Mar 15, 2017
Executives
David Calusian - IR Greg Woods - President and CEO John Jordan - VP and CFO
Analysts
Tom Spiro - Spiro Capital Steve Busch - Everglades Resources
Operator
Good day and welcome to AstroNova's Fourth Quarter Fiscal Year 2017 Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the call over to David Calusian. Please go ahead.
David Calusian
Thank you, good morning everyone, and thank you for joining us. Hosting this morning's call are Greg Woods, AstroNova President and CEO; and John Jordan, Vice President and CFO.
Greg will begin the call by reviewing the Company's operating highlights and business outlook. John will take you through the financials.
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 earlier 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 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 factors that may cause differences, please see the risk factors section in the AstroNova annual report on Form 10-K and other filings the Company makes with the Securities and Exchange Commission.
To supplement its consolidated financial statements presented in accordance with GAAP, AstroNova uses free cash flow which the Company defines as net cash from operating activities plus capital expenditures. The Company believes that the inclusion of these non-GAAP financial measures helps investors gaining meaningful understanding of the changes in core operating results.
It can also help investors to make comparisons between the Company and the other companies on both the GAAP and non-GAAP basis. Now, I'll hand the call over to Greg Woods.
Greg Woods
Thank you, David. Good morning everyone.
I'm pleased to review the Company's fourth quarter and full year fiscal 2017 performance and provide perspective on our recent TrojanLabel acquisition. Turning first to our financial results, we achieved a record quarter in revenues at $25.7 million representing an 8% increase over the prior year's fourth quarter.
We also achieved record full year revenues of 98.4 million, an increase of 4% over the previous year's annual revenue. Product Identification revenues came in at 18.7 million, up 13% over the prior year and setting a new quarterly record for this segment.
This result is underscored by the robust demand for our color inkjet printers and consumables. As color printer placements reached a record level, our Test and Measurement segment posted revenues of 6.9 million up 7% over the third quarter, but 3% lower than the prior year's fourth quarter sales.
For the full year both segments reported year-over-year growth. Product Identification revenues were up 4% over the prior year at 69.9 million, with the increase traceable to the continued expansion of the Company's digital inkjet color printers and consumables.
The Test and Measurement segment reported revenues of 28.6 million for the year, also up 4% over the prior year with aerospace line of ToughWriter printers and consumables, the key growth drivers. From a channel perspective, we experienced significant growth in the fourth quarter from our international markets, with revenues reaching 8.1 million a double-digit increase over the previous year.
The international growth was accomplished despite the adverse impact of foreign exchange rates based on the strong dollar. We also achieved year-over-year growth in our domestic markets with revenues at $17.5 million representing a single digit increase over the prior year.
We continue to expand AsrtoNova's global presence by establishing new dealer relationships in China and several Latin American countries as well as opening the Company's first ever office in India. Operating margins improved both in the fourth quarter and in the full fiscal year underscoring our ability to grow revenue at a faster rate than operating expenses.
More importantly, we made progress throughout the year by accelerating product developments, integrating process improvements and applying IT tools to automate procedures throughout the organization while expanding our addressable market opportunities and continuing to plan transformation of our business operations. As I visit customers, meet with our sales teams and talks with other CEOs of industry events around the world, a recurrent theme emerges that being is the power of technologies to unlock new opportunities.
On the Product Identification side of our business versus everyone I meet is talking about the ability of digital technology customized, transform and differentiate their product packaging and laboring. Increasingly, they are turning to AstroNova to help drive that transformation.
In the fourth quarter, we unveiled the latest addition to our Product Identification family, the QL-800. With its wide format digital color inkjet engine, the QL-800 is a powerful new business tool that allows companies to produce brilliant color labels in the short or medium run batches in-house.
Customers can produce custom narrow and wide format labels up to a width of 211 millimeters. We introduced the QL-800 in November at the PACK EXPO Intentional Trade Show and the response has been terrific.
