Earnings Call Transcript - ALOT Q4 2023

Scott Solomon, Investor Relations

Thank you, Emily. Good morning everyone, and thanks for joining us. Hosting this morning's call are Greg Woods, AstroNova's President and Chief Executive Officer; and David Smith, Vice President and Chief Financial Officer. Greg will discuss the company's operating highlights. David will take you through the financials at a high level. Greg will make some concluding comments and then management will be happy to take your questions. By now, you should have received a copy of the earnings release that was issued this morning. If you don't have a copy, please go to the Investor's page of the AstroNova website www.astronovainc.com. Please note that statements made on today's call that are not statements of historical fact are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on a number of assumptions that could involve risks and uncertainties. Accordingly, actual results could differ materially, except as required by law. Any forward-looking statements speak only as of today, March 23, 2023. AstroNova undertakes no obligation to update these forward-looking statements. For further information regarding the forward-looking statements and the factors that may cause differences, please see the risk factors in AstroNova's annual report on Form 10-K and the other filings the company makes with the Securities and Exchange Commission. On today's call, management will be referring to non-GAAP financial measures. AstroNova believes that the inclusion of these financial measures helps investors gain a meaningful understanding of the changes in the company's core operating results. It also helps investors who wish to make comparisons between AstroNova and other companies on both a GAAP and a non-GAAP basis. A reconciliation of the non-GAAP financial measures to their most directly comparable GAAP measures is available in today's earnings release. And with that, I'll turn the call over to Greg.

Gregory Woods, CEO

Thank you, Scott. Good morning everyone and thank you for joining us. I’d like to begin by recognizing the great work of our team members across the globe in contributing to a profitable year for AstroNova against the backdrop of a challenging macroeconomic environment. High inflation and geopolitical tensions created significant supply chain disruptions across our end markets throughout much of the year. However, our team remained focused on working through these issues and on meeting the needs of our customers, by continuing to drive performance initiatives to improve quality, delivery, cost efficiency and growth. Overall, we grew 34% on our revenue in the fourth quarter to a record $39.9 million. The top line increase was attributable to gains in both segments with Product Identification up $5.7 million or 26% to $28.1 million, and Test & Measurement up $4.4 million or 61% to nearly $11.8 million. While supply chains remained challenged for certain products, we have been able to resolve some of the more extreme supply chain issues we experienced over the past two years with notable improvement in the fourth quarter, particularly in our T&M segment. Compared to last quarter, our unshippable backlog of scheduled orders decreased by roughly $1 million. However, we still left about $1.1 million of scheduled orders that were unfilled at the end of the quarter, primarily in the T&M segment. Based on the work we are doing with our supply chain, we expect to continue to make progress improving our on-time shipments as we move through fiscal 2024. Looking at growth drivers by segment, Test & Measurement benefited from a combination of factors within our Aerospace product group, which manufactures, markets and services, flight deck printers and electronics for commercial and defense customers. These factors included favorable pricing adjustment, greater cost efficiencies, and the ongoing production ramp-up in aircraft deliveries. Turning to the data acquisition portion of Test & Measurement segment, we have won a number of design-ins for defense related programs, and these agreements are presently working their way through the governmental procurement process. While the exact timing is tough to predict, we're pleased to have been selected for these programs and look forward to keeping you updated on the progress of the awards as we move through fiscal 2024. Based on current business conditions, we are excited about the outlook for our Test & Measurement segment in fiscal 2024. Switching over to the Product Identification segment, Q4 was the first full quarter with Astro Machine, which we acquired in August. While the acquisition is still in its early days, the business is performing very well and in line with our expectations as we advance through the integration process. In particular, we have already made good progress integrating products between our two sales channels. Astro Machine has historically produced good operating margins and we are focused on further integration with our sales channels to grow the top line and drive additional profitability through better customer focus, operational improvements and accelerated new product development. We remain excited and confident about the new component of our Product Identification business as a growth platform in the years ahead. By combining the resources of our joint research and development teams, we will soon introduce several new product offerings. Two of these offerings, which target current and prospective OEM customers, leverage much of the technology used in our very successful direct-to-package overprinting solutions. Turning to the data acquisition portion of Test & Measurement segment, we have won a number of design-ins for defense related programs, and these agreements are presently working their way through the governmental procurement process. While the exact timing is tough to predict, we're pleased to have been selected for these programs and look forward to keeping you updated on the progress of the awards as we move through fiscal 2024. Based on current business conditions, we are excited about the outlook for our Test & Measurement segment in fiscal 2024. Switching over to the Product Identification segment, Q4 was the first full quarter with Astro Machine, which we acquired in August. While the acquisition is still in its early days, the business is performing very well and in line with our expectations as we advance through the integration process. In particular, we have already made good progress integrating products between our two sales channels. Astro Machine has historically produced good operating margins and we are focused on further integration with our sales channels to grow the top line and drive additional profitability through better customer focus, operational improvements and accelerated new product development. Before turning the call over to David, I'd just like to comment on our improving financial strength. Our balance sheet remains healthy and we began the new fiscal year on a solid financial footing. With reduced leverage metrics at year end, we continue to pursue the M&A portion of our growth strategy and are confident we will have plenty of capacity to execute the right strategic acquisitions. Our strong backlog and healthy order demand position us for continued execution on our strategic priorities. Powered by the AstroNova operating system, the foundation of our continuous improvement strategy, we are excited about the opportunities to grow across the markets we serve. I'll now turn the call over to David for the financial review.

