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spk01: and welcome to the Astronova's Fiscal Fourth Quarter and Full-Year 2021 Financial Results Conference Call. Today's conference is being recorded. I would now like to turn the conference over to David Kaluzian of the company's investor relations firm, Sharon Merrill Associates. Please go ahead.
spk02: Thank you. Good morning, everyone, and thanks 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 investor section of the Astronova website, www.astronovainc.com. Please note that statements made during 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 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, March 25, 2021. 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 Astonova'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 adjusted earnings before interest, taxes, depreciation, amortization, and share-based compensation, or adjusted EBITDA. Astronova 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 Astronova 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.
spk07: Thank you, David. Good morning, everyone, and thank you for joining us. Overall, the Astronova team performed well in fiscal 2021 in spite of the significant challenges created by COVID-19 and the grounding of the Boeing 737 MAX aircraft. Amid these unprecedented challenges, We remain focused on the areas within our control. We move quickly to realign our workforce, reduce costs, and increase liquidity to ensure that we continue to make progress on our long-term strategic objectives. In our product identification segment, we adapted rapidly and launched a comprehensive digital marketing initiative with new interactive content and other tools to accommodate the new virtual environment in which our customers suddenly found themselves. The pandemic and the max grounding caused a nearly $20 million revenue drop in our strong gross margin test and measurement business. However, through a combination of focused expense reduction and increased efficiencies on a total company basis, AstraNova was able to post full year operating income of $2.4 million which is actually level with fiscal 2020, despite a 13% or $17.4 million overall decrease in revenue on a year-over-year basis. On the bottom line, we reported full-year net income of $1.3 million, down $475,000 from a year earlier. However, adjusted EBITDA increased by $825,000 year-over-year. Now turning to the segmental results, product identification turned in another strong quarter with revenue increasing more than 13% to $23.4 million and double-digit percentage growth across the board in hardware, supplies, and our services compared to last year's Q4. Full-year segmental revenue came in at $90.3 million, marking eight straight years of year-over-year growth. Product identification hardware revenue notched record highs for both the fourth quarter and fiscal year, and we shipped the highest number of color printers in over two years, driven in part by continued strong demand for the T3 OPX printer. With its launch last year, the T3 OPX opened up the adjacent product identification market known as direct-to-product printing. Its ability to print in full color on surfaces from folded boxes to paper bags to wooden planks and many others, the T3 OPX is the ideal product to meet the demand for a high-performance overprinting solution for brand owners and other customers across a range of end markets. Our printer sales drive our supplies business, so the record hardware sales we saw in FISLA 2021 portends well for our supplies business moving forward. The combination of higher revenue and cost efficiencies translated to gains in the PI segment operating profit margin for both the fourth quarter and the full year. Product margin for the fourth quarter was 13.2%, compared with 2.5% in the fourth quarter of 2020. It's worth noting that for the year, the segment posted an operating profit of 14.3%, which is a record for this segment. Turning now to our testing measurement revenue in the fourth quarter dropped to 6.1 million compared to 9.8 million in the same period of fiscal 2020 due to the adverse impacts of the continued grounding of the 737 max and the aerospace industry demand fall off due to the COVID-19 pandemic. However, in Q4, T&M revenue did increase 19% sequentially, quarter over quarter. That increase was in part due to a military aerospace shipment, but we are now seeing early signs of a pickup in the commercial aerospace business as well, especially in our repairs and supplies portion of that business. There are two main drivers to this recovery. One factor is the MAX's return to service in all major markets except China, and we're hopeful that China will come on board soon. And Boeing's max production rates are forecast to ramp up from the current 10 per month to 30 per month in the next year. Clearly, demand is moving in the right direction. The number of carriers placing max orders has been increasing in recent weeks, and there are now at least 13 airlines flying the max. The other factor is the increasing number of passengers returning to the skies due to the rollout of several vaccines. For instance, in the U.S., over 20% of the population has already received at least one vaccine dose, according to health officials. And while airlines are nowhere near returning to the pre-COVID levels yet, recent reports indicate that U.S. air travel has reached its highest level since the pandemic began. Now looking at geographic mix, domestic revenue accounted for approximately 56% of total revenue in the fourth quarter. compared with 63% or compared with 63 period for the same period in 2020. International revenue increased to 44% of total revenue in the fourth quarter of fiscal 2021, up from 37% a year earlier. We saw particular strength in EMEA, where we recently enhanced our marketing team. On a related note, We are also expanding our presence in China by opening an office in the southern port city of Guangzhou, complementing our location in Shanghai's pilot-free trade zone. Before handing the call to David, I want to first thank our team members around the globe for their dedication and commitment in fiscal 2021. Because of the critical role we play for the aerospace and medical industries, AstraNova was deemed an essential business. All of our global facilities have remained fully operational throughout the pandemic, incorporating all of the necessary health and safety precautions. From the outset, we've had no severe COVID-related incidents. That is a credit to our entire team, which over the past year has worked vigilantly to keep themselves and one another safe, allowing us to continue to meet the demands and requirements of our customers. Now let me turn the call over to David for the financial review.