Customers love the versatility, speed and print quality of the product which delivers the results of a high-end digital printing press at a fraction of the price. With the launch of the QL-800, our Product Identification segment returned to growth in the fourth quarter, posting a sales increase of 13% over the same period in fiscal 2016.
As you recall, that segment sales were down in Q3 as customers are waited the introduction of the QL-800, the first entirely new QuickLabel product platform in four years. PACK EXPO was a very successful show for us.
We generated a number of QL-800 orders including several from Latin American countries. As I mentioned on our Q3 call, we recently strengthened our position in Latin America by hiring a sales manager with significant experience in the digital label printing market and he's off to a great start.
Now, let me turn to our Test and Measurement segment where we continue to design and develop innovative products that deliver outstanding value for our customers. A prime example is our ToughWriter 640 flight deck printer, which was recently selected for inclusion in the Boeing 737 catalog.
Over the past several years, we have become a significant player in the wide format flight deck printer market with innovative products like our ToughWriter 5. Inclusion of the ToughWriter 640 in the Boeing catalog now signals the acceptance of our industry leading narrow format printer on a major aircraft program.
This is especially important when you consider that high percentages of Boeing 737 being produced required a narrow format printer. Because of the nature of the airline industry, it's also important to remember that our aerospace business is about long-term growth.
We announced inclusion of wide format ToughWriter 5 in the Boeing catalog more than a year ago, and we're just now starting to win projects, many of which are scheduled for delivery in calendar 2018 and calendar 2019. So, it'd likely to be about 18 months before we can expect to see significant revenue from the inclusion of the narrow format ToughWriter 640; however, I cannot overstate the importance of being selective for inclusion in this Boeing catalogue.
It not only creates a number of upgrade opportunities for us, but it also opens up to orders with several prospective customers for whom being in a catalogue is a prerequisite to doing business. Revenue in our Test and Measurement segment was down about 3% in the fourth quarter, reflecting order timing issues with some of our aerospace customers in the conversion process to next generation data acquisition products.
Late in the third quarter, we did receive final CE approvals for the new DDX-100 portable data acquisition system. Shipments for this product are now underway and we expect that business to accelerate as we move through fiscal 2018.
We've further expanded our T&M product line with the addition of the EVX SmartChart recording system, which we introduced in the second half of last year. The EVX again illustrates our ability to design and manufacture highly differentiated products for the data visualization market.
By incorporating integral data printing, the EVX is ideal for fast growing science and engineering applications such as non-destructive testing, power system monitoring, flight and missile testing, flight simulation and satellite telemetry. Now, let's turn to our acquisition of TrojanLabel which we completed just after our fiscal year ended on February 1st.
TrojanLabel is a European-based manufacturer of products including digital color label presses and specialty printing systems for a broad range of end markets. This acquisition dovetails with our long-term strategic plan, incorporating a profitable growing business that directly complements one of our existing core business segments.
Excluding acquisition related expenses, we expect the acquisition to be accretive to earnings in the first 12 months of combined operation. Let me highlight some of the benefits of this transaction.
First, TrojanLabel expands our product line with the addition of proven technologies focused on larger job runs within the digital printing market. Its customers include print shops, commercial printers, manufacturers, brand owners, contract packagers and the OEM market.
By acquiring TrojanLabel, we gain the leading product line in the meaningful label press market. We also have three commercial products again a great team of engineers that substantially reduce our time to market for other products already on our product development roadmap.
TrojanLabel's newest product, the TrojanThree is a transformational and versatile printing system. The T3 allows customers to print digital color images directly on a wide variety of materials including cardboard, flexible mailing envelopes and even on wood.
Of course, it also does a fantastic job printing vibrant color labels on our full range of inkjet receptive media. The T3 can either be combined with our versatile vacuum belt conveyor system or can be integrated with a wide variety of third-party OEM devices such as nailing tables, high speed packaging lines and label converting presses.
The T3 is truly a game changer, creating a new category in the color inkjet print world. The second benefit of this transaction is that TrojanLabel substantially broadens our geographic footprint, complementing our strong North American direct sales force with Trojan's formidable dealer network in Europe, the Middle East, Africa and Asia.
