Daktronics, Inc. Form 10-Q Summary
Reporting period: The source filing covers the quarter and nine months ended February 1, 2020, corresponding to fiscal 2020, not 2018 Q3 as indicated in the request metadata. Fiscal 2020 is a 53-week year; the nine-month comparison includes 40 weeks versus 39 weeks in the prior-year period.
Business context
Daktronics designs and manufactures electronic scoreboards, programmable display systems, and large-screen video displays for commercial, live-event, school and recreation, transportation, and international markets. Results are affected by seasonality, weather, project timing, large uniquely configured orders, tariffs, and construction schedules.
Financial performance and liquidity
| Metric | Three months ended Feb. 1, 2020 | Three months ended Jan. 26, 2019 | Nine months ended Feb. 1, 2020 | Nine months ended Jan. 26, 2019 |
|---|---|---|---|---|
| Net sales | $127.7 million | $115.1 million | $482.8 million | $441.9 million |
| Gross profit | $24.5 million | $24.9 million | $110.1 million | $105.9 million |
| Gross margin | 19.2% | 21.6% | 22.8% | 24.0% |
| Operating income (loss) | $(9.2) million | $(7.5) million | $3.3 million | $5.5 million |
| Net income (loss) | $(12.7) million | $(3.3) million | $1.6 million | $9.9 million |
| Diluted EPS | $(0.28) | $(0.07) | $0.03 | $0.22 |
| Cash flow from operations | Not separately provided | Not separately provided | $6.2 million | $32.2 million |
Revenue mix: Nine-month sales increased across all segments. Live Events grew 18.3% to $159.2 million, International grew 8.6% to $74.4 million, Commercial grew 5.9% to $120.6 million, Transportation grew 5.2% to $53.3 million, and High School Park and Recreation grew 1.3% to $75.4 million.
Cash and liquidity: Cash and cash equivalents were $40.3 million at February 1, 2020, compared with $35.4 million at April 27, 2019. Working capital was $113.2 million versus $119.6 million at fiscal year-end. Marketable securities declined to $1.7 million from $26.3 million as investments were converted to fund working-capital needs.
Debt and credit availability: There were no advances under the company’s $35.0 million unsecured revolving credit facility, which was extended to November 15, 2022. Approximately $6.3 million of letters of credit was outstanding. The company disclosed that it violated a bank covenant during the third quarter and received a waiver.
Capital allocation: The company paid $6.8 million in dividends, repurchased $2.3 million of common stock, and made $13.6 million of capital expenditures during the nine months. Fiscal 2020 capital expenditures and a planned technology investment were projected at approximately $33 million.
Material changes versus the prior comparable period
- Third-quarter sales increased 10.9%, primarily from Live Events and International project timing, but operating and net losses widened.
- Nine-month sales increased 9.2%, while net income declined from $9.9 million to $1.6 million.
- Gross margin declined 240 basis points in the quarter and 120 basis points year to date. Management attributed the decline primarily to higher tariffs, additional project-delivery costs, product mix, and other project-related costs.
- Tariff-related expenses increased by approximately $0.6 million in the quarter and $3.3 million year to date. Additional project-delivery costs were approximately $1.1 million in the quarter and $4.2 million year to date, with the latter also including an existing litigation claim estimate.
- Operating cash flow fell by $26.0 million year to date, primarily because of changes in receivables, contract assets and liabilities, inventories, and other working-capital accounts associated with project timing and order volatility.
- Product order backlog was approximately $187 million at February 1, 2020, compared with $168 million a year earlier and $182 million at the end of the second fiscal quarter.
Outlook, risks, contingencies, and unusual items
- Management expects continued investment in new and enhanced customer solutions, software, controllers, and micro-LED technologies.
- Management identified potential near-term customer order delays and supply-chain disruptions related to COVID-19, which was emerging at the filing date.
- Key risks include project timing and cancellations, seasonality, competitive pricing, tariffs and trade actions, raw-material availability, single-source suppliers, foreign-currency volatility, warranty claims, and dependence on government spending in Transportation.
- Remaining performance obligations were $247.3 million at February 1, 2020; approximately $209.9 million was expected to be recognized within 12 months. Management cautioned that cancellations, deferrals, scope changes, and foreign-exchange movements may affect this amount.
- The company accrued $2.0 million for a probable and reasonably estimable patent litigation settlement. Total accrued warranty obligations were $25.7 million.
- Outstanding performance-related letters of credit and surety bonds were $14.8 million and $5.3 million, respectively. The company reported no known indemnification claims.
- The company adopted the new lease standard in fiscal 2020, recording an operating lease right-of-use asset of $11.1 million at adoption. The adoption did not affect earnings, equity, or cash flows.
- A $0.05-per-share dividend was declared on February 25, 2020, payable March 19, 2020.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the filing is for fiscal 2020, not 2018 Q3.
- Review the bank covenant violation, waiver terms, and compliance requirements under the amended credit agreement.
- Assess whether tariff, project-delivery, litigation, warranty, and supply-chain costs remain elevated.
- Evaluate the conversion, timing, cancellation risk, and profitability of the $187 million product backlog and $247.3 million of remaining performance obligations.
- Monitor working-capital requirements and operating cash flow, which weakened materially year over year.
- Assess the potential effect of COVID-19 on customer orders, installations, suppliers, and international operations.
- Review the company’s planned approximately $33 million fiscal-year investment program against cash generation and available credit.