AstroNova, Inc. (ALOT) Q2 FY2026 Earnings Call Transcript & Summary

Greetings, and welcome to AstroNova's Second Quarter Fiscal Year 2026 Financial Results. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Debbie Pawlowski. Thank you. You may begin.

Thank you, and good morning, everyone. We certainly appreciate your interest in AstroNova, and thank you for sharing your time with us today. I am pleased to introduce to you, Jorik Ittmann, who is appointed President and Chief Executive Officer of AstroNova effective August 15 this year. Also joining us is Tom DeByle, our Chief Financial Officer, who should be familiar to most of you. You should have the earnings release that crossed the wires earlier this morning as well as the slides that will accompany our conversation today. If not, you can find these documents on the Investor Relations segment of our website, AstroNova, Inc. Please turn to Slide 2 to review cautionary statements. As you are likely aware, during the formal presentation as well as the Q&A session, management may make some forward-looking statements about our current plans, beliefs and expectations. These statements apply to future events that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as in other documents filed by the company with Securities and Commission. These documents can be found on our website or at sec.gov. Also, as noted on the slide, management will refer to some non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. You can find reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and slides. We will turn to Slide 3 and I will turn the call over to Jorik. Jorik?

Thank you, Debbie. Good morning, everyone, and thank you for joining us today. I'm excited to take on this new leadership role and confident in the future of AstroNova. We have a leading market position in Aerospace with a loyal customer base and long-term contracts as a first tier supplier to major aircraft manufacturers. In our Product Identification segment, our new commercial print technologies have begun to ship as these new print solutions are validated by our customers, we expect to be able to address the full funnel of interest we have been generating to drive sales. But I know we have a lot of work to do to get our growth and profitability on track. On Slide 3, you see my priorities for AstroNova. Starting first with our Product ID segment, we began the restructuring of our sales team earlier this year to be much more customer-centric. The company has been losing customers over the last number of years. I believe it's because of how we went to market and how our sales organization was compensated. I have reorganized sales into 2 teams. Customer acquisition and customer retention. This reorients our focus on taking care of our current customers and winning back those we have lost while gaining new customers. We're also working to change the skills of our sales team to align with our new product offerings. Our new print solutions, especially the significantly larger and higher-value print solutions, we're now offering our capital projects for our customers. This is a very different sales process from how we have solved our legacy tabletop printers. The sales cycle is longer and customers' needs are more specific. We've been making progress with our new go-to-market strategy and believe results will begin to demonstrate it over the next several quarters. Our success is also dependent upon a couple of other hurdles we are currently addressing. First, we have to validate with customers that the upgrades we have made to the MTEX product line meets their needs, including print quality, speed, reliability, durability and lower operating costs. We have shipped several of the models with another to be on the way this week. If results come our as we expect, we can drive more sales, if not, we will have to rethink that portfolio. Second, as this might be news to you, we have a different kind of problem with our product line for our partners who serve the Mail & Sheet printer line. We have had a hard time keeping up with demand. We have redesigned products for that market and we have excellent partners serving customers. Our partners and their customers like the products. We just haven't been able to make enough of these products. Our PI leadership team is actively engaged now in order to capitalize on this opportunity. Turning to Aerospace now. Even though revenue declined compared with last year's second quarter, we believe that business is performing on key metrics such as transitioning to our ToughWriter, flight deck printers from legacy equipment. During the quarter, we began shipping the ToughWriter 640 to a major aircraft OEM. As a result, the ToughWriter represented 50% of second quarter shipments and we remain on track to reach our target of over 80% by fiscal year-end. Aerospace can be a lumpy business from quarter-to-quarter, nearly 45% of the segment's revenues for aftermarket sales and service and roughly 10% of hardware sales are dependent upon spare replacement machines. However, for new build aircraft, we like the long-term tailwind provided by growth in commercial aircraft build rates. We're also making changes in the culture of AstroNova. We have great talent within the organization that needs to be unleashed yet held accountable. I am working to create a more collaborative culture that puts the customer first. I'm excited on how the team has embraced change and believe we can develop into an organization that delivers. We have to execute a plan to regain trust with our key stakeholders, including customers, employees and not least, investors. I believe that if we can demonstrate AstroNova can make progress in our markets with our customers, strengthening earnings power and be straightforward and transparent while delivering on our promises, we will build credibility with you. Tom, I will turn it to you now to review the financials.

