Daktronics, Inc. Fiscal 2020 Form 10-K Summary
Reporting period: The supplied filing is the annual report for the fiscal year ended May 2, 2020, which contained 53 weeks. The request metadata references “2018 Q4,” but the filing provided is not a 2018 quarterly filing. Comparative fiscal years ended April 27, 2019 and April 28, 2018 contained 52 weeks.
Business Context
Daktronics designs, manufactures, installs and services electronic scoreboards, programmable displays, large-format video systems, control systems and related software. The company operates through Commercial, Live Events, High School Park and Recreation, Transportation, and International segments. It employed approximately 2,671 people globally during the year, including 2,395 full-time and 276 part-time or temporary employees at year-end.
Products are used in sports venues, commercial and out-of-home advertising, schools, transportation systems, retail, hospitality and other applications. Approximately 83% of fiscal 2020 sales were generated in the United States and 17% in foreign currencies.
Financial Performance and Position
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $608.9 million | $569.7 million | +6.9% |
| Gross profit | $138.7 million | $130.3 million | +6.5% |
| Gross margin | 22.8% | 22.9% | Down 0.1 point |
| Operating income (loss) | $(0.2) million | $(4.7) million | Improved |
| Net income (loss) | $0.5 million | $(1.0) million | Improved |
| Diluted EPS | $0.01 | $(0.02) | Improved |
| Operating cash flow | $10.8 million | $29.5 million | Down 63.4% |
Fiscal 2020 sales increased in Commercial, Live Events, High School Park and Recreation, and Transportation, while International sales declined modestly. Live Events was the largest segment at $196.6 million of sales. Contribution margin increased to $72.8 million, or 12.0% of sales, from $65.6 million, or 11.5%.
Fiscal 2020 gross margin was pressured by approximately $4.9 million of tariff costs, including an approximately $3.0 million year-over-year increase, and approximately $4.3 million of project-delivery costs and an existing litigation claim estimate. These pressures were substantially offset by higher volume over relatively fixed infrastructure costs and lower warranty expense.
At May 2, 2020, cash and cash equivalents were $40.4 million, restricted cash was $0.01 million and marketable securities were $1.2 million. Working capital was $106.0 million, compared with $119.6 million at April 27, 2019. Total assets were $372.7 million and shareholders’ equity was $177.0 million.
The company had $15.0 million outstanding under a $35.0 million revolving credit facility, which matures November 15, 2022. The facility bears interest at LIBOR plus 145 to 195 basis points and was at an effective rate of 2.0% at year-end. Daktronics reported compliance with all applicable covenants.
Material Changes Versus the Prior Comparable Period
- Sales increased $39.2 million, or 6.9%, partly benefiting from the extra fiscal week and favorable timing of large projects.
- Orders increased 2.0% to $620.8 million; the weekly order run rate was approximately unchanged because new product-related orders offset weaker account-based activity during the COVID-19 period.
- Backlog increased to $268 million from $257 million, with approximately $223.0 million of remaining performance obligations expected to be recognized within 12 months. Backlog timing may be affected by project delays or cancellations.
- Operating loss narrowed to $0.2 million from $4.7 million, and net income improved from a $1.0 million loss to $0.5 million of income. The fiscal 2020 tax benefit was driven by permanent tax credits and valuation allowances against a very small pretax loss, making the effective tax rate not meaningful.
- Operating cash flow fell $18.7 million, primarily because of unfavorable changes in operating assets and liabilities, including accounts receivable, inventory and contract assets.
- Capital expenditures increased slightly to $18.1 million from $17.3 million. Purchases of and loans to equity investments increased to $11.7 million from $1.3 million.
- The company borrowed $15.0 million, paid $9.0 million of dividends versus $12.6 million in fiscal 2019, and repurchased $5.6 million of stock. Dividends and share repurchases were suspended on April 1, 2020.
- Warranty expense related to the previously disclosed out-of-home display issue was zero in fiscal 2020, compared with $2.4 million in fiscal 2019. Total accrued warranty obligations increased to $25.6 million from $24.5 million.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative fiscal 2021 revenue or earnings guidance. It stated that the COVID-19 pandemic makes the timing and level of orders, sales, margins and cash flows difficult to predict. Near-term demand was expected to weaken across Commercial, Live Events, High School Park and Recreation, Transportation and International markets as customers delayed discretionary or government-funded projects.
During the fourth quarter, facility closures, reduced manufacturing and field-service capacity, installation restrictions, supply-chain uncertainty and customer project delays affected operations. Management expected the pandemic to adversely affect fiscal 2021 revenue and results, but could not reasonably estimate the magnitude or duration.
Management’s liquidity actions included drawing $15 million under the credit facility, reducing capital spending, lowering executive and board compensation, furloughing and reducing staff, eliminating the 401(k) match effective April 1, suspending dividends and suspending share repurchases. Subsequent to year-end, 57 employees accepted a voluntary retirement or exit program with estimated costs of $0.9 million, and 98 employees were terminated in a reduction in force with $1.4 million of severance; these costs were recorded in fiscal 2021.
Other significant exposures include tariffs and component price volatility, single-source suppliers, fixed-price contracts, customer credit risk, warranty claims, foreign currency fluctuations, surety and performance guarantees, litigation, and covenant or refinancing risk. Outstanding letters of credit and bank guarantees were $13.1 million, and surety bonds were $18.2 million. The company had a contingent obligation to invest up to $5.0 million more in X Display Company if specified conditions were met.
The company accrued $2.1 million for a probable and reasonably estimable patent litigation claim. Management stated that other unresolved legal matters were not expected to have a material effect. No goodwill impairment was recorded, including after an interim COVID-19-related review of the International business unit.
Auditor Deloitte & Touche LLP issued an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective as of May 2, 2020.
Most Important Facts to Verify
- Confirm that the intended period is fiscal 2020 rather than 2018 Q4, because the supplied document is a fiscal-year 2020 Form 10-K.
- Monitor COVID-19 effects on order bookings, backlog conversion, project delays, customer collections and fiscal 2021 margins.
- Assess liquidity after the $15.0 million borrowing, the decline in operating cash flow, suspended dividends and suspended repurchases.
- Review credit-facility covenants, the November 2022 maturity, LIBOR transition exposure and availability of unused borrowing capacity.
- Evaluate the sustainability of the near-breakeven operating result excluding favorable tax effects and the impact of tariffs, litigation and project-delivery costs.
- Track the $25.6 million warranty accrual, $2.1 million patent claim accrual, performance guarantees and other contractual commitments.
- Verify backlog quality and timing because management states that backlog is not necessarily indicative of future revenue or profitability and may be delayed or canceled.