Third, the AstroNova-TrojanLabel combination creates huge cross-selling opportunities, placing TrojanLabel products in the hands of our North American direct sales force, creates a significant market boost for these printers as well as the associated consumables. TrojanLabel operates as a wholly owned subsidiary of AstroNova.
As we've done with our previous two acquisitions, we're using the AstroNova Operating System, AOS to rapidly integrate this latest acquisition. AOS is set of lean tools and customer centric business processes we have developed over the past four years.
AOS is based on our corporate values and focused on efficiency and effectiveness. These values encompass our commitment to work collaboratively and produce innovative, drive continuous improvement and deliver value for our customers, employees and shareholders.
Just one week after the Trojan closing, we presented our combined product lines at the Annual West PACK Show in California, and we see significant interest from both current and perspective customers. Looking ahead, we do a fair amount of IT system integration to complete, but we expect to have the majority of this work finish by our fiscal third quarter.
We will also be making substantial investments in fiscal 2018 in sales, marketing, engineering and technical support. These investments are designed to rapidly expand our addressable markets and accelerate profitable growth.
We're excited about the integration and integrating this talent TrojanLabel team innovative technology, and outstanding products in our AstroNova family. Now, I'm going to turn the call over to John for the financial review.
John Jordan
Thank you, Greg. Good morning everyone.
As Greg mentioned, revenue increased to a record $25.7 million in the fourth quarter and $98.5 million for the full year of 2017. Domestic revenue of $17.5 million was essentially the same as in the fiscal 2016 fourth quarter.
Revenue from international sales increased 28.2% with higher sales in most international market. Fluctuations in foreign exchange rates reduced revenue by approximately $188,000.
Revenue in the Product Identification segment contributed $18.7 million in the quarter, 13% more in the fourth quarter of fiscal 2016. Revenue for the Test and Measurement segment was $6.9 million, up about 3% from the same period a year earlier, largely reflecting transition to our next generation data acquisition products and the timing of aerospace order releases.
The consumables product category continues to deliver strong recurring revenue with revenue of $14.8 million for the fourth quarter, 16% higher than the same period in fiscal 2016. Hardware revenue of $8.5 million was 7.4% lower than the fourth quarter of fiscal 2016, largely related to order timing as we ramp up the new products in both Product Identifications and Test and Measurements.
Revenue from service parts and repairs contributed $2.4 million in the quarter, 27.7% more than the fourth quarter of fiscal 2016. For the year, consumables revenue was higher by 8.5%.
Hardware revenue was up by about 2.9% and service parts and repairs increased 5.1%. Gross margin increased 90 basis points in the quarter to 39.3% and gross profit increased to $10.1 million from $9.1 million in the same quarter of the prior year primarily as a function of the revenue increase.
Operating expenses increased $581,000 or 7% to $8.9 million in the fiscal 2017 fourth quarter from $8.3 million in the same period a year earlier. Transaction cost associated with the TrojanLabel acquisition was $610,000 during the quarter.
As a percentage of revenue, operating expenses declined to 34.8% of revenue in the fourth quarter of fiscal 2017 from 35.1% in the same period a year earlier. Operating income for the fourth quarter increased by $350,000 or 45% to $1.2 million reflecting a disciplined approach to managing cost and a reasonable ability to leverage the cost structure to deliver gross profit to the operating income line.
If expenses related to the acquisition are excluded operating income increased to $1.9 million. For the full year operating income increased 6% to $6.3 million and operating margin of 7% in 2017.
The Product Identification segment generated $2.8 million in segment operating profits with a margin of 14.7% and Test and Measurement reported operating income of approximately $775,000 with the corresponding segment margin of 11.2%. The income tax provision in the quarter was approximately $782,000, disproportionately high 50.5% provision due to non-deductibility of certain acquisition transaction costs and adjustment of deductions calculated in prior quarters.