David Smith, CFO

Thanks Greg, and good morning everybody. I'll add a few comments to what Greg said about the quarter and the full year financial performance. I'll comment on our liquidity and the impact of the Astro Machine acquisition on our results and on the year-end balance sheet. On the top line, full year revenue grew by double digits across all three major categories. Contributing to this was $12.5 million in Astro Machine revenue since acquisition on August 4 this past year. Supplies revenue increased 12% to $82.1 million accounting for about 57% of total sales. Hardware revenue was up 31.5% to $43.4 million or 30% of total sales. The remaining 13% of sales came from other, which increased 41% to $18 million. Much of that growth was attributable to, as Greg said, the profitable repair, service and consumables part of our Aerospace product group. As Greg noted, that's fueled by aircraft utilization and is closely linked to that on an operational basis. Fiscal 2023 gross profit was up 10% in dollars, but down on a margin perspective by 380 basis points to 33.8%. The percentage decrease was mostly due to the mix impact of Astro Machine's lower gross margins. As we've talked about before, compared to the core Product Identification business, the Astro Machine business model has a lower gross profit margin but it has more favorable operating margins. The press release references both the GAAP results and the non-GAAP results and we reconciled those in the exhibits to the release in a lot of detail. We use adjusted EBITDA as a measure of profitability and operating performance and for the 12 months ended January 31, adjusted EBITDA, excluding the acquisition costs of about $720,000 totaled $11.1 million. That's compared to $7.3 million in fiscal 2022, which excludes both the large CARES Act benefits and the write-off of our legacy ERP system. Product Identification segment operating profit for the fourth quarter of 2023 was $1.9 million compared to $1.5 million in the same period last year. For the full year, segment operating profit was $7.9 million compared with $9 million in fiscal 2022, excluding the CARES Act benefits. For the period of ownership, beginning August 4, Astro Machine's contribution was $1.6 million. T&M segment non-GAAP operating profit for the fourth quarter was $3.2 million compared with $0.5 million in the same period last year. And for the full year of 2023, T&M non-GAAP operating profit was $9 million compared to $2.6 million in fiscal 2022, again excluding the CARES Act benefits. Fiscal 2023 operating expenses were $40.7 million compared to $40 million last year. The increases were due to the addition of Astro Machine for half a year and the slightly higher wages and benefits and higher travel-related expenses as the pandemic ended and we were able to get back to meeting customers face to face again. Our plan is to hold very tight control on operating expenses in fiscal 2024 and expect if they increase, it will be only modestly. At the end of the third quarter, we estimated the allocation of the Astro Machine purchase price to the assets acquired and we finalized that in the fourth quarter, included in that allocation are the customer relationship and trade name intangibles that were appraised at just under $3.5 million. We're going to amortize that over five years, so it will amount to a non-cash charge of just under $700,000 per year and $348,000 since the acquisition. In accordance with GAAP that will be on the sales and marketing line. Despite the borrowings in the third quarter to acquire Astro Machine, our overall financial capacity is strong. Our debt-to-EBITDA or leverage ratio is declining as we reduce debt by $4.4 million in the quarter and increase the EBITDA, including the acquisition of Astro Machine. We negotiated a new covenant structure when we refinanced our credit facilities to accomplish the acquisition and we're well inside those covenants. As a result of those facts, we believe we have incremental borrowing capacity if or when we need it, and we're in frequent contact with our bankers about our plans. On top of the revolving credit facility availability, our bank agreement provides term loan equivalent secured financing of capital equipment, and we'll likely borrow about $1.7 million for that purpose this year as we plan to upgrade our hardware and supplies manufacturing equipment to keep up with expected demand growth in fiscal 2024. And with that, I'll turn the call back to Greg.

