AstroNova, Inc.

Good morning and welcome to the Astro Nova fiscal third quarter 2025 financial results conference call. Today's call is being recorded. I would now like to turn the conference call over to Scott Solomon of the company's investor relations firm, Sharon Merrill Advisors. Please go ahead, sir.

Thank you, Astro, and good morning, everyone. Our Q3 fiscal 2025 earnings release on the slide presentation accompanying management's prepared remarks are posted to the investors' page of our website, www.astronovainc.com. Turning to slide two of that presentation, 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, December 12, 2024. Astronova undertakes no obligation to update these forward-looking statements. For other 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 other filings that the company makes with the Securities and Exchange Commission. On today's call, management will refer 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 and helps investors who wish to make comparisons between Astronova and other companies on both a GAAP and a non-GAAP basis. The non-GAAP financial measures are reconciled to the most directly comparable GAAP measures in today's earnings release. Turning to slide three, hosting this morning's call are Greg Woods, Astronova's President and Chief Executive Officer, and Tom DeBile, Astronova's VP and Chief Financial Officer. Greg will begin the call with an overview of the company's third quarter performance. Tom will discuss segment results. Greg will make some concluding comments, and then management will be happy to take your questions. please turn to slide four as I turn the call over to Greg.

Thank you, Scott. Good morning, everyone, and thank you for joining us today. Let me start by addressing our third quarter performance. Overall, the results were disappointing. We saw a significant decrease in consolidated margins and a notable year-over-year increase in our operating expenses. Much of this is tied to the ongoing integration of MTEX-NS, into our product identification segment, an integration that has proven to be far more time consuming and resource intensive than we anticipated when we completed the acquisition in May. In the third quarter, Emtex had an operating loss of 1.1 million on revenue of 1.7 million. While we did see some sequential revenue improvement, initial sales volumes, revenue contributions, and margins did not meet our expectations. We have been mobilizing quickly to rectify this situation. Our focus now is on accelerating M-Tex's path to profitability and ensuring its foundational capabilities are positioned to support stronger performance in the quarters ahead. To facilitate this, we recently completed a full realignment of M-Tex's organizational reporting structure. All of M-Tex's key functions, sales and marketing, manufacturing, technology, finance, and human resources now report directly to AstraNova leadership. This change aims to speed up the implementation of consistent best practices within EmTech's sales process, ensuring it aligns with our product identification segment standards and the broader operational excellence we strive for across our company. During the EmTech integration process, the AstraNova team discovered certain details that appear to be inconsistent with the information originally provided by the seller as part of our definitive agreements. We are continuing to research these matters and are seeking potential remedies from the seller under these agreements. Given the confidential nature of our customer relationships, we will not be taking questions on this topic on today's call. As part of the integration process, We have launched an AstraNova-wide cost reduction and product line rationalization initiative. This is a comprehensive effort aimed not only at reducing expenses, but also at refining our product portfolio to sharpen our competitive edge. Early progress is encouraging. We've closed some significant new orders that underscore the market's confidence in our evolving offerings. However, we anticipate that the full integration and optimization of M-TECH's operations will extend through mid-calendar year 2025. We recognize that this is a multi-phase journey, but we are committed to working through each step deliberately and strategically to drive sustainable long-term gains. One product launch update from our PI segment. In fiscal Q4, we began shipping a large inkjet printer order that had been delayed to allow some customer requested enhancements. We expect that the order will contribute several million dollars to our PI segments top line over the next several quarters. Moving to slide five, despite the integration-related challenges, I want to emphasize our continued confidence in MTAX's technology. Their inkjet printing solutions, combined with their unique real-time printer monitoring and management software, remain compelling. In the quarters ahead, And in conjunction with our product rationalization program, we intend to integrate M-Texas technology into most of our product lines. We also plan to retrofit several models within our large global installed base. We believe this approach will ultimately give our customers improved performance and a lower total cost of ownership. Turning to slide six. Our total revenue increased nearly 8% in the third quarter, driven largely by the momentum in the aerospace product line within our test and measurement segment. Our role as the leading supplier of flight deck printers and electronics for commercial, defense, and business aviation continues to provide strong competitive advantage for Astronova. The segment's performance would have been even stronger had it not been for the nearly two-month Boeing strike, which delayed shipments. With the strike now resolved, we're ramping shipments back up, and we expect stronger sales volume as we close out fiscal 2025. As shown in slide 7, when considering the longer-term outlook for our T&M segment, keep in mind two key factors that are expected to drive margin enhancement in the coming years. Today, about 43% of our aerospace printer shipments are represented by our proprietary Tuffrider brand. The remaining 57% of shipments are acquired flight direct printer brands. As we have discussed on prior calls, we are in the process of upgrading customers from the three acquired brands to our Tufrator branded wide and narrow format printers. By the end of fiscal 2027, we estimate that our Tufrator brand will account for approximately 89% of our shipments. We expect this Tufrator transition plan to be completed by the end of fiscal year 2027, resulting in enhanced technology experience and streamlined parts and services for our customers. By having fewer SKUs, the transition will reduce our overall manufacturing costs, thereby improving margins. In addition to those benefits, our projected royalty expenses, as shown on slide eight, dropped dramatically from over $4 million per year in fiscal 25 through 27 to just $375,000 in fiscal 2028. Now, let me turn the call over to Tom for the financial review. Tom?