spk06: Good morning, everyone. Thanks, Greg. Greg provided a comprehensive review of our performance, so I'm just going to highlight a few key points from the P&L and balance sheet. To provide some context about the results and to reinforce Greg's remarks, the test and measurement segment revenue was off nearly $20 million. It's strong growth margin revenue. Virtually all of that is directly attributable to the two black swan events of the max grounding and the pandemic. The impact of a significant drop like that is very difficult to make up for on the operating income line. But we did it through a workforce realignment, reduction in outside services and other expenses, and through what I would call a digitization of the selling process in our product identification business, along with a number of other operational initiatives. Consistent with the goals that we indicated on prior calls, for the year we reduced operating expenses by 7.4 million or 16% from fiscal 2020. On a percentage basis, the expense reduction exceeded the decrease in revenue by three points. There were other cost reductions that improved results that are seen at the gross profit line. For the full year, because of adverse mix, standard margins were down about 300 basis points, but gross margins were only down 90. But the trend within the year was better. And in the fourth quarter comparisons, while mix was still a factor at standard margins, it was less so, and gross margins were up 370 basis points from the prior year. We expect a significant portion of the cost reduction initiatives to remain visible in the income statement in fiscal 2020. Others, for example, trade show expenses and travel will likely increase in the future as the ability to travel returns, depending on the degree of our customers' acceptance of the transition that we've made together with them to remote or virtual interaction, as opposed to in person. Beginning with this fourth quarter of fiscal 2021, we're reporting adjusted EBITDA, which is EBITDA further adjusted only for share-based compensation. As we said at the outset of the call here, a reconciliation of adjusted EBITDA to net income is included in the press release, and it differs only very slightly from the calculations that are used in our debt governance. Adjusted EBITDA was $3.2 million in the fourth quarter of fiscal 21, or 10.7% of revenue compared to $42,000 in the same period of fiscal 2020. For the full year, adjusted EBITDA was 10.9 million or 9.4% of revenue compared with 10.1 million or 7.6% of revenue in fiscal 20. Turning to the balance sheet, our liquidity profile has improved dramatically. Cash and equivalents at year-end 2021 or $11.4 million. Cash and equivalents at the end of the prior year totaled only $4.2 million. At the end of the fourth quarter, excluding the PPP loan, was $12.4 million, which is down from $19.8 million at the end of fiscal 2020 and $24.8 million at the end of the first quarter of fiscal 2021. As we announced in this morning's earnings release, and which appears in the 8 filing this morning with more of the details. We just entered into an amendment to our bank credit agreement. It significantly increases our credit availability and improves the term. The agreement, which runs four and a half years through September 2025, provides for a $10 million term loan in addition to a $22.5 million revolving credit facility. It also provides for substantially reduced amortization payments and fewer better structured covenants and other restrictions and some other structural improvements. At closing, our bank term loan debt was $10 million, down $2.4 million from the end of fiscal 2021, and we have nothing outstanding on the revolving credit facility. The facility also includes a $10 million so-called increase or accordion function built within it, which while uncommitted, enables streamlined and accelerated access to additional bank financing should such a need arise. With that, let me turn the call back to Greg for closing comments.
spk07: Thanks, David. We navigated a challenging fiscal 2021 by focusing on the things within our control. The external headwinds of the past year have not disrupted our investment and innovation, the growth engine of our business. We remain on pace to launch at least one major new product per year, coupled with a range of technology innovations and ancillary products. 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. Thank you. Our first question comes from Sameer Patel with Escaladen Capital.
