Good day, and welcome to AstroNova's Q4 Fiscal Year 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Scott Solomon. Please go ahead, sir. .

Thank you, Orlando. Good morning, everyone, and thank you for joining us. Hosting this morning's call are Greg Woods, AstroNova's President and CEO; and Joe O'Connell, Senior Vice President and CFO. Greg will begin the call by reviewing the company's operating highlights, business outlook. Joe will take you through the financials.

Greg will make us some concluding comments, and then management will be happy to take your questions. Today's earnings release and supplemental slides are posted on the Investor Relations section of our website at www.astronovainc.com..

Please note that the statements made during this call that are not statements of historical fact 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 company's risk factors in the 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 non-GAAP net income, non-GAAP net income per diluted share and free cash flow.

The company believes that the inclusion of these non-GAAP financial measures in this press release and on this conference call help investors gain a meaningful understanding of the changes in the company's core operating results.

It can also help investors to make comparisons between the company and other companies on both a GAAP and a non-GAAP basis.

Management uses these non-GAAP measures in addition to GAAP financial measures as a basis for measuring its core operating performance and comparing such performance to that of prior periods and to the performance of its competitors. These measures are also used by the company's management to assist with their financial and operating decision making.

For more information, please see the GAAP to non-GAAP reconciliation tables in this morning's earnings release. The tables have more details about the GAAP financial measures that are most directly comparable to the non-GAAP financial measures and the related reconciliations between those financial measures. .

Now, I'll hand the call over to Greg Woods.

Thank you, Scott. Good morning, everyone. We capped a successful and profitable year with a healthy fourth quarter, highlighted by 15% growth in our domestic business and double-digit percentage gains in orders and backlog.

We continue to execute against a strategy built on expanding our geographic reach, growing our recurring revenue stream and creating a culture of operations excellence resulting in greater efficiency across both manufacturing and product development..

The improved efficiency is evident in the $4.7 million of free cash flow generated in fiscal 2016. Supporting that efficiency of course is the AstroNova Operating System. This is the foundation of our drive toward continuous improvement and product innovation, quality, delivery, cost and growth. .

Now let me take a moment to briefly review our financial results. Q4 was the company's 14th consecutive quarter of year-over-year revenue growth. This result was paced by our domestic channel which grew 14.9% over the same period of fiscal 2015. Fourth quarter revenue of $23.8 million increased 7.7%, while bookings grew 19.7% to $24.9 million. .

On the international front, our revenue declined 8.3% on a U.S. dollar basis from the fourth quarter of last year, but was down only about 1% in constant currency.

Once again in the fourth quarter, our growing export dealer channel performed very well, reflecting the contributions from the new direct sales locations we opened in Asia and Latin America over the past year. .

Looking at our business segments, QuickLabel Systems accounted for approximately 70% of the revenue in both the fourth quarter and full year for fiscal 2016. Global demand for our Kiaro! brand color label printers and consumables remains very strong, thanks in large measure to the quality of our products, service and support..

As some of you know, during fiscal 2016, we transitioned our consumables plant here in West Warwick to a 3-shift operation to accommodate the increased demand. We also began replacing our decades-old production equipment with fully automated, state-of-the-art systems.

Our first new converting machine came online at the end of fiscal '16, and we're already seeing significant productivity improvements as a result. Other new systems are slated to follow in the coming quarters. .

Turning to our Test & Measurement segment, orders were up 38% for the fourth quarter and 18% for the full year. Our fourth quarter sales were down slightly from the same period in fiscal 2015 and down 3.6% for the full year.

As we've discussed previously, the offset between orders and shipments has been driven by some aerospace customers extending deliveries into future quarters..

Fiscal 2016 was also an important year for the company from an M&A perspective. In June, we acquired RITEC's aerospace printer product line for civil and commercial aircraft, expanding our leadership in these markets.

