Daktronics, Inc. Form 10-Q Summary
Business context and reporting period
Daktronics designs, manufactures and sells electronic display systems worldwide through five segments: Commercial, Live Events, High School Park and Recreation, Transportation, and International. The filing covers the three and six months ended October 28, 2017, the second quarter and first six months of fiscal 2018. The request metadata identifies “2016 Q2,” but the filing text clearly reports fiscal 2018 results and compares them with the periods ended October 29, 2016.
Key financial metrics
| Metric | Three months ended Oct. 28, 2017 | Prior comparable period | Six months ended Oct. 28, 2017 | Prior comparable period |
|---|---|---|---|---|
| Net sales | $169.3 million | $170.0 million | $342.0 million | $327.1 million |
| Gross profit | $42.6 million | $44.3 million | $87.3 million | $83.4 million |
| Gross margin | 25.2% | 26.1% | 25.5% | 25.5% |
| Operating income | $9.4 million | $12.7 million | $21.2 million | $20.6 million |
| Net income | $7.1 million | $9.0 million | $15.6 million | $14.6 million |
| Diluted EPS | $0.16 | $0.20 | $0.35 | $0.33 |
Second-quarter revenue was essentially flat year over year, while six-month revenue increased 4.6%. Six-month operating income rose 2.5% and net income rose 6.9%, helped in part by a lower effective tax rate of 27.5% versus 30.5%. Product design and development expense increased 27.0% for the six-month period as management accelerated investment in new and enhanced customer solutions.
Segment and operating changes
- For the six-month period, Live Events revenue increased 26.1% to $146.3 million, Transportation increased 16.5% to $35.4 million, and High School Park and Recreation increased 3.2% to $58.1 million.
- Commercial revenue declined 11.7% to $67.2 million, primarily from lower on-premise volume and timing of large spectacular projects.
- International revenue declined 27.5% to $35.0 million, reflecting lower order volume and fixed-cost absorption pressure.
- Second-quarter gross margin declined to 25.2%, primarily because of lower sales volume and additional warranty charges. Six-month gross margin remained 25.5%.
- Orders increased 1.1% for the six months to $295.3 million. Backlog was $155 million at October 28, 2017, versus $142 million a year earlier and $184 million at the end of the prior quarter.
Cash flow, liquidity and capital structure
- Six-month operating cash flow was $9.3 million, down from $15.0 million, primarily because accounts receivable increased $29.9 million as sales grew and working capital changes consumed cash.
- Investing activities provided $4.5 million, including $10.8 million of marketable-security maturities or sales, partially offset by $7.7 million of capital expenditures.
- Financing activities used $7.0 million, including $6.2 million of dividends and $1.0 million of principal payments. No shares were repurchased during the period.
- Cash, cash equivalents and restricted cash totaled $39.7 million at October 28, 2017, compared with $32.8 million at April 29, 2017. Marketable securities totaled $21.8 million.
- Working capital was $144.2 million, compared with $127.1 million at fiscal year-end.
- The company had no advances under its $35.0 million U.S. revolving facility or its $20.0 million international facility. It was in compliance with all loan covenants. Letters of credit and bank guarantees were outstanding, but the filing reports no funded revolver balance.
- Debt and other long-term obligations were modest relative to liquidity; the filing reports fixed-rate long- and short-term debt maturities totaling approximately $1.8 million through fiscal 2020, excluding other obligations.
Guidance, outlook, risks and unusual items
- Management projected fiscal 2018 capital expenditures of less than $25 million for manufacturing equipment, capacity, quality and reliability, and information infrastructure.
- Management expects continued product-development investment during fiscal 2018 and believes available working capital will satisfy foreseeable operating requirements.
- Results remain sensitive to large-project timing, sports-market seasonality, competitive pricing, customer delivery schedules, and fluctuating order bookings. Backlog is not a GAAP measure and may be canceled or delivered over extended periods.
- A prior-period warranty issue involving display modules generated $3.4 million of warranty expense in the first six months of fiscal 2018. Accrued obligations related to the issue were $4.4 million at October 28, 2017, but management warned that ultimate costs could be materially higher due to discretionary customer-support actions or higher-than-expected failure rates.
- The company sold its non-digital division in September 2017 and recorded a $1.3 million gain. This gain was included in cost of goods sold within the International segment.
- Outstanding performance guarantees included $8.8 million of letters of credit and $10.3 million of surety bonds. The company also had $6.5 million of purchase commitments and $9.1 million of future operating-lease payments.
- Key risks include material and component availability and pricing, foreign-exchange movements, international economic conditions, competition, dependence on two major digital-billboard customers, warranty claims, and execution of large construction-type projects. A 10% change in foreign-exchange rates was estimated to affect pretax income by approximately $1.0 million.
- The company adopted cash-flow presentation standards for restricted cash and certain cash payments during the quarter without a material financial-statement impact. It expects to adopt the new revenue-recognition standard in the first quarter of fiscal 2019 and does not currently anticipate a material change in revenue timing or amount.
Investor verification points
- Verify whether the metadata period should be fiscal 2018 second quarter, as stated by the filing, rather than 2016 second quarter.
- Monitor accounts-receivable growth, operating cash conversion, inventory levels and billings on construction-type contracts.
- Assess whether the elevated warranty costs and remaining $4.4 million issue-specific accrual adequately cover potential future claims.
- Evaluate the sustainability of the Live Events strength against weakness in Commercial and International segments and the decline in backlog from the prior quarter.
- Confirm execution of the less-than-$25 million capital-expenditure plan and the effect of increased product-development spending on future margins.
- Review liquidity and covenant headroom, including outstanding letters of credit, surety bonds, performance guarantees and contingent consideration related to the ADFLOW acquisition.