Gregory Woods, CEO

In our Product Identification segment, the integration of Astro Machine is proceeding on plan and we'll have the benefit of a full year of revenue from this business in fiscal 2024. The new products and operational upgrades planned for Astro Machine should enhance the overall growth and profitability of the Product Identification segment as we move forward. Now, David and I will be happy to take your questions. Operator, please line the questions.

Operator, Operator

Thank you. Our first question comes from the line of Peter Sidoti with Sidoti & Company. Peter, please go ahead.

Peter Sidoti, Analyst

Greg, I noticed that inventories and accounts receivable are up. Do you expect to reduce these?

Gregory Woods, CEO

Yes, that's something that we are working on through the year and we're taking advantage of pricing efficiencies as well where we find them. And we're still in a situation where occasionally we have to buy more than we need just to secure the supplies. But as I mentioned, that's starting to decrease in terms of supplier reliability increasing. So we expect to continue to bring that down actually as we move through the year.

Peter Sidoti, Analyst

Okay. And what about capital spending this year and next?

David Smith, CFO

This year, just like I said in my comments…

Gregory Woods, CEO

That's what David said…

Peter Sidoti, Analyst

Okay, so you will be generating a lot of excess cash flow this year and next. Do you expect to use that to pay down the existing debt?

Gregory Woods, CEO

Sure. I mean, yes, we always allocate capital to the difference of…

Peter Sidoti, Analyst

Okay. I was just, it seems like, it just seems like there's a lot of cash. Okay, thank you very much.

Gregory Woods, CEO

Sure.

Operator, Operator

Our next question comes from Tom Sparrow with Sparrow Capital. Please go ahead, Tom.

Unidentified Analyst, Analyst

Tom Sparrow, good morning.

Gregory Woods, CEO

Good morning, Tom.

Unidentified Analyst, Analyst

Just a couple. Greg, you mentioned on the data acquisition side of the business that if I understood you, you've won a couple of contracts with the government and they'll begin to kick in this fiscal year. Do you expect those revenues from those contracts to be material to the income statement?

Gregory Woods, CEO

Yes, and the Test & Measurement data acquisition part of the business is primarily what I was referring to. And the data acquisition is a smaller part of the Test & Measurement segment, but yes within that product group certainly would be significant and it will make an impact on the overall financials. When you look at the kind of run rate that we're at right now, it won't be orders of magnitude, but it's an important win for that team.

Unidentified Analyst, Analyst

I see. And on the Product Identification side of the house, the last quarter or two while we owned the Astro Machine business, if I back out the revenues from that acquisition, I just did this quickly, it looked to me like the revenues from what I would call core Product Identification or legacy product identification were down. Am I right or perhaps I'm not doing the numbers correctly?

Gregory Woods, CEO

Yes, they were, they're basically flat and yes, which was a little disappointing, and it had to do with some items you mentioned before where we had some supply issues from one of our suppliers that caused us to have to refit some of the machines in the field and we're working our way through that process. Now, we're probably about halfway through that. It really, it gets involved with kind of flushing out the bad ink and getting new ink in there. And that did cause those machines not to produce as much revenue as we had expected. But lastly we're coming back out of that right now. So I think by the end of Q1 we'll have most of that behind us, a little bit to clean up in Q2. But in general…

Unidentified Analyst, Analyst

I see. And if the product we had, the problem that we had, came from one of our suppliers, are we seeking compensation from that supplier?

Gregory Woods, CEO

Of course, and that comes in different…

Unidentified Analyst, Analyst

Okay. Well, I'm, well, how is it going? I mean, are we in negotiations, we have a lawsuit? What how does that look?

Gregory Woods, CEO

No, no, it won't be a lawsuit. We've got a mutually agreeable way to work our way out of that with, I don't want to get into details of it because it is not public, but yes, it will help as we go into FY 2024, let's put it that way.

Unidentified Analyst, Analyst

Okay, great. Well, thanks much and good luck.

Gregory Woods, CEO

All right, thanks, Tom.

Operator, Operator

And with that, our next question comes from George Melas with MKH Management. George, please go ahead.