Daktronics, Inc. Form 10-Q Summary
Reporting period: Three months ended July 28, 2012, the first quarter of fiscal 2013. The filing compares results with the three months ended July 30, 2011. The request metadata identifies “2011 Q1,” but the filing itself is for fiscal 2013 Q1.
Business Context
Daktronics designs, manufactures and sells electronic display systems worldwide through five reportable segments: Commercial, Live Events, Schools and Theatres, Transportation, and International. Results are affected by large project timing, sports-market seasonality, customer delivery schedules, competitive pricing and construction-type contracts.
Financial Performance and Liquidity
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $132.9 million | $118.7 million | 12.0% increase |
| Gross profit | $36.4 million | $29.5 million | 23.3% increase |
| Gross margin | 27.4% | 24.9% | Up 250 basis points |
| Operating income | $10.7 million | $5.1 million | 109.3% increase |
| Operating margin | 8.1% | 4.3% | Improved |
| Net income | $6.7 million | $3.4 million | 98.3% increase |
| Diluted EPS | $0.16 | $0.08 | Doubled |
| Operating cash flow | $16.5 million | $11.6 million | 41.8% increase |
Net margin was approximately 5.0%, compared with 2.8% in the prior-year quarter. Income before taxes was $10.9 million, and income tax expense was $4.2 million. The effective tax rate increased to 38.6% from 36.8%.
Cash and cash equivalents were $38.8 million at July 28, 2012, compared with $29.4 million at April 28, 2012. Marketable securities totaled $25.1 million, providing approximately $63.9 million of cash and marketable securities, excluding restricted cash. Working capital increased to $126.1 million from $119.8 million.
Operating cash flow was supported by higher earnings, customer deposits and other operating-liability changes, partly offset by a $9.5 million cash impact from increased accounts receivable. Days sales outstanding increased from 54 to 56 days.
Investing activities used $1.2 million, including $1.4 million of capital expenditures. Management expects approximately $14 million of capital expenditures for fiscal 2013. Financing activities used $5.8 million, primarily for $4.8 million of dividends and repayment of $1.0 million of notes payable.
Total debt was approximately $0.5 million, consisting primarily of China-related borrowings. The company had no advances under its $35.0 million U.S. line of credit and remained in compliance with its covenants. The minimum fixed-charge coverage ratio was 54-to-1, and interest-bearing debt to EBITDA was 0.04-to-1.
Material Changes Versus the Prior Comparable Period
- Sales increased 12.0%, led by Transportation, Commercial and Live Events.
- Transportation sales increased 44.3%, including a $1.8 million favorable revision to estimated costs on a large procurement contract. The revision reflected lower expected costs related to a component issue and product design change.
- Live Events sales increased 15.6%, with higher margins on large contracts contributing to improved profitability.
- Commercial sales increased 17.3%, while Schools and Theatres sales declined 1.7% because of delivery timing. International sales declined 12.6% due to lower beginning backlog.
- Orders increased 23.8% to $173.5 million. Transportation orders more than doubled due primarily to an airport project exceeding $20 million.
- Backlog increased to $164 million from $154 million one year earlier and $123 million at fiscal year-end.
- Gross margin improved primarily from better margins on large Live Events and International contracts and lower manufacturing conversion costs, partly offset by higher warranty costs.
- Product design and development expense increased to $6.0 million from $5.7 million; general and administrative expense was essentially flat.
Guidance, Outlook, Risks and Unusual Items
- Management expects Commercial orders for fiscal 2013 to be similar to fiscal 2012, but noted substantial quarter-to-quarter volatility and dependence on two large outdoor-advertising customers.
- Management expects Transportation sales to increase significantly in fiscal 2013 as the large airport project is installed during the second and third quarters.
- Management was more optimistic about fiscal 2013 Schools and Theatres orders and expected International sales to increase based on current orders and pipeline opportunities.
- Live Events forecasting remains difficult because of discretionary customer upgrades, competition, project timing and the seasonal professional baseball selling cycle.
- Management expects product-development spending to remain above its long-term target of approximately 4% of sales while developing higher-resolution, lower-cost and more energy-efficient displays and control systems.
- The company identified potential additional doubtful-account expense of between $0 and $2.5 million related to a customer whose payment depends on funding from a local government entity that has no legal obligation to fund the customer.
- Warranty liabilities totaled $22.6 million at quarter-end. Performance guarantees included $4.2 million of letters of credit and $25.9 million of bank guarantees and surety bonds.
- Outstanding repurchase obligations under fixed-price equipment arrangements were $1.3 million, with a recorded guarantee liability of $0.2 million.
- Risks include economic weakness, competitive pricing pressure, large-project execution and cost estimates, order and backlog volatility, government spending, foreign currency movements, customer credit deterioration, warranty claims and potential goodwill impairment.
- The company’s credit facilities were scheduled to expire on November 15, 2012. Management stated that available working capital and financing sources should be adequate for foreseeable operating needs.
Most Important Facts for Investors to Verify
- Whether the large airport order and other backlog convert to revenue and cash flow on the expected schedule and at expected margins.
- The collectability of the customer receivable potentially requiring up to $2.5 million of additional allowance.
- Whether the favorable $1.8 million Transportation contract estimate revision is sustainable or primarily a one-time benefit.
- Trends in warranty costs, backlog quality, project execution and gross margins on large contracts.
- Renewal or replacement terms for the credit facilities expiring November 15, 2012.
- Cash conversion, accounts-receivable days, customer deposits and working-capital requirements as project activity changes.
- Progress and returns from elevated product-development spending and the expected $14 million fiscal-year capital expenditure program.