Thank you, Jorik, and good morning, everyone. On Slide 4, you can see the second quarter revenue of $36.1 million declined 10.9% year-over-year and sequentially 4.2%. 70% of the quarter's revenue was reoccurring. By segment, Product ID and Aerospace decreased 8.9% and 15.1%, respectively. Lower sale Product Identification in the quarter were primarily driven by $2.6 million decline in recurring supplies, parts and service from customer attrition. This was partially offset by higher demand for the Mail & Sheet flat pack products. In July, we began shipping our professional label printers, the QL-425 and 435 models. And in August, we shipped the AJ-800, a new direct-to-package printer line that was upgraded from the former MTEX model. For Aerospace, the year-over-year decline was a result of a tough comparison against last year's second quarter, which benefited from a $1.3 million in unusually large spare printer shipments to both the airline and the defense customer as well as nonrecurring engineering revenue from an OEM project. For the first half of fiscal 2026 revenue of $73.8 million increased marginally year-over-year due to higher hardware sales, offsetting the decline in recurring supplies, parts and service revenue. Turning to Slide 5. Gross profit in the second quarter was $11.6 million, down $2.7 million year-over-year, reflecting lower sales and unfavorable mix, primarily related to the decline in aerospace volume. For the first half of fiscal 2026, gross profit was $24.3 million or 32.9% of sales, a $2 million decline from the same period as a result of less favorable product mix, primarily in the Aerospace segment. For the second half of the year, we expect Aerospace gross margin improve on similar volume since we began shipping the ToughWriter to a major OEM in June, higher volume and improved mix in the Product ID should drive margins as well. Look at Slide 6. Product ID operating income for the quarter declined $0.4 million or 18%, it was partially offset by a $0.5 million reduction in operating costs. In the first 6 months of fiscal '26, GAAP operating income also declined. We expect improvements in sales and with the impact of our cost reductions, we should see improving margins for the segment. Looking at Slide 7. Aerospace operating income for the quarter was down $1.4 million or 37% due to sales volume and unfavorable mix. This was partially offset by $0.3 million in cost reductions. For the first half of fiscal 2026 GAAP and adjusted operating income declined due to weak second quarter results. Turning to Slide 8. Our net loss was $1.2 million or $0.16 per share, reflecting lower volume, partially offset by a $0.5 million tax benefit. Adjusted EBITDA was $2.1 million, down $1.8 million compared with the prior year period. Adjusted EBITDA margin for the second quarter was 5.7%. Moving to Slide 9. Cash provided from operations in the first half of fiscal '26 was $4.6 million and down from the prior year based on everything we have covered here. As Jorik mentioned, we are rethinking how we operate the business and are driving a stronger focus on cash generation through improved operational performance. We are carefully managing our capital. And as a result, our CapEx was almost $0.1 million in the first 6 months of the year. We have been constraining our capital investments and expect CapEx for the fiscal year to be less than $0.5 million. We paid down $5.1 million in debt through the first half of fiscal '26 and as of July 31, 2025, we have $10.4 million in total liquidity including $3.9 million in cash, $5.9 million available on our revolver and an untapped $0.6 million line of credit in Portugal. Our leverage ratio of funded debt to adjusted EBITDA was 3.5x. The bank waived our fixed charge coverage ratio for the second quarter, and we are in discussions regarding restructuring of our debt which we expect to have completed in the next 60 days. Our objective with the turnaround of Product ID and continued advancement of the Aerospace segment is on a consolidated basis to grow sales, drive product profitability, generate cash and pay down debt. Now please turn to Slide 10, and I'll hand the call back to Jorik.

Thanks, Tom. We had orders of $30.9 million in the second quarter of fiscal 2026, which were relatively unchanged from the prior year period but up $1 million sequentially as the sold improvements in Aerospace more than offset a very weak order quarter for Product ID. As we discussed earlier, we have changed the team's structure and are actively meeting with current and past and prospective customers. Aerospace orders were up $3.8 million for the trailing first quarter. I'm seeing how much variation this business can have from quarter-to-quarter. We do expect that as Boeing increases its build rates and inventories level out, we should see steady growth in hardware sales related to new builds. Backlog for the quarter was down $4.6 million year-over-year to $25.3 million and represent about 30% of expected shipments for the second half of the year at the midpoint of our guidance range. If you will turn to Slide 11, and I will summarize the work we have to do to put AstroNova on track to deliver stronger profitability and improve sales. There unfortunately is not any single lever to pull to make this work. We have to reengage with our customers and simplify our processes to improve our responsiveness. We need to measurably improve our customer retention rate, we have to evolve our sales approach for a new higher-value printers. We also are addressing production challenges in the Mail & Sheet flat pack printer operation. We need to streamline processes to take out costs and reduce our lead times. We're simplifying operations in Portugal and better prioritizing and allocating our resources. I remain encouraged as we move forward, we expect to see a full benefit of $3 million in annualized cost reductions in the second half of the fiscal year with a much better understanding of the potential of our new printers over the next few months. And our Aerospace business provides a stable base with a couple of tailwinds, including increasing aircraft build rates and a benefit to profit margin, we will realize in fiscal 2028 as Honeywell royalty rolls off. I'm looking forward to the challenge of improving the business and driving change for AstroNova. Operator, let's open the line for questions.

[Operator Instructions]. This concludes the question-and-answer session. And this concludes our conference for today. You may disconnect your lines at this time, and we thank you for your participation.