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spk01: And welcome to the AstroNova's third quarter fiscal 2021 financial results conference call. Today's conference is being recorded. I would now like to turn the conference over to David Kalustyan of the company's investor relation firm, Sharon Merrill Associates. Please go ahead, sir.
spk02: Thank you. Good morning, everyone, and thank you for joining us. Hosting this morning's call are Greg Woods, AstroNova's president and CEO, and David Smith, the company's chief financial officer. Greg will discuss the company's operating results. David will comment on the financials. Greg will make 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 today. If you do not have a copy, please go to the Investors section of the Astronova website, www.astronovainc.com. Please note that statements made during today's call that are not statements of historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform 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 except as required by law. Any forward-looking statements speak only as of today, December 7, 2020. 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 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 the non-GAAP financial measure Earnings Before Interest, Taxes, Depreciation, and Amortization, or EBITDAH. Astranova believes that the inclusion of this measure helps investors gain a meaningful understanding of the changes in the company's core operating results and also can help investors who wish to make comparisons between Astranova and other companies on both a GAAP and non-GAAP basis. A reconciliation of this non-GAAP measure to its most directly comparable GAAP measure is available in today's earnings release. And with that, I'll turn the call over to Greg.
spk04: Thank you, David, and good morning, everyone. Thank you for joining us today. We performed in line with our expectations for the third quarter, particularly in light of the ongoing effects of COVID-19. In the product identification segment, revenue and operating margin increased sequentially and year on year. While in testing measurement, our results continue to reflect the effects of the pandemic on the commercial aerospace industry. Let me touch on each of these segments. On the product identification side, We're seeing the benefits of our new and fully updated product offerings, combined with the expanding emphasis on digital sales and marketing. Our enhanced digital presence, highlighted by our new website, AstronovaProductID.com, has been very well received. Earlier this quarter, we launched a new site globally, which integrates our Quick Label, Trojan Label, and Get Label brands into one comprehensive site with state-of-the-art interactive capabilities. This site includes digital educational content such as online demonstrations, e-books, white papers, and blogs to help customers make informed decisions. The response from the user community to all of the newly added digital thought leadership content has been very positive across the board. Product identification revenue in the quarter of $22.9 million was up more than 5% year over year and nearly 6% on a sequential basis. Pavement operating profit increased by 87%, the $3.5 million, due to the higher revenue as well as operating expense reductions. These results were driven by strong demand for our printers and supplies, including our new color label printers, such as the QL120X and the QL850, as well as our recently released wide format direct product and packaging printer, the T3-OPX, which continues to exceed our expectations. The rate of new customer acquisition was also favorable, which contributed to this segment's strong performance in Q3. Innovations in technology and applied marketing are cornerstones of our product identification growth strategy. At the recent PAC Expo Connects digital trade show, we demonstrated a range of advanced new products that enable customers to further increase productivity, reduce waste, and drive those efficiencies to the bottom line. These new offerings, includes several new products that expand our reach into our customers' product identification automation processes. For example, the LF100 and LF200 label finishers, compact all-in-one desktop finishing systems that add inline label lamination and die cutting, saving production time and lowering media expenses. And the T2C-based print-and-apply solution, a new downstream adjacency for us, that combines our label printing technology with high-speed automated robotic label placement. PackExpo Connects was our first large-scale virtual trade show. We hosted eight interactive seminars, as well as a broad range of video demo rooms. All were well-received and well-attended, and our sales teams are now busy following up with those attendees. Turning to test and measurement, Not surprisingly, the combination of COVID-19 and the 737 MAX grounding continues to adversely affect commercial printer deliveries in Q3. Segment revenue of $5.1 million was down about $6.4 million year over year and $900,000 sequentially. That being said, in light of recent developments, we're hopeful that the third quarter will represent the low point for our T&M segment. Though we don't have a crystal ball, The potential of approved coronavirus vaccines in the coming days and the FAA's November decision of clearing the 737 MAX for return to service are positive signs for our commercial aerospace business as we move through fiscal 2022 and beyond. As the aviation industry works its way through what is expected to be a gradual recovery, we have restructured the commercial aerospace portion of our business to more closely align our operations with the current reduced production levels. Even at these reduced operating levels, however, we have made sure to keep our core technical and support teams in place so that we can rapidly ramp up production as the current crises abate. In terms of recent highlights, during the third quarter, we announced the receipt of an exclusive multi-year commitment from a major North American carrier, which is deploying our narrow format Tuckrider printers in its Boeing 737 aircraft. As I noted on the Q2 call, This will likely result in more than 200 printer orders during the term of that agreement. The defense portion of our test and measurement segment, while traditionally a much smaller component of revenue than commercial, is growing and trending positively. In our last call, I mentioned the receipt of a printer contract for military transport aircraft, and we continue to pursue similar airborne activities and opportunities. We have received initial orders for our new data acquisition recorders and telemetry systems for evaluation at several US and foreign military ground facilities. These early successes bode well for this next generation equipment. Now, let me turn the call over to David for his financial review, after which I'll make some concluding remarks, and then we'll open the line for questions. David.
