Daktronics, Inc. Form 10-Q Summary
Reporting period: Three months ended July 27, 2013, representing the first quarter of fiscal 2014. The filing compares results with the three months ended July 28, 2012. The provided request metadata states “2012 Q1,” but the filing itself clearly covers July 2013.
Business Context and Financial Position
Daktronics designs, manufactures and sells electronic display systems through five reportable segments: Commercial, Live Events, Schools and Theatres, Transportation, and International. Results are affected by seasonality, large project timing, competitive pricing, customer discretion and project mix.
| Selected balance-sheet items | July 27, 2013 | April 27, 2013 |
|---|---|---|
| Cash and cash equivalents | $22.1 million | $40.6 million |
| Marketable securities | $24.6 million | $24.1 million |
| Total current assets | $252.5 million | $240.1 million |
| Total assets | $336.9 million | $319.4 million |
| Total liabilities | $146.2 million | $131.2 million |
| Shareholders’ equity | $190.7 million | $188.2 million |
| Working capital | $125.8 million | $125.5 million |
Revenue, Profitability, Cash Flow and Liquidity
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $138.7 million | $132.9 million | +4.4% |
| Gross profit | $35.5 million | $36.4 million | -2.4% |
| Gross margin | 25.6% | 27.4% | -1.8 percentage points |
| Operating income | $8.6 million | $10.7 million | -19.7% |
| Operating margin | 6.2% | 8.1% | -1.9 percentage points |
| Net income | $5.7 million | $6.7 million | -14.4% |
| Net margin | 4.1% | 5.0% | -0.9 percentage points |
| Diluted EPS | $0.13 | $0.16 | Down |
| Cash dividend declared per share | $0.120 | $0.115 | Higher |
- Operating cash flow was an outflow of $4.6 million versus inflow of $16.5 million in the prior-year quarter.
- Investing cash flow was an outflow of $6.0 million, including $4.0 million of capital expenditures and $1.3 million for the OPEN acquisition.
- Financing cash flow was an outflow of $8.2 million, including $5.1 million of dividends and $3.4 million of principal payments on long-term obligations.
- Cash and cash equivalents decreased by $18.5 million during the quarter to $22.1 million. Accounts receivable increased to $86.9 million and inventories increased to $58.9 million, reflecting seasonality, project timing and preparation for pending orders.
- The company had no advances under either of its $35 million credit facilities and was in compliance with applicable covenants. Interest-bearing debt to EBITDA was 0.02-to-1.
Material Changes Versus the Prior Comparable Period
- Revenue increased $5.8 million, led by Live Events and International, partly offset by declines in Commercial and Transportation.
- Live Events revenue increased 23.7% to $55.1 million, supported by university, arena and professional sports stadium projects.
- International revenue increased 24.2% to $19.0 million, including $1.1 million contributed by OPEN.
- Commercial revenue declined 12.1% to $33.7 million, primarily because of lower billboard and national-account replacement activity.
- Transportation revenue declined 21.4% to $13.0 million because the prior-year period included approximately $6 million from a significant transit project.
- Gross margin declined because of lower-margin large custom Live Events projects, additional warranty costs and lower-margin Transportation project work. The decline was partly offset by improved margins in Commercial, Schools and Theatres, and International.
- Income tax expense decreased to $2.7 million from $4.2 million, and the effective tax rate declined to 32.2% from 38.6%, primarily because of tax true-ups and changes in the expected research and development tax credit.
- Orders declined 8.2% to $159.3 million, largely because the prior-year period included a $20 million Transportation order. Backlog increased to $167 million from $164 million year over year and $141 million at fiscal year-end.
Outlook, Commentary, Risks and Unusual Items
- Management expects Commercial sales to be generally flat in the near term because of lower expected billboard orders and national-account replacements.
- Management expects long-term Live Events growth but cautions that competitive bidding, discretionary venue upgrades and project timing make fiscal 2014 forecasting difficult.
- Schools and Theatres has potential for larger video-system projects, but management does not expect orders necessarily to increase over fiscal 2013.
- Transportation is not expected to have a project comparable to the prior-year major airport project; management expects a return toward more normal growth.
- Management expects International sales growth, supported by its project pipeline, established sales networks, third-party advertising opportunities and the OPEN acquisition.
- Gross profit levels remain difficult to project because of competitive pressure, product-price declines, project mix and warranty costs. Management is pursuing supplier quality, manufacturing process and product-reliability initiatives.
- Capital expenditures are expected to be less than $16 million for fiscal 2014. The company believes available working capital and financing sources will be adequate for foreseeable needs.
- On May 8, 2013, the company acquired all of OPEN, a Belgian manufacturer serving the third-party advertising market. The preliminary allocation included $1.3 million of goodwill and $1.8 million of identifiable intangible assets; the purchase price allocation remained subject to completion.
- Outstanding performance guarantees included $5.0 million of letters of credit and $18.0 million of surety bonds. The company reported no material probable loss from litigation.
- Key risks include large-project timing, seasonality, pricing and competitive pressure, discretionary customer spending, government spending in Transportation, foreign currency exposure, warranty obligations, parts shortages and working-capital volatility.
- The board declared a $0.09-per-share dividend on August 22, 2013, payable September 20, 2013. Future dividends remain subject to board discretion.
Important Facts for Investors to Verify
- Whether the significant increase in receivables and inventories converts to operating cash flow in subsequent quarters.
- Progress on restoring gross margins after the first-quarter decline and the effect of large custom projects and warranty costs.
- Conversion of the $167 million backlog into revenue, including potential cancellations or schedule changes.
- Commercial and Transportation order trends, particularly billboard, national-account, airport and transit projects.
- Integration, profitability and final purchase-price allocation for OPEN.
- Renewal or replacement of the two credit facilities, both of which were scheduled to expire on November 15, 2013.
- Exposure under warranties, performance guarantees, foreign-currency forwards and customer equipment repurchase commitments.