spk05: Hey, guys. Congrats on a great year, all things considered. Yeah, thanks, Sameer. So I guess the first question, I didn't see the actual credit agreement in the 8K. Maybe it'll be filed. But once you get the PPP loan paid off, are there any remaining restrictions on your ability to allocate capital?
spk06: Nothing significant.
spk05: Okay. And so with that, I mean, that's a pretty big, it seems like you've built in some pretty big capacity there. So are you looking at M&A opportunities or kind of what are you thinking as you come out the other side of COVID?
spk06: I'll take a crack at that and then Greg can chime in as well. Sure. You know, clearly the first thing we want to do is make sure that we have enough capacity to support ongoing operations. at some point we're going to start to grow again. Uh, we'll need, uh, working capital, uh, to support the business. That's the number one, uh, uh, number one requirement. Uh, and there is a level of, uh, capital that needs to be reinvested in the business. Um, and that, that will also be, uh, critical then beyond that, of course, uh, if there are other external growth opportunities, we'll have some capacity to handle those. Greg?
spk07: Yeah, I may just answer a little in a simpler manner. You know, we take a look at, you know, capital allocation and where's the best return on investment going to be looking at. You know, there's obviously some short-term things, but we're typically looking at a medium to long-term horizon for that. And as you know, in our past, we have done a number of acquisitions. We do have an active pipeline where we re-applicate acquisitions, and that is part of our growth strategy along with product development and organic growth of the business. So it'll be a combination, and we're always looking for where's the best place to invest that capital. But the great thing about this agreement, it's with our existing bank. We're able to renegotiate contracts. this agreement. And I think it gives us plenty of firepower if we find a good acquisition or a good investment opportunity to further accelerate the growth of the business.
spk05: Great. And then on the cost reductions, I mean, you actually kind of discussed a little bit, saying that some of it's going to stick, and obviously some of it may come back. Kind of any more color there? I mean, for example, Spirit has talked about being able to get back to sort of prior margins, you know, at rate 42 on the MAC, you know, as opposed to where MAC's rates were before. So I'm just kind of curious, like, when you guys think that you'll, you know, how your profits will evolve kind of as the aerospace part ramps back up.
spk07: Yeah, so the aerospace part of it, that doesn't drive a big part of the cost. You know, we had to keep kind of a critical mass of people in place. You know, it's a very specialized business. So more of the cost reductions happen kind of in the general business as well as part of the identification side of it. So I think what you will see is, you know, probably not in the first half very much, but, you know, the trade shows will open up again. Travel opportunities will open up again. Um, so those two spending categories have been, you know, dramatically reduced for us, you know, for obvious reasons, um, on the aerospace side, you know, it is a high margin business in some areas, some places, uh, you know, it depends on which product and which opportunities, but in general, you know, we're, uh, kind of under utilizing our resources right now with respect to the facilities. Um, so as that ramps up, uh, we'll see some nice, uh, margin improvements, uh, in that segment of our business as well. And I think it's pretty well known what that curve is. It looks a little more hopeful than what people predicted back at the end of last year, so we'll keep a close eye on it. But the fact that in the U.S. they're posting higher and higher records of passenger travel, that's a good sign with respect to the MAX. They've now got, I think it's about 13 airlines around the world that are flying that plane, and Boeing is building back their backlog again, which is good to see. yeah congrats and then the last question you mentioned the major d product introductions um usually talk about those a little bit more anything specific you want to call out for 2021 or are you going to keep this posted i'm probably going to keep you a little bit in the dark for right now but uh if it works anything like it has in the past years we typically have uh one of those uh you know i should say product identification uh releases in the fall trade show season uh So I'd say keep a lookout for that, you know, maybe at PAC Expo, maybe a little bit later. But that's, you know, there's things like that in the works. Understood. Thanks. Appreciate it.
spk05: Thanks.
spk01: Thank you. Our next question comes from Dick Ryan with Colliers.
spk04: Thank you. Hey, Greg, you mentioned military shipment for Arrow and Q4. Can you give us kind of an order of magnitude of that, and is it – still ongoing or was it completed?