If the effects of acquisition are removed, the effective tax rate for the quarter would be 37.3% and the full year efficiency tax rate would be 33.3%. Fourth quarter 2017 net income was $766,000 or $0.10 per diluted share compared with $828,000 or $0.11 per diluted share in the fourth quarter of fiscal 2016.
If expenses related to the acquisition are excluded net income for the 2017, quarter was $1.3 million or $0.18 per diluted share. Net income for the full year was $4.2 million or $0.56 per share in fiscal 2017 and 4.5 million or $0.61 per share in fiscal 2016.
On the balance sheet, cash and marketable securities were $24.8 million on January 31, 2017, compared with 25.4 million at the end of the third quarter this year, and $20.4 million at the end of fiscal 2016. Accounts receivable at the end of the quarter were $15.7 million, representing 49 days sales outstanding, compared with 52 days at the end of Q3 2017, and 50 days at year end 2016.
Inventory at the end of the quarter was $19.5 million, representing 114 days of inventory on hand. Inventory at the end of fiscal 2016 was $14.9 million representing 92 days on hand.
The higher inventory level was driven by the ramp of new products in both Product Identification and the Test and Measurement segment. Capital expenditures for the quarter were $279,500 primarily related to improvements to physical plant and updates IT system and software updates.
The fourth quarter dividend was $0.07 per share, returned $523,000 to shareholders. There were 312 AstroNova team members at the end of the fourth quarter, down from 318 at the end of Q3 2017.
Revenue per employee was $310,000 based on trailing12 month average population, a 10% improvement from $286,000 in the same period last year. Bookings in the fourth quarter were $26.4 million 5.9% more than in the prior year quarter, backlog at $17.6 million with $700,000 higher than at end of Q3, fiscal 2017, primarily attributable to the strength of orders in the Product Identification segment.
Free cash flow for the 12 months ended January 31, 2017 was $5.7 million compared to $4.7 million in fiscal 2016. Greg discussed the acquisition of TrojanLabel, which is now a wholly own subsidiary of AstroNova.
The purchase price is approximately $9.1 million with an additional earn out potential of approximately $5 million to $7 million subject to closing adjustments. We also put a $9.2 million strategic financing in place to make use of offshore cash flows and reduce our cost of capital, and by use of a swap transaction we swapped the variable rate U.S.
dollar obligation for a 0.67% Danish Crone fixed rate obligation. That trade enables us to take advantage of the current negative interest rates in Europe and a basis point reduction due to the supply demand anomalies available with the Danish Crone.
Before I return the call to Greg, I remind you that Greg and I will be in New York City on Wednesday March 29th to present at the Sidoti Spring 2017 Emerging Growth Conference. If you're planning to attend the event or would like to arrange a one-on-one meeting, please contact Sharon Miller Associations and I'll give you the phone number, 617-542-5300.
Now, I will turn the call to Greg for closing comments.
Greg Woods
Thank you, John. We're pleased with our financial and operational accomplishments in fiscal 2017 highlighted by record revenue, solid operating income and new products in both segments.
In TrojanLabel, we recorded a great business with products that delivered the best value proposition for customers in the mini-press and specialty printing markets. As we move into fiscal 2018, we remain focused on executing on our long-term strategic growth initiatives.
These initiatives are designed to expand our business through new product introductions, geographic channel expansion and investments to strengthen our brands and improve our operational efficiency. And with that, John and I will be happy to take your questions.
Operator?
Operator
Thank you. [Operator Instructions] And our first quarter comes from Tom Spiro with Spiro Capital.
Tom Spiro
I had a couple of questions about the QL-800. I wondered as our sales of hardware in the Product Identification segment and consumables shift towards the QL-800 with the market implications will be as QL-800 have a similar gross margin with consumables have similar gross margins what would that mix shift imply?
Greg Woods
Yes, it's pretty similar, Tom. It depends on what consumables they take as likelihood that the QL-800 will actually use more consumables.
So, the consumables per product versus our 4 inch product would actually go up. It's obviously early days, but that's where you've seen with our previous 8 inch products, the Kiaro!
200.
Tom Spiro
And the gross margins generally comparable between the Kiaro! and the QL-800?