The transition of the RITEC business to our manufacturing facility in West Warwick is nearly complete and will occur upon receipt of final regulatory approvals, which we expect to have in Q2. Until then, RITEC continues to manufacture printers under contract with AstroNova. .

RITEC is our second acquisition in the aerospace business in the past 2 years. In January 2014, we acquired the Miltope product line, adding new printer models to our lineup. In addition, we significantly expanded our airline customer base both domestically and internationally.

Orders -- order trends, rather, within the global aerospace business remain positive, and we believe that the industry demand drivers continue to bode well for us. .

The other product group in our T&M segment is data acquisition. During the second half of fiscal 2016, we launched the first of our next-generation Daxus data acquisition products. The Daxus products include an array of high-performance features that deliver increased accuracy and wide-ranging connectivity in a compact, portable design.

The Daxus products include our industry-leading graphical setup and analysis software that lets users install a system and begin collecting data in just minutes. The first Daxus model has been well received as we have rolled it out around the globe. Look for additional members in the Daxus product line to be released as we move through the year. .

Before turning over to Joe for his finance review, let me add that I'm extremely proud of the success that our global AstroNova team has achieved. Over the past 3 years, we have grown our top line by a compound annual rate of 16%, in large measure because we have significantly transformed the way we do business.

We have implemented a number of operational excellence initiatives and a rigorous product development system that are both empowering our employees and benefiting our customers.

By converting over 1/3 of our operations to cellular manufacturing, for example, we have not only saved floor space but shortened the time it takes to assemble, test and package our products..

In another initiative, we kicked off a new inventory reduction program in the second half of fiscal '16 and it has already reduced the inventory on hand by more than 5%. These ongoing efforts will continue to create opportunities for margin expansion and improved cash flow.

From an IT perspective, the most significant accomplishment of fiscal '16 was the conversion of our enterprise resource planning system to the new Oracle EOne platform. In addition to the new EOne software, this required a complete upgrade of our computing and networking hardware systems.

It will take time, of course, to fully realize all the benefits of this new platform, but we're confident the scalability and versatility of the new ERP system gives us the strong data integration analysis foundation we need to support the global integration phase of our IT upgrade program..

With the EOne platform now in place, we will begin the process of integrating the many stand-alone subsystems throughout the company, such as CRM and PLM, with our new EOne environment. Once completed in fiscal '18, we will have a very powerful integrated global information system to support our continued growth for many years to come. .

Finally, one of the most visible initiatives in 2016 was our worldwide corporate rebranding to AstroNova. The new brand reflects our traditional strengths in aerospace, complemented by a larger presence in Test & Measurement, Product Identification and other markets where our data visualization technology gives us a strong competitive advantage. .

Now let me turn the call over to Joe for his financial review. .

Thank you, Greg. Good morning, everyone. Let's start with the income statement. The net sales in the fourth quarter were nearly 7.7% -- up 7.7% to $23.8 million. Our domestic sales, as you've heard earlier, were up 14.9% in the fourth quarter over fiscal 2015 to $17.4 million.

Our international business, our foreign currency headwinds resulted in a decline of 8.3%. However, on a constant-currency basis, sales would have been basically lower by only maybe 1%. .

Looking at our business segment, QuickLabel Systems posted sales of $16.6 million, that's 12% ahead of the fourth quarter of fiscal 2015. We continue to see strong demand for our Kiaro! family of products, particularly our inks, labels and other consumables.

Sales in the Test & Measurement segment, which includes ruggedized product for the aerospace market and data acquisition systems, totaled $7.1 million for the fourth quarter and it's down 1% from the same period of fiscal 2015. As mentioned in our Q3 call, orders from some aerospace customers have been extended into future quarters. .

Looking at the sales by product category, our consumables saw another quarter of strong double-digit growth, increasing 17.8% year-over-year to $12.8 million and representing 54% of our total quarterly sales.