spk05: Thank you, Greg. And good morning, everybody. Rather than repeating all the information on the earnings release, I'll just highlight a couple of key points about our P&L and balance sheet. In light of the ongoing economic impacts of COVID-19 and the 737 max impacts on us, in Q3, we again remained focused on cost control initiatives. As a result of actions that we've taken this year, including in the third quarter, operating expenses declined by about 2%. 0.5 million or 21% from the year earlier quarter. Through the first nine months of fiscal year 21, operating expenses are down 5.3 million or nearly 16%, which is about the same as the revenue percentage drop over that period. As a reminder, in the second quarter, we reduced executive compensation imposed cross-the-board freeze on all other employee compensation at 2019 levels, and reduced a host of expenses in professional and other services, travel and trade show expenses, and so forth. For fiscal 2021, we're still targeting a more than $7 million reduction in operating expenses compared with fiscal 2020. On a percentage basis, we're aiming to have the expense reduction exceed the decrease in revenue. One potential risk that targeted reduction is an uptick in COVID cases that has affected us over the past month and could result in higher personnel expenses in Q4. The operating margin in the quarter was 1.5%, up 20 basis points from the same period last year. As for non-cash charges, depreciation and amortization were $1.4 million and share-based compensation was $591,000. EBITDA in the quarter was $1.7 million or 6.1% of revenue. Through the first nine months of the year, EBITDA is $6.1 million or 7.1% of revenue. On the other expense line, we reported an expense of $436,000 in the quarter, which primarily reflects interest expense and also some foreign exchange losses. Turning to the balance sheet, cash and cash equivalents at the end of the quarter were $9.6 million. That was $17.9 million, or $13.5 million, excluding the $4.4 million Payroll Protection Program loan, which we still expect will be forgiven. During the quarter, we paid down $2 million of revolving credit debt and amortized another $800,000 in our term loan, thus reducing our total debt by $2.8 million from the period ending August 1st. We now have the full $10 million available under our revolving credit facility. Our debt structure challenges earlier this year after the two Black Swan events. of the 737 MAX and COVID have been resolved. We are and expect to remain in compliance with all bank covenants and plan to refinance or restructure our debt facility at some point in the coming quarters. We're comfortable with our liquidity position relative to our operating requirements. In terms of working capital, at quarter end, the net of inventory and payables had declined about $1.2 million compared to the end of the fiscal second quarter. Receivables were up $800,000 due to heavy shipments at the end of the quarter, but day sales outstandings are constant and other quality metrics are good. Another note, because it comes up, we continue to pay the guaranteed minimum royalty to Honeywell under our asset purchase and license agreement, and that guaranteed liability shows up in current and long-term liabilities on the balance sheet. But as in the second quarter, due to the decline in aerospace volume, we had no excess royalty payments in the third quarter. With that, I'll turn the call back over to Greg.
spk04: Thanks, David. Looking ahead, we're optimistic that the third quarter momentum in our product identification business will continue in Q4, aced by a growing base of new customers and the ongoing ramp-up of new products. On the test and measurement side, we're expecting fourth quarter revenue to be stronger than the third quarter based on anticipated contributions of shipments for defense applications. Now, David and I would be happy to take your questions. Operator?