Greg Woods
Yes, they're similar, maybe slightly less than the 800 and little bit more on the consumables for the 800, so it probably balances out.
Tom Spiro
And is the QL-800 going to be the first of a family of QL products or is that it?
Greg Woods
It's actually the second, so we had the QL-111 which we introduced about a year before, but that we didn't really call it a full new product, but it's a modification of our Kiaro! 100.
So, this is a totally new from a ground up product in terms of the transports and really everything in the product is different than the Kiaro! line.
Tom Spiro
Sure, but with the Kiaro! I remember we came out with the D line.
We had the narrow, the wide, we had -- we ended up I think perhaps maybe half a dozen versions. Is that the goal for the QL as well or no?
Greg Woods
Yes, there's another -- well, there's multiple versions, so we've a five year product roadmap and the roadmap pretty much has a tick at least once a year of new products coming out in that family.
Tom Spiro
And lastly, John, in your commentary I think you gave us the operating income numbers for the company without the acquisition expenses and I missed them. Could you repeat them please?
Greg Woods
We were at 359,000 for the quarter, increased 359,000 to 1.2 million, and if we take out the acquisition costs, it's 1.9 million.
Operator
[Operator Instructions] And our next question comes from Steve Busch with Everglades Resources.
Steve Busch
Are we still buying back stock at all? I don't know we've done in a while, but is this your plan, and do we see now we're back on a growth track to restart that program at all?
Greg Woods
We actually -- there's a Board authorization for a number of shares and it's really -- it hasn't gone away. So, it's really been a constant quite frankly.
But we cannot -- we do have authorization, but we're not doing anything different than we have been.
Steve Busch
And we use to have a number that you would give that was the, I don't know I want to call the backlog, but it was the kind of your airline orders long term. Do you still have that number?
Greg Woods
We're not actually publishing that number right now, so you can -- people can make their own judgments on it. The question is you go out -- the contracts don't really have a fixed end date.
So some of them go out and definitely some are 10, some are 20 years, but if you take a look at the marketplace and look at where wide format printers are used. We have the majority of that market share and then narrow format of course we just jumping in there.
So, you can pull the other own estimates on that.
Steve Busch
All right, so you don't give that create -- that old backlog number whatever it was called?
Greg Woods
Yes, we stopped publishing that over or discussing that well over a year ago.
Operator
And we will now hear from Charlie Dove.
Unidentified Analyst
Just wondering, what's your inventory increase was for the quarter on the year?
John Jordan
For the year it's about $5 million, it was $14 million at year end last year. I'll give you the precise number in a second.
So, we were at $19.5 million at year end, and last year at year end, we were $14.9 million.
Unidentified Analyst
So almost like $5 million increase in inventory?
John Jordan
Yes, 4.5, I'd say.
Unidentified Analyst
All right. And how does the CapEx for the year compared to your long run expectations in your five year plan?
John Jordan
We are little less this year about half of what our normal plan would be at say 2.5 billion. We didn't buy any substantial machine and equipment this year, but we have plans coming up when we will be spending somewhat more in CapEx.
Unidentified Analyst
In fiscal year '18?
Greg Woods
Right, we try to give you a little bit more color on that. We've talked in the past about some of our high volume label production equipment, and we did a project this year manifesting finish as we speak on the first machine.
And the reason, we're going to buy -- we would have a second one on board already. But we're adding some nice upgrades to them and we want to prove out that they actually do what we expect them to do.
And then, we'll get back in the order queue from kind of the substantial investment for each one of those machines several hundred thousand dollars. But all of those well in next couple of weeks will be putting ordering for another one very shortly that is in our capital plan of this year.
Unidentified Analyst
What point of ROI you're expecting in terms of this CapEx expenditures on improving, decreasing expense?
John Jordan
We certainly expect ROI better than our cost of capital, but we wouldn't go into any further details on that.
Greg Woods
Let me just tell you about the machine I just talked about the production efficiencies on that are about 2.5X our existing equipment. So, it's a very nice improvement.