Our media plant in West Warwick continues to operate a third shift, which has enabled us to increase the capacity of our facility as well as shorten our customer lead times. Hardware sales were down approximately 5% from year -- to $9.1 million in the quarter due primarily to the timing of orders from some aerospace customers.

We expect to see an uptick in hardware revenues as orders are placed in subsequent quarters..

Sales from our service, parts and repairs totaled $1.9 million in the quarter, that's a 14.8% increase from the same period of fiscal 2015. Gross profit for fiscal 2016 fourth quarter increased to $9.1 million from $8.6 million in the same quarter of the prior year.

Our gross margins in the quarter were 38.4% versus 39% in the fourth quarter of fiscal 2015. The variance in gross margin related largely to product mix, costs associated with the product line integrations and an absorption in our manufacturing operations. .

Operating expenses in the quarter increased 6.8% to $8.3 million from $7.8 million from the same period a year ago. The increase is largely from discrete costs associated with the RITEC transaction and our rebranding initiative.

Operating income in the fourth quarter was unchanged at $793,000 with an operating margin of 3.3%, and that compares with an operating margin of 3.6% for the same period in fiscal 2015. .

Turning to the segment operating profit, QuickLabel Systems generated $1.7 million in segment operating profit with a margin of 10.2%; whereas, Test & Measurement had operating income of approximately $1 million with a corresponding margin of 14%.

Our federal, state and foreign tax provision in the quarter was $352,000, representing an effective tax rate of 29.8%, and that compares against last year's 6.2% in the fourth quarter of fiscal 2015..

Fourth quarter net income was $828,000 or $0.11 per diluted share compared with $543,000 or $0.07 per diluted share in the fourth quarter of fiscal 2015.

On a non-GAAP basis, excluding the expenses associated with the RITEC acquisition, rebranding initiative, et cetera, our net income for the fourth quarter was $1.3 million or $0.17 per diluted share.

This compares with $758,000 or $0.10 per diluted share in the fourth quarter of 2015, which includes the share buyback cost and the write-down of an asset held for sale. .

For the 12 months ended January 31, 2016, we reported revenue of $94.7 million. That's an increase of 7.1% compared to the $88.3 million reported for the same period of fiscal 2015. On a constant-currency basis, full year revenue would have increased 10.5% to $97.7 million. The difference being, of course, a foreign exchange hit of about $3 million.

GAAP net income was $4.5 million or $0.61 per diluted share, compares with net income of $4.7 million or $0.60 per diluted share in fiscal 2015. On an adjusted basis, excluding the items listed in the reconciliation table in our earnings release, non-GAAP net income was $0.77 per share in fiscal 2016.

That's 18.5% higher than the $0.65 reported for 2015. .

Our balance sheet remains healthy. Total assets at the end of the fourth quarter were $78 million. Our equity balance for the same time frame was $67.3 million, representing a book value of $9.18 per share, and that's up from the prior year-end of $8.76 per share.

Our cash and marketable securities at the end of fiscal 2016 were $20.4 million compared with $23.1 million for the end of fiscal 2015. Accounts receivable at the end of the quarter were $15.3 million, representing some 50 day sales outstanding. This compares to the 52 day sales outstanding at the end of fiscal 2015..

Inventory levels at the end of the quarter -- at the end of the year were $14.9 million, representing 92 days of inventory on hand. This compares favorably to inventories of $15.6 million at the end of fiscal 2015, representing 104 days on hand.

Our capital expenditures in the quarter were $888,000 primarily related to information technology, building improvements, machinery equipment, tools and dyes. The company returned $514,000 to shareholders in the fourth quarter in the form of cash dividends, representing $0.07 per share. .

Our employee population stood at 329 folks at the end of the fourth quarter. That's down some 12 employees from the prior year. Our sales per employee increased to $286,000, up approximately 7% from the $267,000 per employee at the end of the prior year.