spk01: Thank you, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We will pause for just a moment to allow everyone the opportunity to signal for questions. Again, please press star 1 now. Thank you. Our first question comes from Dick Ryan with Colliers.
spk03: Thank you. Greg, you mentioned on the product ID side some new customer acquisitions. Can you give us a sense of how many new customers have come in, or maybe just from a geographic standpoint, where are you seeing strength and weakness in the product ID side with your new marketing initiatives?
spk04: Sure. It's really pretty widespread, quite frankly. I mean, we still have some sectors like retail are not doing well, but a lot of our segments seem to be doing fairly well. The new customers, you know, North America, Europe, and Asia all have a good contribution of new customers. You know, it's partly driven by new products to get us into new market areas, as I highlighted earlier. For example, the T3 OPX, which instead of printing labels, which you then apply to a product, you can print directly onto packages, bags, wood, a whole variety of things. So that's opening up opportunities with, for example, commercial printers as well as brand owners. So there are new customer markets for us. And then even in the label business, we're getting more and more new customers as opposed to, you know, we always track percentage of upgrades We have a very high loyalty with our customer base, so that stays pretty consistent. But we keep a close eye on the actual new customers and new markets. One example I could throw out there, which we pretty much see all across North America, is the CBD business. So we're getting quite a few new customers there in a variety of states and territories.
spk03: Any COVID-driven business creating opportunities for you?
spk04: Yeah, we're still seeing that in terms of the janitorial cleaning supplies, you know, chemical products. That is actually still ramping, as well as medical products. We have several kind of PPE-type customers and actually medical test companies, too, where it can label business. And recently we got, you know, a few new customers in kind of the eye care area, which I don't know if that's really COVID-related or not, but just – a better penetration overall for our business within the medical industry.
spk03: Okay. On the T&M side, the sequential increase anticipated for the aero side, is that pretty much driven by the new military contract? and maybe a bigger perspective on the 737 MAX issue. Are there printers in inventory that have to be worked through as their production ramps kind of slowly improve, or is that kind of a book-and-ship business with their level of production?
spk04: Yeah, so with the Boeing 727 MAX, it's a bit of a mix. I mean, Boeing does keep some inventory, but they don't keep a lot. It's mainly customer-purchased printers, which we then directly ship to Boeing for their aircraft assembly as it's coming on the production line. And as you know, it has restarted, but it's kind of in the single-digit type of numbers as far as the Boeing aircraft production. But we are seeing increases in production. Yeah, I won't mention the actual aircraft models, but there are some of them that we went through a dry spell of, you know, very low to no orders for several months. We have started to see those orders come in, too. A good chunk of those won't hit until next fiscal year, but it's a good sign that it's moving in the right direction. So, you know, what I'd say is it's a mix of a slow uptick in the commercial business versus it had been going the other way. And then, you know, we do have a few of these different defense contracts that are due to ship actually December and January that should give us a bit of a bump here in the fourth quarter.
spk03: Okay. When does the Honeywell handoff end? I mean, obviously, you've got the COVID issues, but how much longer do you anticipate that impacting margins?
spk04: Well, we're hopeful to wrap that up this quarter. I know we've been trying to get it done for a few quarters here. But, you know, COVID did have some impacts in terms of restructuring at other, you know, both at Airbus and Honeywell, as well as our own organization. So a little bit of disruption to the contract negotiations. But, you know, we're certainly in the final stages right now. I would say, you know, very high probability that we'll have it done in Q4. And then, you know, the impact would start pretty much immediately from there.
spk03: Yeah. Okay. Okay, great. Thank you.
spk04: Sure, Dick. Thanks.
spk01: Thank you. Again, as a reminder, please press star 1 now to join the queue. Again, we are holding for questions. Please press star 1 to ask a question. At this time, I am showing no further questions. I would now like to turn the call back over to Mr. Woods for closing remarks.
spk04: Great. Well, thank you all for joining us here this morning. And on behalf of everyone at Astronova, have a wonderful, safe, and healthy holiday season. And we look forward to keeping you informed and updated on our progress. Goodbye.
spk01: Thank you, ladies and gentlemen. This concludes today's call. Thank you for your participation. You may now disconnect. You are being called for a conference.
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