you. In the past, we've talked about this bookings number, or I'm not sure how you guys want to call that. It's a rather large number over several years. Contract numbers, yes, what is that number now?

I'd say it's still in the same range. We've said before, it's close to $200 million. And again, we don't take that as actual backlog until the orders are actually released. But if you add up the contract values that we have and the projected number of aircraft over that time period, that's how we come up with that number.

And is that all just airline?

Well, I'd say it's mostly not airline. The airline business has to be short-term orders. We do get some long-term orders from the airlines. But the long-term orders tend to come from the tier 1 suppliers, for example, the Honeywells of the world, and then you also have the OEM manufacturers, Boeing, Airbus, for example.

Right. So I guess, what I'm saying, is it all cockpit printers? Or is it also Test & Measurement, T&M?

No, it's all -- those are -- those contracts are aviation printers. So whether it's in the cockpit or somewhere else on the aircraft, that's what those [indiscernible]

Okay, right, okay. So what percentage of our Test & Measurement sales this quarter came out of those contracts that maybe had been existing for the last couple of years?

We really don't divulge that. We don't break it down to that level of detail.

Right. I mean, is it more or less?

It's for competitive...

I'm sorry?

It's for competitive reasons that we don't do that. So we don't want to let others know -- so yes, we don't give more detail on that.

Okay, okay. Are you guys involved with the -- I don't know if you can even answer this, the new COMAC regional jets from China?

Can't answer that.

Can't answer that. Okay. Do you think, going forward, by the end of this fiscal year or next fiscal year, we'll be at the same kind of percentage split between Test & Measurement and QuickLabel? Or we'll be trending since the growth is going a little bit faster on the Test & Measurement side now will it be trending more towards a 50-50 mix in business? Or is it -- do you think, QuickLabel will still be pretty much there?

QuickLabel will be bigger. As you saw the gap close a little bit this quarter, so yes, it's a little bit harder call there. I mean, there's -- either one of them could surge ahead. But I think the Test & Measurement is definitely catching up.

It's about -- I think it's 70-30 this quarter here, I think. And you'll see that perhaps move, as Greg says, probably closer to maybe 65%, but I don't think you'll see it, at least in the foreseeable future, at a 50-50 profile.

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

You're finally getting a reasonable degree of profitability, very pleased to see. And the previous caller answered my question which was, again, concerning about the backlog and the aviation area, the $200 million contract, that's what I wanted to find out also. So keep up the good work. We appreciate it.

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

I'll just echo back the kudos, a wonderful quarter. Really nice to see the sales come through and the incremental margins come through. Just a couple of quick things for me. The -- so Miltope added how much to sales in dollar amounts or percentage terms?

That's pretty much what we disclosed. It's an $8 million run rate on an annual basis.

Yes. So $2 million in the quarter?

That's right, Dennis. About $2.2 million to be precise, yes.

Okay, okay. So we didn't see as much organic growth on the T&M side, but did we see growth in both the data acquisition, as well as the ruggedized printers?

We don't tend to break those out, as you say. That's always been a challenge for us. We're trying to protect a certain amount of proprietary information. But I think that we did see -- certainly saw some growth in ruggedized. And certainly, T&M, with -- I think we've mentioned this before. The TMX product continues to have a strong demand. So it's -- we're kind of pleased, I guess, Dennis, the best way to characterize the performance from the components of the Test and Measurement group.

Yes. Okay, great. And then, the -- in terms of the sales offices, so we -- in fiscal '14, we opened the office in Monterey. And Greg, I'm not sure I got -- for fiscal '15, we're looking to establish a presence in Asia. Is that opening an office in China, or are there other locations that you're looking at?

We're looking in both inside and out of China. So for the customer set that we have, we really need kind of a dedicated group that services just China. And then another group that will focus on the rest of Asia primarily. So then maybe in Singapore or some other place in the region that make sense, that can geographically cover that wide area.

And we would expect both offices to be opened in fiscal '15?

Yes, that's what we're hoping to do. It's really more a function of the people, right? So if we can find the right people in the right time, that's what we'll do.

Okay, okay. And then, on -- when we actually bring the production of the Miltope printers into our Rhode Island plant, so we'll be capturing then a manufacturing margin, so we should see a better margin on, say the $2 million plus of Miltope sales that we're now consolidating? Is that the way to think about it?

Well, it's going to be a little tough, Dennis, because it will be integrated with the business, as you say. It'll be just a different line -- you obviously -- we've got to honor the contracts that they already have. But the nice part about it, as we have talked about this before, is the fact that we'll pick up some nice absorption on the products moving through the factory. So the expectation is the company will start to see some improved profitability in terms of gross margins as a result of the additional throughput.

Okay, okay. So I'm -- and maybe I've got the numbers wrong, but I'm looking at the EBIT margin of Test & Measurement that shook out just under 11%, definitely up versus what we saw in the first quarter of fiscal '14, but a little bit lower than what we saw in the rest of the fiscal year. I'm wondering, can that get back to the mid-teens margins that we've seen in the past? Or is there something kind of structural that might keep that more challenging?

No, I think that -- I think, Dennis, your point's a valid one. I think the expectation is that we would return -- eventually, that's the goal, is to get back up to the double-digit percentage segment operating profit that you see for Test & Measurement. We think we -- that certainly is going to happen with that particular segment.

Yes. But being able to manufacture the Miltope printers, wouldn't that help though?

Yes, that will help, certainly, absolutely right. But you have -- and you have the data acquisition products also in there as well. So that's also -- it's the benefit as a result of the additional production.

There are no more questions at this time. I would like to turn the call back over to management for any closing remarks.

Thank you, everyone, for joining us on today's call. Joe and I look forward to keeping you updated on Astro-Med's progress as we move forward, and have a good day. We'll talk to you again in August. Bye now.

Thank you, ladies and gentlemen. This does conclude the Astro-Med's first quarter conference call. You may now disconnect.