Orders received in the fourth quarter increased 19.7% to $24.9 million, reflecting a strong demand for all of our products. We exited the fourth quarter with a backlog of $16.6 million, approximately 38% higher than the end of the previous fiscal year.

The strength of our liquidity is also evident in the $4.7 million in free cash flow generated in fiscal 2016. .

Let me conclude by saying that on March 31, Greg and I will be presenting at the Sidoti Spring 2016 Emerging Growth Convention in New York City. Then in mid-April, we'll be meeting with investors in Boston and New York as part of an investor road show. To schedule a one-on-one, please contact Sharon Merrill Associates at (617) 542-5300. .

Now let me turn the call back over to Greg. .

Thank you, Joe. The investments we are making in new products, processes and infrastructure position AstroNova for growth in fiscal 2017 and beyond. We will continue to support that growth through focused, carefully planned strategies designed to advance our leadership in data visualization technology. .

Now, Joe and I will be happy to take your questions.

Operator?.

[Operator Instructions] And we'll take our first question from Tom Spiro with Spiro Capital. .

Tom Spiro, Spiro Capital. So I had a couple of questions. Number one, on QLS, it looked like QLS may have struggled a little bit in the quarter as compared to the prior quarter or 2. I know you went to the third shift for your consumables.

Can you give us a little bit of color on how QLS fared?.

Well, actually, I think we did pretty well, Tom. I think the -- overall, the -- especially driven by the Kiaro! line, we're continuing to be up double digit in that growth area.

But as you know, as we've talked about this before, we have a real mix of products within the QLS because you got historical products okayed that perhaps are not -- are declining. But the Kiaro! line, which we're very impressed with, have done quite well.

I think we're quite pleased with overall performance of the QuickLabel systems, and you'll continue to see that growth going forward. .

Well, I noticed the operating income in the fourth quarter was down more than $1 million from the third quarter. Sales were down modestly, operating income was down more sharply.

Is there anything there we need to be thinking about? Is there a manufacturing issue of some kind?.

I don't think so, Tom. I think the goal for us was to get that up over 15%. As you know, historically, if you looked at that, it's been almost in single digits. And that's going to be driven by the growth of the line. Obviously, we've put a new press in and -- during the fourth quarter.

This is the new press, the state-of-the-art die-cutting press that we have installed that's going to improve and increase our capacity. But there's some, obviously, reduction to practice issues associated with that. But no, I think we're very comfortable that the trend we see with QuickLabel will continue to show improvements in the operating margins.

.

I was -- I'm sorry, go ahead. .

No, I was just going to add that -- there's a significant impact, I don't believe, in the fourth quarter, but there are several new product development efforts going on, and so the R&D spending is up within the QLS group as well. .

As you transition to the new manufacturing equipment, I would imagine there's some kind of a learning curve associated with that? And perhaps, for some period of time your efficiencies decline?.

That's -- it could be, Tom. I think that's a -- the good news which -- as you say, with any kind of a transition like that, this is really a very significant change in terms of manufacturing capabilities from the old rotary presses that we have. So yes, you're absolutely right, there'll be a transition.

But I have to say, we're very impressed at the speed in which people are coming up the learning curve. .

And have you had the new equipment -- sorry. .

No, I was going to say, in terms of both going to the third shift and the new equipment, we ended up having an overlap where you're training people. So -- of course, we didn't have the third shift before. So you have extra people that you're training to bring online there, so there is some bit of a conversion there. .

And have you used the new equipment long enough now to conclude that it's worth adding to it, buy more of them? Or are you still in a testing phase?.

Honestly, it's running in -- I'd say it's not in full production because we are going to do automatic packing there as well, but we're probably at 90% of full production with the first machine we have. And the numbers are actually much better than we expected.

So we budget -- I won't say what our numbers are because I don't want to kind of help our competitors too much. But we had a certain percentage that we expected in the improvement, and it's probably 50% better delta than we thought it was going to be. .