Thank you, Greg, and good morning, everyone. Let me begin with an overview of our financial performance on slide nine. Net revenue for the third quarter was up 7.7% to $40.4 million, with growth in our TM segment offsetting a modest revenue decline in PI. Excluding MTEC, total net revenue increased 3% for the quarter. Gross profit margin for the third quarter was 33.9%, compared with 39.4% in the prior year period. Gross profit margins were down in the quarter due to lower margins at MTEC, sales mix, and lower European hardware sales. Non-GAAP operating expenses for the third quarter were $12.1 million, up 19.3% from the prior year period. MTACs accounted for $1.3 million of the increase. The remaining cost increases related to headcount additions of key personnel and sales and finance organizations, prototype expenses, and higher information technology costs. Non-GAAP operating income came in at $1.6 million for the third quarter, versus 4.6 million in the year earlier period, primarily due to higher costs in 2025 period and a loss of 1.1 million related to M-TECHS. As in the second quarter, costs and management tension to further align the M-TECHS products, services, and control environment with those of Astra Nova affected our results. Adjusted EBITDA for the third quarter of fiscal 2025 was 3.2 million compared with 5.7 million in the prior year period. Non-GAAP diluted earnings per share was 6 cents compared with 37 cents in the third quarter a year ago. Bookings were 37.6 million in the third quarter compared with 35.5 million in the year earlier period. Backlog as of November 2nd, 2024 was 27.1 million compared with $31.2 million at the end of the third quarter of fiscal 2024. Turning to our PI segment results on slide 10, revenue was down 1% from the prior year period to $26.3 million. Excluding the M-TECHS acquisition, sales in PI were down 7.2%, primarily due to lower hardware sales. High segment operating profit in the third quarter of fiscal 2025 was $1.9 million, or 7.2% of revenue. This compares with $4.8 million, or 18.1% of segment revenue in the third quarter of fiscal 2024. The decrease reflects higher costs in fiscal 2025, in part associated with the M-TEX acquisition, product mix, lower sales volume in Europe, in the delayed product release. Moving to slide 11, test and measurement segment revenue increased 28.2% from the prior year period to 14.1 million, driven by the aerospace product line. Reflecting the top line growth, operating margins were 3.3 million for Q3 fiscal 25 versus 2.6 million in the prior year, up 0.7 million or 26.9%. Looking at our balance sheet and leverage on slide 12, cash and cash equivalents at the end of the quarter were 4.4 million, down 400,000 from the end of Q2. Funded debt increased to 48.9 million at the end of Q3, up from 45.6 million at the end of Q2. The liquidity was 14.7 million at the end of the quarter, down from Q2 by 7.2 million. The drop in liquidity reflects higher accounts receivable in aerospace shipments with longer payment terms, lower accounts payable as the timing of payments to key suppliers all occurred in Q3 FY25. Astronova also supported Amtex with a $2.7 million of working capital loan directly from our revolver. Turning to cash flow on slide 13, Through the first nine months of fiscal 25, we generated cash from operations of 2.3 million compared with 5.9 million for the same period of fiscal 2024. Year-to-date free cash flow was 1.2 million versus 4.6 million for the same period a year earlier. During the quarter, we used cash from operations of 4.7 million. This was driven by higher aerospace accounts receivable, lower accounts payable, and lower EBITDA versus prior quarter. As Greg noted, we are initiating a comprehensive evaluation of costs and expenses to ensure they align with our strategic priorities and operational goals. Given the extended integration timeline for MTACs, we no longer will be providing guidance for fiscal 25 and 26. Instead, we plan to provide longer-term targets. We look forward to presenting the results of these evaluations along with the financial targets on our call in March. Now I'll turn the call over to Greg for closing comments. Greg?