spk07: Yeah, as far as the order of magnitude, I don't want to comment on that specifically. I mean, you know, it was a good size order, but, you know, it certainly wasn't a lion's share of what shipped out. It is part of an ongoing contract that we have. It's a multi-year contract. I think I mentioned in earlier calls, we picked up some of these during the course of the year last year. And they're multi year agreements. It's a little bit unpredictable exactly when they give us the releases. So it's hard to call which quarter they're going to hit in and but an annual basis, we have a fairly good idea of how that's going to drop in. And we're working on some other ones as well. So hopefully we can add to that. Okay.
spk04: Just spend a little bit more time on the aero side. Obviously, with the Airbus, you know, your standard offering there, the MAX, it's kind of an airline decision. Any sense of if Boeing had inventory of your printers, or are you starting to ship with kind of a clean inventory slate from them?
spk07: Yeah, typically they don't keep a lot of inventory of our printers because that's a buyer-furnished equipment. So the airlines actually purchase the printers for us for their particular aircraft as it's going into production, and we ship those to Boeing so they can be installed on that airline's production tail. So, you know, We are starting to see the orders come back in from the airlines for us to ship to Boeing. We don't get visibility on what they have for inventory. Obviously, they keep some for last-minute emergencies and things like that, but they don't typically keep a lot of inventory of our printers.
spk04: Has COVID impacted how airlines are viewing either new printers or upgrading old printers that are already installed? Any sense of airlines making kind of different decisions post-COVID?
spk07: Well, not 100% post-COVID yet, but, you know, where we'll see the impact there, I mean, we had a couple announcements last year of airlines actually adopting our newer printers. We do expect that that kind of upgrade program would continue. You know, our Tough Rider brand has a number of superior features and functions compared to some of the other brands that we acquired. So I think we'll see this, you know, more of a migration to our tough riders. You know, it's a multi-year process, right? Because in the airline industry, things tend to move fairly slow. But we will see that. And the other thing, we can re-engage with a number of these airlines. We had several potential deals in the works prior to COVID, you know, for people to upgrade their old printers to our newer printers. And one of the biggest things is the weight is about half the weight of a typical competitive model. So we're reengaging with some of those airlines now. As they get on better financial footing, they're able to make those kind of decisions, and we're seeing that with a few airlines already.
spk04: Okay. On the supply chain side for both ends of the business, we hear of obviously electronic shortages, you hear of plastics, you've got some supply issues, you know, up and down the line. How has that impacted you guys? I didn't see any boost in inventory, so you're building kind of, you know, some stockpile there. But how are you seeing your supply chain?
spk07: We're seeing things lengthen out in certain areas, you know, because of the you know, our supply chain is fairly long, right? So some aerospace products, especially are, you know, six to 12 month delivery. The only good thing about that is things dropped off so quickly that we had, you know, a huge surplus. So the surplus is actually, in this case, kind of a good thing, because it's cushioning some of these disruptions we're seeing, you know, with You know, transit times, things we ship by sea, you know, I think you know all the stories, right? Ships are sitting out there trying to get in the docks or they're stuck in a canal somewhere. Those things haven't been critical for us because we have a pretty big buffer. And we do that on purpose, too. We didn't want to have it quite as high as it was because of the downturn. But in this year, it's actually turning out to be a good thing because we haven't really seen things that are disrupting our operations in any significant way. Okay.
spk04: Thank you.
spk07: Sure.
spk01: Thanks, Nick. Thank you. Our next question comes from George Malas with MKH Management.
spk03: Hi. Good morning, Greg and David. Congrats on a good year. It's been an interesting year. I have sort of a A follow-up question on aerospace. I think you guys noted that it was down 17 million year-over-year. Is there anything that makes you doubt whether you can go back, whether that business can go back to the revenue level of fiscal 19 or fiscal 20?