Are you planning on buying more in this fiscal year?.

The expectations, I think we have that planned in the capital budget. .

Yes. .

What is it the Capex budget for this year?.

It's about $2.3 million. .

I see. Over on the aerospace side, I know for the last 2 or 3 quarters, we've discussed the delays from some of the manufacturers I guess to release production.

Can you give us an update on that, where all that stands?.

Yes, you'll start to see some of that kicking in now in fiscal '17, now that we're into '17. It's -- some of it's new programs as well, which are actually coming online, so they tend to ramp up through the year. So we're looking at -- yes, I wouldn't look for a step-function change, but a nice gradual buildup as these orders come online.

There's a variety of accounts, so it isn't like one order that goes from shifting 0 to 100% type of thing. So to get several of those coming online, it will stack up through the course of '17. .

And the completion of the RITEC transaction seems to be taking a bit longer than we expected.

What's going on there?.

Yes, so we're done internally in terms of our production facilities. They're set up, we're ready to roll. We just need to have the regulatory guys give us the green light. So in the meantime, those printers are shipping out, but they're under contract. They're still being built by RITEC.

Of course, we're billing on those, but we have to pay them to build it for us. .

Why is the regulatory approval taking so long, longer than we expected?.

It's better how long it takes the FAA and some of the other parties just to approve these things, yes. .

Okay. So no -- but no issues have been raised, this is -- there's no problem to it. .

Yes, just working through the bureaucracy. It's not like there's an issue we have to go back and redo things or whatever. It's just... .

I see. I see. Joe, just a couple of minor sort of details here. You mentioned the CapEx.

What are your thoughts about the tax rate for the new fiscal year?.

Well, we're working on that, Tom. Actually, we're trying to -- I think historically, we've looked at about -- effective tax rate about 36%. We're trying to drop that, obviously. We've got some plans that we're a little bit reluctant to go into right now. But obviously, the goal is to get -- to continue to drive that down.

For planning purposes, I think we're probably looking at between 34% and 36% for fiscal '17. .

I see. Greg, I think you mentioned in your opening comments the domestic sales were up nicely, but the international sales in constant currency were actually down slightly, which surprised me since we've expanded our efforts overseas, hired more folks, opened up branches and such.

What's going on there?.

Well, it's a blend, Tom. And to tell you the truth, I can just comment on that to say, it's like you get with multiple channels. We're very pleased, by the way, with the expansion in Asia. Europe is a little bit of a challenge.

I think the -- so if you over -- and there's this dominant piece of the revenue stream that we have internationally, but I think we're expecting to see that improve during fiscal '17. But certainly, we're very impressed of the growth that we've seen in the Far East in terms of brand-new businesses. .

Yes, I mean, that's pretty much it. I would just not throw all of Europe in the same bucket. So you have certain parts of Europe that are down which was a counterweight to -- we've got other regions in Europe that are doing very well actually. So it's a bit of an offset there. .

There are parts in Europe that are down or down in constant currency, are there not?.

Not really. As I say it's -- for the most part, I think it's a case where the availability of products and being able to go ahead and meet the challenges in the marketplace. But I think we're -- as I said before, I think we're very comfortable that you're going to see a nice improvement in the European -- all 3 branches in Europe during fiscal '17. .

I see. And lastly, we talked on the last call or 2 about the challenges the FX moves have presented.

Is there anything we can do there in sort of the -- over the intermediate term to try to shift some of our costs into foreign currencies?.

We got a couple of things, as you see, on the agenda, Tom. To talk a little bit more, we'll talk probably next year a little bit more specifics on that. But yes, that's a focus in terms of trying to temper the impact of the foreign exchange. .

And by next year, you mean fiscal '18? Or you mean later this year?.

No, fiscal '17. This is coming -- yes, exactly. This fiscal '17 period. .

And we'll take our next question from Steve Busch with Southpaw Investments. .

