Daktronics, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended January 26, 2019, representing fiscal 2019 third quarter. The request metadata identifies “2017 Q3,” but the filing itself is for fiscal 2019 Q3.
Business Context
Daktronics designs, manufactures, and sells electronic scoreboards, programmable display systems, and large-screen video displays for commercial, live events, schools and recreation, transportation, and international markets. Results are seasonal and vary with the timing of large, uniquely configured projects. The third quarter is typically slower because of holidays, sports-market seasonality, and reduced outdoor construction activity.
Financial Performance and Liquidity
| Metric | Q3 FY2019 | Q3 FY2018 | Nine Months FY2019 | Nine Months FY2018 |
|---|---|---|---|---|
| Net sales | $115.1 million | $130.3 million | $441.9 million | $472.4 million |
| Gross profit | $24.9 million | $28.6 million | $105.9 million | $115.8 million |
| Gross margin | 21.6% | 21.9% | 24.0% | 24.5% |
| Operating income (loss) | $(7.5) million | $(3.3) million | $5.5 million | $17.8 million |
| Net income (loss) | $(3.3) million | $(6.2) million | $9.9 million | $9.4 million |
| Diluted EPS | $(0.07) | $(0.14) | $0.22 | $0.21 |
- Q3 contribution margin declined to $9.3 million, or 8.1% of sales, from $13.3 million, or 10.2%.
- Nine-month operating cash flow was $32.2 million, up from $27.0 million. Investing cash flow was $(19.9) million, primarily reflecting $14.1 million of capital expenditures, marketable securities activity, and the $2.3 million net acquisition of AJT Systems. Financing cash flow was $(8.8) million, including $9.4 million of dividends.
- Cash, cash equivalents, and restricted cash totaled $33.3 million at January 26, 2019, compared with $49.1 million at January 27, 2018. Marketable securities totaled $37.6 million.
- Working capital was $135.6 million, compared with $132.8 million at April 28, 2018.
- The company had no borrowings outstanding under its $35.0 million U.S. revolving facility or its $20.0 million international facility. Approximately $11.2 million of letters of credit and $3.6 million of bank guarantees were outstanding under those facilities. The company was in compliance with all covenants.
- Warranty obligations totaled $26.7 million, including $11.3 million current and $15.4 million long term.
Material Changes Versus Prior Comparable Period
- Q3 sales decreased 11.7%, primarily because Live Events lacked several large projects recognized in the prior-year quarter and International sales declined due to project timing.
- Commercial, High School Park and Recreation, and Transportation sales increased 4.7%, 29.1%, and 37.5%, respectively.
- Nine-month sales declined 6.4%. Live Events decreased 29.7%, partly offset by growth in Commercial, High School Park and Recreation, Transportation, and International.
- Q3 gross margin was broadly stable, but profitability was pressured by lower volume over relatively fixed infrastructure, $1.8 million of expenses associated with an unprofitable project and a litigation claim, and higher commodity costs. Lower warranty expense and favorable sales mix partially offset these items.
- The Q3 net loss improved versus the prior year primarily because the prior-year period included significant tax expense. The current quarter recorded a $4.1 million tax benefit, while the prior-year quarter recorded $2.5 million of tax expense.
- Nine-month net income increased modestly despite lower sales, aided by a $956,000 reduction in contingent consideration related to a prior acquisition and lower tax expense.
- Product order backlog was $168 million at January 26, 2019, up from $151 million a year earlier and $150 million at the end of the preceding quarter. Remaining performance obligations totaled $222.2 million, of which approximately $186.0 million was expected to be recognized within 12 months.
- The company acquired AJT Systems on June 21, 2018. AJT develops real-time broadcast graphics and video-server systems; the acquisition was funded primarily with cash and was not material enough to require pro forma disclosures.
Guidance, Outlook, Risks, and Unusual Items
- Management expects product design and development spending to remain at a similar level for the remainder of fiscal 2019 as in fiscal 2018.
- Fiscal 2019 capital expenditures are projected to be less than $20.0 million.
- Management believes available working capital and cash resources will be adequate for foreseeable operating needs, but additional financing could be required if growth exceeds expectations, profitability deteriorates, or strategic investments increase.
- Management remains optimistic about long-term digital-display industry growth but highlighted tariffs, sanctions, commodity-price volatility, supply constraints, foreign exchange, intense competition, pricing pressure, and project timing as risks.
- Single-source suppliers may cause component shortages or delays. Large projects may be canceled, deferred, or revised, and backlog is not necessarily indicative of future revenue or profit.
- A previously disclosed display-module warranty issue generated $1.6 million of warranty and service-agreement expense during the nine months, with $828,000 remaining accrued for probable future claims. Management does not expect material changes to this accrual.
- A customer continued withholding $2.2 million of payments over an alleged failure to meet specifications. Management believes the claim is remote and expects to prevail in collection.
- A prior customer property-damage claim settled during Q3 and was fully covered by insurance.
- The company adopted ASC 606 in fiscal 2019 without a material effect on the timing or amount of revenue recognized. It expects to adopt the new lease standard in fiscal 2020 and preliminarily estimates approximately $5.6 million of operating lease right-of-use assets and liabilities.
Important Facts for Investors to Verify
- Confirm that the reported period is fiscal 2019 Q3, not 2017 Q3.
- Assess whether the higher backlog and orders can offset continued weakness or project timing volatility in Live Events and International.
- Monitor gross-margin recovery, the effect of tariffs and commodity costs, and exposure to unprofitable or competitively bid projects.
- Review operating cash conversion, capital expenditures, dividends, and the decline in cash and restricted cash compared with the prior year.
- Track warranty claims, the remaining $828,000 accrual for the disclosed module issue, and the $2.2 million customer receivable under dispute.
- Review covenant compliance and the November 15, 2019 maturity dates of the two revolving credit arrangements.