Daktronics, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended October 31, 2020, representing fiscal 2021 second quarter. The request metadata identifies “2019 Q2,” but the supplied filing is for October 31, 2020 and compares with November 2, 2019. Amounts are in thousands unless otherwise stated.
Business Context and Reporting Period
Daktronics designs, manufactures, and sells electronic scoreboards, programmable display systems, and large-screen video displays for commercial, live-event, high-school and recreation, transportation, and international markets. The six-month current period comprised 26 weeks versus 27 weeks in the prior comparable period. Results were materially affected by the COVID-19 pandemic, including reduced customer spending, event restrictions, furloughs, workforce reductions, and cost-control measures.
Key Financial Metrics
| Metric | Three Months Ended Oct. 31, 2020 | Three Months Ended Nov. 2, 2019 | Six Months Ended Oct. 31, 2020 | Six Months Ended Nov. 2, 2019 |
|---|---|---|---|---|
| Net sales | $127.4 million | $174.9 million | $271.0 million | $355.2 million |
| Gross profit | $33.3 million | $40.1 million | $69.1 million | $85.6 million |
| Gross margin | 26.2% | 22.9% | 25.5% | 24.1% |
| Operating income | $6.7 million | $4.8 million | $16.2 million | $12.4 million |
| Net income | $3.4 million | $7.3 million | $10.9 million | $14.3 million |
| Diluted EPS | $0.08 | $0.16 | $0.24 | $0.32 |
Six-month net sales declined 23.7%, while operating income increased 30.3% because of lower selling, general and administrative, and product design and development expenses, as well as improved gross margin. Net income declined despite higher operating income because the prior-year period included a tax benefit, while the current period recorded tax expense.
Six-month operating cash flow was $40.0 million, compared with cash used of $10.3 million in the prior period. Capital expenditures were $5.8 million versus $9.8 million. Cash, cash equivalents, and restricted cash increased to $73.5 million from $40.4 million at May 2, 2020.
At October 31, 2020, cash and cash equivalents were $69.8 million, restricted cash was $3.6 million, working capital was $129.0 million, and total shareholders’ equity was $190.4 million. The company had drawn $15.0 million on a $35.0 million revolving credit facility, with approximately $13.1 million remaining available and $6.9 million of letters of credit outstanding. The company reported compliance with all bank covenants.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales decreased 27.2%; six-month sales decreased 23.7%. All business units reported lower six-month sales, led by Live Events, International, Commercial, and Transportation.
- Six-month order volume declined 23.9% to $257.8 million. Second-quarter orders declined 10.2%, although International orders increased 14.5% and Live Events orders were broadly flat.
- Product order backlog increased to approximately $201 million at October 31, 2020, compared with $182 million at November 2, 2019 and $192 million at the end of the prior quarter.
- Gross margin improved to 25.5% for the six months, partly because of sales mix and lower service-related activity. Management stated that the unusually favorable service-agreement margin is not expected to be sustained.
- Operating expenses declined: six-month general and administrative expense fell 20.3%, and product design and development expense fell 30.8%.
- The company incurred approximately $2.8 million of fiscal-year severance and voluntary-exit costs, offset by approximately $1.0 million of government wage subsidies. In the second quarter, 150 employees were terminated with approximately $2.7 million of severance.
- The company suspended dividends and share repurchases for the foreseeable future. No shares were repurchased and no dividends were paid during the six months ended October 31, 2020.
Guidance, Outlook, Risks, and Unusual Items
Management expects COVID-19 to continue adversely affecting revenue and operating results during fiscal 2021, but stated that the magnitude and duration cannot be reasonably estimated. Customers in advertising, retail, sports, events, transportation, and government-related markets may delay capital spending. Risks include event and gathering restrictions, economic weakness, customer credit deterioration, supply-chain disruptions, tariffs, foreign-currency volatility, single-source suppliers, seasonal order timing, project cancellations or deferrals, and uncertain recovery patterns.
Management projects approximately $15 million of fiscal 2021 capital expenditures and expects available working capital and financing sources to meet foreseeable operating needs. However, additional financing may be required if growth or strategic investments exceed expectations, and financing availability is not guaranteed.
Remaining performance obligations were $254.3 million at October 31, 2020, of which approximately $211.7 million was expected to be recognized within 12 months. Cancellations, deferrals, scope changes, foreign-exchange movements, and project execution risks could affect conversion of these obligations into revenue.
Other unusual items included higher equity-method affiliate losses of $1.1 million for the six months, a $3.0 million prior-year project delivery and litigation-related charge, and prior-year tariff expense of approximately $1.4 million. A patent litigation accrual was $2.2 million at October 31, 2020. Outstanding performance guarantees included $6.9 million of letters of credit, $3.1 million of bank guarantees, and $31.3 million of surety bonds. No material indemnification claims were known to the company.
Important Facts for Investors to Verify
- Whether COVID-19 restrictions and delayed customer spending continue to reduce orders, revenue, and conversion of the $201 million product backlog.
- Whether gross margins normalize after the temporary benefit from reduced service activity and favorable service-agreement mix.
- Compliance with the amended credit agreement, including the liquidity covenant and debt-to-EBITDA covenant, and the availability of the remaining credit facility.
- The sustainability of operating cash flow after working-capital timing benefits and the company’s ability to fund approximately $15 million of planned capital expenditures.
- The effect of suspended dividends and share repurchases on capital allocation and shareholder returns.
- Potential changes in warranty obligations, patent litigation exposure, performance guarantees, affiliate losses, credit losses, and project cancellations or deferrals.
- Management’s statement that disclosure controls were effective as of October 31, 2020 and that no material change occurred in internal control over financial reporting during the quarter.