Daktronics, Inc. Form 10-Q Summary
Business Context and Reporting Period
Daktronics designs, manufactures and sells electronic scoreboards, programmable display systems and large-screen video displays for sporting, commercial and transportation applications. The source filing is for the quarter ended January 27, 2018, representing fiscal 2018 third quarter and nine months; this does not match the requested “2016 Q3” metadata.
The company reports five segments: Commercial, Live Events, High School Park and Recreation, Transportation, and International. Results are affected by seasonality, large project timing, competitive pricing and customer delivery schedules.
Financial Results and Key Metrics
| Metric | Three Months Ended January 27, 2018 | Prior Comparable Period | Nine Months Ended January 27, 2018 | Prior Comparable Period |
|---|---|---|---|---|
| Net sales | $130.3 million | $115.7 million | $472.4 million | $442.9 million |
| Gross profit | $28.6 million | $23.3 million | $115.8 million | $106.7 million |
| Gross margin | 21.9% | 20.1% | 24.5% | 24.1% |
| Operating income (loss) | $(3.3) million | $(6.9) million | $17.8 million | $13.7 million |
| Net income (loss) | $(6.2) million | $(5.1) million | $9.4 million | $9.4 million |
| Diluted EPS | $(0.14) | $(0.12) | $0.21 | $0.21 |
Third-quarter sales increased 12.6%, while gross profit increased 22.5%. The third-quarter operating loss improved to approximately 2.6% of sales from approximately 6.0%; the net loss margin was approximately 4.7% versus 4.4% in the prior period. Nine-month sales increased 6.7%, gross margin improved modestly, and operating margin increased to approximately 3.8% from 3.1%.
- Third-quarter segment sales changes were: Commercial down 1.9%, Live Events up 10.1%, High School Park and Recreation down 9.4%, Transportation up 22.6%, and International up 61.4%.
- Nine-month segment sales changes were: Commercial down 8.6%, Live Events up 21.9%, High School Park and Recreation up 0.9%, Transportation up 17.9%, and International down 4.6%.
- Product design and development expense increased 19.0% in the quarter and 24.4% for the nine months as management accelerated development of video technology, software and controller capabilities.
- Backlog was $151 million at January 27, 2018, compared with $170 million a year earlier and $155 million at the end of the preceding quarter.
Cash Flow, Liquidity and Capital Structure
- Cash provided by operating activities was $27.0 million for the first nine months, down from $45.4 million in the prior-year period.
- Investing cash outflow was $1.2 million, including $10.9 million of capital expenditures, compared with $11.4 million of investing outflow in the prior year.
- Financing cash outflow was $10.1 million, including $9.3 million of dividends. No shares were repurchased during the period.
- Cash, cash equivalents and restricted cash totaled $49.1 million at January 27, 2018, supplemented by $23.9 million of marketable securities.
- Working capital was $142.9 million, compared with $127.1 million at April 29, 2017.
- No borrowings were outstanding under the $35.0 million U.S. revolving facility or the $20.0 million international facility. Approximately $10.7 million of letters of credit and $2.7 million of bank guarantees were outstanding under the facilities.
- The company was in compliance with its debt covenants. Total liabilities were $151.6 million and shareholders’ equity was $204.4 million at January 27, 2018.
Material Changes, Outlook and Risks
- The Tax Cuts and Jobs Act produced a provisional $3.7 million deferred tax asset remeasurement expense and a $0.6 million deemed repatriation tax expense in the quarter. Management expects an effective tax rate of approximately 30% for the remainder of fiscal 2018 and approximately 21% in fiscal 2019, subject to further SAB 118 adjustments.
- Management expects capital expenditures to be less than $20 million for fiscal 2018 and believes available working capital will meet foreseeable operating needs.
- Management intends to increase spending on new or enhanced customer solutions for the remainder of fiscal 2018.
- The company sold its non-digital division in September 2017 and recognized a $1.3 million gain, included in cost of goods sold in the International segment.
- A continuing warranty matter involving older out-of-home displays generated $4.0 million of expense during the first nine months. Accrued obligations related to the issue were $3.1 million at January 27, 2018, but additional discretionary costs or higher failure rates could materially increase the ultimate cost.
- Outstanding performance guarantees included $13.4 million of letters of credit and $8.3 million of surety bonds. Management reported no material probable loss from litigation.
- Key risks include seasonality, timing and cancellation of large projects, competitive pricing and margin pressure, customer concentration among two major digital billboard customers, raw-material shortages and price increases, foreign currency volatility, warranty claims, government-dependent transportation spending, and economic conditions in international and commercial markets.
- The company plans to adopt the new revenue recognition standard in the first quarter of fiscal 2019 using the modified retrospective method and does not currently expect a material impact on results, other than additional disclosures.
Investor Verification Items
- Verify the reporting period: the filing text states January 27, 2018 and fiscal 2018 third quarter, despite the requested 2016 Q3 metadata.
- Assess whether the lower backlog and nine-month order decline indicate weakening future revenue despite current sales growth.
- Monitor the older-display warranty exposure, including discretionary remediation costs and the remaining $3.1 million accrual.
- Reconcile future effective tax rates and deferred tax balances as the provisional Tax Act accounting is finalized.
- Evaluate cash conversion, particularly the $18.4 million year-over-year decline in operating cash flow and working-capital movements.
- Review segment profitability trends, especially Commercial and International margin pressure and the dependence of growth on Live Events and Transportation.