Thanks, Tom. Summarizing on slide 14, we believe that the integrating of M-TECH's innovative technology with Astronova's existing strengths our operational excellence, established customer relationships, and strong brand recognition, we can accelerate growth in our core markets and strengthen our position as the innovative leader in advanced product identification solutions. Although the path to fully realizing the benefits of the M-TECHS acquisition is longer and more complex than anticipated, the strategic upside is significant. Now, Tom and I will be happy to take your questions. Operator, please open the line for Q&A.

thank you very much if you would like to ask a question please press star followed by one on your telephone keypad now please ensure your device is unmuted locally and if you change your mind or your question has already been answered then please press star 2. we will now pause to allow questions to be registered Our first question comes from Brandon Daniel with Atai Capital. Brandon, your line is now open. Please go ahead.

Hey, guys. Good morning. Sorry if I missed this in the earlier comments. Just some clarity here. On that jet order that's being delayed, is that related to the legacy business or the in-text business?

It's a little bit hard hearing you, Brandon. This is Greg. Could you repeat that question, please?

Oh, yeah. Hey, sorry. Is this better, Greg? Can you hear me now?

Yeah, it's just kind of a little bit muted, but go ahead. Go ahead.

Yeah, so I'll talk a little bit louder. On that order, is that related to the legacy PI business or in-tech? I thought I missed it a little bit.

Oh, that's legacy business. That actually relates back to an order we got back at the beginning of the year, actually. It's from a very large customer and a very good customer. And as they got the first units that we shipped out, they said, could you add this? Could you add that? And obviously, we want to accommodate them. So we put all those enhancements in. They got even better product out of it. And we just started shipping those this month. But yeah, it's a legacy product, but it's a new generation of product with also a different inkjet technology, but not the M-TEX technology.

Okay, awesome. Thanks. That's not a question. Sure.

Thank you very much. Just as a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. Now, our next question is from Robert van Voorhis with Venetal Capital Management. Robert, your line is now open. Please go ahead. Robert, your line is now open.

Go ahead.

Can you guys hear me now? Sorry about that. Yeah. So I just have a couple quick questions. So for corporate G&A, can you just confirm how much of MTEC's expenses are in that line item? I think from the filing, I could gather it was around like $570,000. I think it's $270,000 G&A and then the $300,000 one-time expense. Chris, can you provide any color on that? Or is that right?

Yeah, Tom, go ahead. You can grab that one.

OK, thank you. If you look at our press release, you can. It's broken out on the final page 12. Where you where you can see that the selling expenses for M tax were 839 for the quarter 209 on research and development. And we had $273,000 for the M-TECH general and administrative expenses.

OK. And so in just the $300,000 one-time acquisition expense, I assume that that is sort of in corporate G&A, so the general administrative line item below the segment operating profit. Is that right?

Yes. So in our corporate, we paid 420,000, actually, and then it was offset by a credit balance at MTEC, which is reflected in their results. So, MTEC, that's the real figures for MTEC as a standalone entity.

Okay. Got it. Thanks. And then just a quick question on T&M. I assume the delayed Boeing orders, those are pretty high margins. So is that one of the reasons why margins would have declined sequentially? That would be my guess.

Yeah, you're pretty much on track there. Yeah, those are typically higher margin orders. It varies, you know, between the different shipments we make there. But, yeah, those are good orders. And, yeah, we're glad to see them come back online now.

Okay, got it. And then just my final one should be pretty quick. I think Brandon kind of answered this with the answer to his question. But just on sequential PID margins, I assume that's primarily a mix, right? That's just a result of the delayed order and then maybe some other stuff in the legacy business?

Yeah, that's a significant order that we have a lot of the inventory for already, which is good. So we're kind of cranking those out. That was a big part of it. There's other mixed things in there, but that's the biggest factor in the traditional business.

Okay, got it. That's all my questions. Thanks. Sure.

Thank you very much. We have no questions at this time. I will now turn the call back to Mr. Woods for closing comments.

Well, thank you all for joining us here this morning. We look forward to keeping you updated on our progress. And I hope everyone has a wonderful holiday season. Have a good day.

Thank you very much, Greg. And thank you, everyone, for joining. This concludes today's call. You may now disconnect your lines.