So I don't really have much to add, the last caller went over quite a few things. So your sales are pretty lumpy quarter-over-quarter, but year-over-year, you're basically saying you've got growth ahead. .

Oh, yes. The only thing that we see -- well, the aviation business can tend to be a bit lumpy, but we do see a little bit of trend that we've seen -- actually been watching it for the last 3 years or so. Q3 tends to be a bit higher than Q4. So the last 3 years has kind of been the case. We haven't pinned down exactly why.

It's not dramatic, but we do see that trend there. It may had to do with the holidays and things like that but we haven't nailed it down exactly.

But yes, on a year-over-year basis -- and like I've said in a few other times and calls, we don't really try to manage to rush orders in or out to make the particular quarter's number, we like to have a nice make steady pace that's more efficient for manufacturing.

And certainly want to get things to customers when they want them, not ahead of time and not late, certainly. .

Right. I appreciate that, and it doesn't bother me quarter-to-quarter. So 2 questions, I guess.

What's your biggest concern, Greg, that isn't out there right now, but that you worry about that could derail QLS growth over the next year?.

We don't have a -- we've kind of looked at all the competitive threats and whatnot. We have a raft of -- there's always competitors out there, we don't see those going away. There could -- maybe there could be a dark horse competitor that may jump in there.

But if you look at the installed base and the channel that we have, no one else has a channel anything like what we have. So even if something like that were to emerge, it would take many years for someone to try and replicate or compete with us on what we're doing. And of course, we're not sitting still either.

So I kind of mentioned a little bit earlier in the call here that QLS has some higher expenses in the R&D area. So you should look for new products coming out from us this year, which should keep us ahead of the competition.

And beyond that, you've got a kind of a nice tail of consumable business that's built up amongst the thousands and thousands of printers that we have out there. We have many, many very happy customers that are finding new and better ways to actually use their products.

They kind of start out at kind of one level and say, "Hey, this is easier than I thought. I'm going to extend my brand now into new areas. It's easier to do. I can take on some smaller customers that wouldn't otherwise have been able to justify kind of an on-demand basis." So we think it looks particularly with -- the trends should continue.

We don't see why it should change dramatically. .

Okay. So pretty much barring a complete macro meltdown, you're looking good. .

Yes. And even that or -- hopefully, we don't see that. But one of the nice things about the QLS business is it's very diversified across many markets. And a lot of them are kind of in the consumer goods, fast-moving consumer goods area.

So you -- not that they're recession-proof per se, but you look at food products and household items, those -- chemicals, those things tend to move. Unless -- it may up drop down a bit, but not as much as a capital type market. .

Right. Right. That's why I love it. Okay.

And then so -- I guess, on the flip-side, is there anything out there that we haven't really talked about on these calls or that could drive Test & Measurement all of a sudden? Is there -- what's out there that could actually all of a sudden help us on the T&M side?.

Yes, like I mentioned in the call here, the Daxus product line that we just released at the end of fiscal '16 is the first major product that we've had. It's a whole new platform, it's not just a product. So it's really, nothing has been done like that here, in about 5 years, I guess, was the last time we did it. 5, 6 years ago.

So it's been a few years in the making. But what you should see from us now is a steady release of additions to that family. So it's a whole family we have planned out over the next 3 years of products. So that'll get us into both new markets and strengthen our presence in existing markets.

So it takes -- it isn't like you walk into an application there, lot of it's transportation, whether it's rapid rail or aerospace or automotive, and they change overnight. But we're getting those seeds planted with our existing customers, and I think the new product is going to be a big part of that driver. .

I'll now turn the call back over to Mr. Greg Woods for any additional or closing remarks. .

Very good. Thank you. As far as closing, that's pretty much what we had. And we're glad to handle your questions here for you today. Thank you for joining us, and have a great day. .

And ladies and gentlemen, that does conclude our conference for today. We thank you for your participation..