Unidentified Analyst
With substantial improvement, so regarding the [ruggedized] (ph) equipment, can you provide us with any insight into what percentage, if you look at each of the contract, how many -- what percentage of it at full delivery during fiscal year '17, '18 and '19? In other words, what kind of growth are you expecting in those areas?
Greg Woods
Yes, I mean there is something different contract. I don't have the number off the top of my head, but we've got a number that are ramping up that we've announced.
If I go back to more recent announcements, the 777 or around 777-X is a brand new program, the 787 is the project that we're on that's ramping nicely. I can pretty much follow the aircraft deliveries and get a good feel for that, how the overall industry is going.
And the most recent when it referenced the 737, the wide format we just about it, like I said little over a year into that with the wide format printer being available in their catalogue. And if you look at the ramp of that, I think Boeing is roughly calling about a 9% to 10% increase per year on the aircraft, and it's by far their highest running aircraft.
If you look at that I think they're in the mid-40s right now trying to get up into the 50s and maybe as high as 60 units per unit, which if you look at some of the wide-body aircraft and they're more on low 100 kind of numbers, 100s as far as the annual deliveries. So, it's kind of significant to be on that program and now both on the narrow and wide format give us some great exposure, but that particular one as I mentioned the narrow format I don't see much for about 18 months or so.
Unidentified Analyst
So, would it be safe to say that it sounds like less than half of the existing contracts would be full year exposure for fiscal year 2018?
Greg Woods
I can't put an exact number on there, but I think what you can use for planning purposes if you want is, you can take a look at the overall growth of the airline industry. I know that we would be growing faster than that because we're adding contracts with -- we don't have full market share.
So, we're on every single plane that ships today. That's far the best estimate I can give you.
Operator
And once, we would hear from Tom Spiro with Spiro Capital.
Tom Spiro
Greg, I know we introduced a couple of new data acquisition products over the last year or so. I guess I don't see them in the numbers yet.
How they're doing?
Greg Woods
As I mentioned, the Daxus has been little over a year. I didn't even talk about that one today, but it's a sister product the DDX-100 which is Daxus as it comes with a touch screen being well received.
So, we're held back on the approvals to finish. You've delivered some of those.
Now, we get deliveries going out on those. But it's going to Test and Measurement, the data acquisition piece of Test and Measurement, it's a little similar to the aerospace, and it'll take a while to ramp up.
In the case of data acquisition, it's not so much long-term contract it's more of adoption by customers. So, the good news is that we're getting very good feedback with respect to the feature set, the price point, the packing of the product.
So, we're very encouraged about that in 2018.
Tom Spiro
Are we actually getting commercial sales, no, I mean we're really selling them?
Greg Woods
Yes, the Daxus has been shipping for a while now and DDX-100 started shipping right around the end of third quarter beginning of fourth quarter.
Tom Spiro
We talked a little earlier about the CapEx. Can you give us the CapEx budget for the current fiscal year?
Greg Woods
I don't think we put it out prospectively, but we would expect it to kind of in general it should be moving more towards our depreciation number, that's typically what we're running.
Tom Spiro
And your R&D, we've talked about this in past quarters, seems to run much higher than it used to, I know some of that is acquisition expenses. What are your thoughts about G&A?
What are your thoughts about G&A as we move into New Year?
Greg Woods
The G&A, again, I think the rate of growth -- no, I don't think. I know the rate of growth in our G&A is going be much less than the top line.
So, we're going to start to see that pulling a bit. We had -- there is other kind of one-time items that we don't call out and there that we had in fiscal 2017, which regard to consultant size and things like that.
Some of the IT programs that got involved with that, which will necessarily repeat in future years.
Operator
And there is no further question. I'll now turn the call back over to Mr.
Woods for additional or closing remarks.
Greg Woods
Great, thank you. So, thank everyone for joining us here this morning.
We look forward to keeping you updated on our progress and have a good day. Bye now.
Operator
And that concludes our conference for today. Thank you for your participation.
You may now disconnect.