Daktronics, Inc. Form 10-Q Summary
Reporting period: Three months ended August 1, 2015, representing the first quarter of fiscal 2016. The comparable period ended August 2, 2014 included 14 weeks versus 13 weeks in the current period. The request metadata identifies “2014 Q1,” but the filing is for the 2015 quarter and compares against fiscal 2015 first-quarter results.
Business Context and Reporting Period
Daktronics designs, manufactures, and sells electronic display systems worldwide through five reportable segments: Commercial, Live Events, High School Park and Recreation, Transportation, and International. Results are affected by seasonality, large project timing, competitive pricing, customer delivery schedules, and project mix.
Product backlog was $205.5 million at August 1, 2015, compared with $165.1 million at August 2, 2014 and $190.5 million at the end of fiscal 2015. Approximately $28 million of Live Events backlog was expected to be realized after fiscal 2016 because of new stadium build schedules.
Key Financial Metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $150.2 million | $166.6 million | (9.8%) |
| Gross profit | $35.5 million | $43.4 million | (18.2%) |
| Gross margin | 23.6% | 26.0% | Down 240 bps |
| Operating income | $6.1 million | $13.6 million | (55.2%) |
| Operating margin | 4.1% | 8.2% | Down approximately 410 bps |
| Net income | $3.8 million | $8.7 million | (56.8%) |
| Diluted EPS | $0.09 | $0.20 | Down $0.11 |
| Operating cash flow | $(10.1) million | $24.5 million | Decrease of $34.6 million |
Net margin was approximately 2.5%, compared with approximately 5.2% in the prior-year quarter. The effective tax rate was 35.9%, compared with 36.1%.
Segment Sales
| Segment | Q1 FY2016 Sales | Year-over-year change |
|---|---|---|
| Commercial | $43.2 million | 8.6% increase |
| Live Events | $47.9 million | 36.7% decrease |
| High School Park and Recreation | $19.0 million | 5.7% decrease |
| Transportation | $13.8 million | 3.4% increase |
| International | $26.4 million | 48.6% increase |
Liquidity, Cash Flow, Debt, and Capital Resources
- Cash and cash equivalents were $35.3 million at August 1, 2015, down from $57.3 million at May 2, 2015. Marketable securities totaled $25.3 million.
- Working capital was $145.2 million, compared with $148.1 million at fiscal year-end.
- Operating cash flow was negative primarily because inventory consumed $7.6 million and changes in construction contracts, customer deposits, and accounts payable consumed $11.6 million.
- Investing cash outflow was $7.8 million, including $7.2 million of capital expenditures and $0.6 million for acquisitions or investments.
- Financing cash outflow was $3.8 million, including $4.4 million of dividends paid.
- The company had no advances outstanding under its credit facilities. It maintained a $35.0 million U.S. line of credit and a separate $40.0 million international facility, subject to a combined borrowing limit of $40.0 million.
- Letters of credit and bank guarantees totaled approximately $13.3 million and $2.4 million, respectively, under the credit facilities. Surety bonds outstanding were $50.9 million against a $150.0 million bonding line.
- The company was in compliance with applicable debt covenants. Management stated that available working capital and financing sources should be adequate for foreseeable operating requirements.
- Fiscal 2016 capital expenditures were projected at approximately $25 million.
Material Changes Versus the Prior Comparable Period
- Sales declined despite higher Commercial and International revenue, primarily because Live Events revenue fell by $27.8 million due to project timing and the completion of spring baseball projects before the current quarter.
- Orders increased 2.7% to $165.1 million. Live Events orders benefited from a large multi-million-dollar stadium project and other professional, minor league, and college projects.
- Gross margin contracted because of business mix, higher warranty charges, increased production labor costs, lower margins on large custom contracts, and the absence of a $1.3 million gain from the prior-year sale of the theatre rigging business.
- Operating expenses declined modestly in aggregate, but general and administrative expense increased 2.9% and product design and development expense increased 2.4%.
- Other expense increased primarily because of unrealized foreign-currency losses involving the euro, Australian dollar, and Canadian dollar.
- Operating cash flow deteriorated from a $24.5 million inflow to a $10.1 million outflow, reflecting working-capital timing, increased inventory, and reduced earnings.
- The acquisition of Data Display, a European transportation-display company acquired in August 2014, contributed to International and Transportation operations. The final purchase-price allocation increased goodwill by $0.4 million.
Guidance, Outlook, Commentary, and Risks
- Management expects continued long-term growth from adoption of large-format electronic displays, replacement cycles, digital billboards, sports and entertainment venues, transportation infrastructure, and international expansion.
- Management cautioned that pricing and margins face ongoing pressure from competition and that large custom projects generally carry lower and more volatile margins.
- Results may fluctuate materially because of seasonality, large project timing, customer delivery schedules, construction schedules, and the timing of orders and deposits.
- Commercial growth opportunities include standard displays, national accounts, spectacular projects, architectural lighting, and digital billboards; digital billboard demand remains dependent on regulatory conditions and a concentrated group of large customers.
- International operations are exposed to foreign exchange movements, economic conditions, political and regulatory factors, and manufacturing utilization. Management estimated that a 10% change in all foreign exchange rates could affect annual pretax income by approximately $1.8 million.
- Outstanding warranty obligations were $27.5 million at August 1, 2015. Performance guarantees and surety bonds could expose the company to losses if it failed to complete covered projects.
- The company had $0.5 million accrued for probable and estimable legal contingencies and stated that unresolved legal matters were not expected to materially affect financial position or liquidity.
- Management expected to continue paying dividends for the foreseeable future, subject to Board approval. A $0.10 per-share dividend was declared on September 3, 2015, payable September 25, 2015.
- The filing identifies forward-looking risks relating to competition, financing, margins, parts availability, seasonality, new products, acquisitions and dispositions, foreign currency, customer concentration, and economic conditions.
Investor Verification Items
- Verify whether the sharp Live Events sales decline reflects timing alone and whether the reported backlog converts to revenue and cash as scheduled.
- Monitor gross-margin recovery, particularly warranty costs, custom-project pricing, production utilization, and the mix of lower-margin large contracts.
- Assess the sustainability of dividends and capital expenditures in light of negative quarterly operating cash flow.
- Review inventory growth, construction-contract balances, customer deposits, and accounts receivable for working-capital or collection risk.
- Confirm available borrowing capacity, covenant compliance, and the relationship between letters of credit, surety bonds, and potential performance obligations.
- Evaluate foreign-exchange exposure and the effect of currency losses on International results and consolidated earnings.
- Review the fiscal-week difference and the prior-year theatre-rigging sale gain when comparing quarterly performance.
- Consider the concentration of Commercial sales among several large digital-billboard customers and the impact of competitive pricing on future margins.