Daktronics, Inc. 10-K Summary
Period clarification: The supplied filing is Daktronics’ Form 10-K for the 52-week fiscal year ended April 28, 2018, not fiscal 2016 Q4. It includes unaudited quarterly data for fiscal 2018 and fiscal 2017, including the quarter ended April 28, 2018.
Business Context and Reporting Period
Daktronics designs, manufactures, installs, and services electronic scoreboards, video displays, message systems, transportation signs, advertising displays, control systems, and related software. Its five reporting segments are Commercial, Live Events, High School Park and Recreation, Transportation, and International.
Approximately 60.8% of fiscal 2018 revenue was recognized using percentage-of-completion accounting for construction-type contracts. The business is seasonal and results can vary materially based on the timing of large projects, sports and construction activity, customer delivery schedules, and competitive pricing.
Key Financial Metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $610.5 million | $586.5 million | +4.1% |
| Gross profit | $145.7 million | $140.4 million | +3.7% |
| Gross margin | 23.9% | 23.9% | Flat |
| Operating income | $12.5 million | $15.4 million | -19.2% |
| Operating margin | 2.0% | 2.6% | Down 0.6 points |
| Net income | $5.6 million | $10.3 million | -46.2% |
| Diluted EPS | $0.12 | $0.23 | Down $0.11 |
| Operating cash flow | $30.4 million | $39.4 million | -23.0% |
| Capital expenditures | $18.1 million | $8.5 million | Increase of $9.6 million |
Fiscal 2018 quarterly results were uneven. Fourth-quarter sales were $138.2 million, gross profit was $29.9 million, and net loss was $3.8 million, or $(0.09) diluted EPS. The fourth quarter included $2.4 million of additional warranty charges and a $0.5 million tax benefit related to the Tax Cuts and Jobs Act.
Segment Performance
| Segment | FY2018 Sales | Year-over-Year Change | FY2018 Contribution Margin |
|---|---|---|---|
| Commercial | $134.5 million | -9.1% | $8.0 million, 5.9% |
| Live Events | $236.3 million | +10.4% | $35.4 million, 15.0% |
| High School Park and Recreation | $87.6 million | +5.8% | $18.3 million, 20.9% |
| Transportation | $59.6 million | +13.6% | $17.0 million, 28.6% |
| International | $92.5 million | +3.6% | $4.1 million, 4.5% |
Liquidity, Capital Structure, and Other Metrics
- Cash and cash equivalents were $29.7 million; marketable securities were $34.5 million.
- Working capital was $132.8 million, compared with $127.1 million at the prior year-end.
- Total assets were $358.8 million and shareholders’ equity was $197.6 million.
- The company had no advances outstanding under its $35.0 million U.S. revolving credit facility or its $20.0 million international facility. Approximately $6.5 million of letters of credit was outstanding under the U.S. facility and $1.2 million of bank guarantees under the international facility.
- The credit facilities mature November 15, 2019 and contain fixed-charge coverage and funded-debt-to-EBITDA covenants. The company reported compliance with all applicable covenants.
- Cash used for dividends was $12.4 million, or $0.28 per share. The Board declared another $0.07 quarterly dividend on May 31, 2018.
- The company made no share repurchases in fiscal 2018 and had $38.2 million of remaining authorization under its $40.0 million repurchase program.
- Backlog declined to $170.8 million from $203.2 million. Management expected fulfillment within 24 months but cautioned that backlog is not necessarily indicative of future revenue or profitability.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because of higher Live Events, High School Park and Recreation, and Transportation sales; Commercial sales declined.
- Orders decreased 4.9% to $583.5 million. Commercial, Live Events, and Transportation orders declined, partly offset by stronger International orders.
- Gross margin remained 23.9%, but operating income and net income declined because of higher product design and development spending, increased selling and administrative costs, higher warranty expense, and a substantially higher tax rate.
- Product design and development expense increased 22.2% to $35.5 million as the company accelerated investments in video technology, software, quality, reliability, and cost reduction.
- Warranty expense related to a mechanical device failure in older out-of-home displays increased to $4.5 million from $1.8 million. Total accrued warranty obligations increased to $30.0 million from $27.9 million.
- The company sold its non-digital division assets and recorded a $1.3 million gain. Fiscal 2017 included an $0.8 million intangible asset impairment that did not recur.
- The Tax Cuts and Jobs Act produced a provisional $3.8 million increase in fiscal 2018 tax expense, including deferred-tax remeasurement and deemed-repatriation effects. The reported effective tax rate rose to approximately 55.2% from 33.7%.
- Operating cash flow declined by $9.0 million, while capital expenditures more than doubled to $18.1 million, resulting in a $3.1 million net decrease in cash, cash equivalents, and restricted cash.
Guidance, Outlook, Risks, and Unusual Items
Management expected fiscal 2019 capital expenditures to be less than $20 million and anticipated an effective tax rate of approximately 21%, subject to the finalization of Tax Cuts and Jobs Act accounting. Management also expected continued product design and development investment, slightly higher selling expenses, and higher general and administrative expenses.
Management described the long-term outlook as favorable across the business, supported by adoption of digital displays, replacement cycles, sports venue upgrades, transportation infrastructure spending, out-of-home advertising, and international market penetration. However, fiscal 2019 orders and sales were considered difficult to forecast because of discretionary customer spending, large-project timing, macroeconomic conditions, regulatory factors, funding levels, and competition.
- Fixed-price construction contracts expose the company to losses if material, labor, subcontractor, logistics, or technical costs exceed estimates.
- Single-source and limited-source suppliers, component shortages, tariffs, freight constraints, and global supply-chain disruptions could affect production and margins.
- Warranty obligations remain a significant uncertainty, including potentially discretionary remediation beyond contractual requirements.
- Two major customers represented more than 50% of Commercial digital billboard sales, creating concentration within that niche.
- Foreign currency exposure affected 18% of fiscal 2018 sales; management estimated that a 10% change in all foreign exchange rates would affect pretax income by approximately $1.2 million.
- Outstanding performance guarantees included $7.7 million of letters of credit and $16.5 million of surety bonds.
- A customer was withholding $2.2 million of payment over alleged specification issues; management believed collection was probable. The company also recorded a $1.9 million liability and corresponding receivable related to subcontractor-caused property damage.
- The company identified cybersecurity, privacy, anti-corruption, trade compliance, regulatory, litigation, tax, and employee-retention risks as potentially material.
Most Important Facts for an Investor to Verify
- Confirm that the intended reporting period is fiscal 2018 rather than fiscal 2016 Q4.
- Assess whether the lower backlog and orders signal weaker near-term revenue despite fiscal 2018 sales growth.
- Monitor warranty accrual adequacy and additional discretionary costs related to older out-of-home displays.
- Evaluate whether increased research and development and capital spending can improve product competitiveness and margins.
- Review the final accounting impact of the Tax Cuts and Jobs Act, including deferred-tax assets, deemed repatriation, and GILTI treatment.
- Verify compliance with credit-facility covenants, dividend restrictions, letters of credit, surety obligations, and other contractual commitments.
- Track cash conversion, inventory growth, project billings, and working-capital requirements given the company’s large-project and percentage-of-completion accounting.