spk07: Yeah, just one quick correction. We went through a lot of numbers quickly there, but So the test and measurement segment, which, of course, is largely aerospace, decreased by 19.6 million. So that was the aerospace-related hit. Our overall Astronova revenue was down 17.4 year-over-year, just kind of clarifying that. But to your question there, you know, we do expect that it's going to grow back, you know, but it depends who you listen to, right? You know, some people are saying two years, you know, between two and four years is what people are predicting to get back to those kind of levels. The one thing that we do know from a couple points of view, there's people switching to the tough order, like I talked about our brand tends to be a higher volume product for us because it's our main brand and the margins, therefore, are a little bit better on that. So the more people switch to that brand, that's an overall improvement to our bottom line. So the other thing that's going to help us is having to reduce costs and be more efficient in things this past year. We've learned a few things as well. So as we ramp back up, we're fairly confident that you're going to see higher margins on the way back up as we get back to that level. So whenever we get there, it's hard to predict. But getting back to those kind of revenue numbers, you'll see higher margins if we can stick to the plan that we have in place right now.
spk03: Okay. And from a revenue perspective, from a market share perspective with airlines, with Airbus, is there any meaningful change in the last two or three years?
spk07: Uh, you know, we picked up a little bit of market share, so we have a substantial market share already. So we kind of, you know, added to that a little bit. Um, you know, I don't expect it to decrease, you know, but, you know, you never know what's going to happen out there. And, um, you know, going forward, um, you know, really our game plan, and we've talked about this before, is, you know, like our networking products, adding other products to the mix, uh, since we're a supplier right now to all of the major OEMs, uh, some 200 airlines were a direct supplier to, and a lot of the tier one, uh, companies, you know, like the Honeywell's and Talus's in the world, for example. So, um, our focus really now is kind of on the upgrades and adding more products to the mix.
spk03: Okay, great. And then the question for David, uh, David, the cost came down quite, uh, the OPEX came down, you know, significantly, uh, this coming, this year, um, I think sort of sequentially they're picking back a little bit. What do you expect in the coming year from an OPEX perspective?
spk06: We're not going to give any specific guidance on our OPEX expectations. What we have said, and I'll just reiterate, is that we do expect a fair portion of the operating expense reductions that we've been able to obtain to stick and to be available to us this coming year. You know, we've been a little bit cautious in letting people know that there are some expenses that probably will tick back up. So it's going to be, you know, not 100% of what we've been able to reduce we'll get to keep, but it'll be a substantial portion of it.
spk03: Okay. Thank you very much.
spk01: Thank you. Next, we have a follow-up from Samir Patel with Ascalon Capital.
spk05: Hey, I just wanted to follow up on the aero side. I don't know if you still disclose the breakdown of supplies and hardware in that business, but I was just curious, you know, kind of independent. You have two drivers, right? You have the production ramp of the MAX and then other aircraft back to pre-COVID levels over the next two to four years, as you said. And then you hopefully have sort of the shorter term. You talked about the pickup in U.S. domestic travel, for example, on the supply side. So I was curious if you had any thoughts there.
spk07: Yeah, we don't disclose it down at the segmental level, but what you see first is the more the planes fly, and I think I made this comment before, the more the planes are flying, the more they use our supplies, and the more they'll break printers or a cup of coffee gets dumped in, or whatever happens to them over 20 years or 10 years, something they can wear out. So our MRO portion of the business, we've seen that pick up faster than the new printer orders. I would think that would be the case. That'll tend to level off and get back. It's not back to where it was, but that particular part of the business is probably about 40% back. And as the OEM picks up and more printers are out there, that kind of helps support that business as well. But it's a smaller part of the overall aerospace contribution. Yeah, so... It helps. It's great to see that coming back. And that's driven basically by passenger revenue miles. The more that they fly, the more we see that business pick up. But on the new equipment, it's really based on aircraft production, kind of supplemented by upgrades.
spk05: Understood. And sorry to be nitpicky, David, but you mentioned RPKs just now. Wouldn't it be more driven just by flights? Like, is it actually, you know, I would assume the amount of paper used during a flight is kind of constant, whether the load factor is like, you know, 5% or 95%. So is it more the number of flights or actually the RPKs? Yeah, that would be true.
spk07: Yeah, it's flight, but it's also the distance of the flights, too. So it's maybe a better measurement.
spk05: Okay. Okay. Understood. Thanks. That's all I have. Sure.
spk01: Thank you. This concludes today's Q&A. I would now like to turn the call back over to Mr. Woods for closing remarks.
spk07: Great. So thank you, everyone, for joining us this morning, and we look forward to keeping you updated on our progress in the future. Have a good day. Bye now.
spk01: Thank you, ladies and gentlemen. This concludes today's teleconference. You may now
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