Daktronics, Inc. Form 10-Q Summary
Business context and reporting period
Daktronics designs, manufactures and sells electronic scoreboards, programmable display systems and large-screen video displays for sporting, commercial, transportation and other applications. The filing covers the three months ended August 1, 2020, the first quarter of fiscal 2021. The requested metadata identifies “2019 Q1,” but the filing itself is for 2020; the comparable period ended August 3, 2019.
The current quarter contained 13 weeks versus 14 weeks in the prior-year quarter, in addition to the effects of the COVID-19 pandemic.
Financial highlights
| Metric | Three months ended August 1, 2020 | Three months ended August 3, 2019 |
|---|---|---|
| Net sales | $143.6 million | $180.3 million |
| Gross profit | $35.8 million; 24.9% margin | $45.5 million; 25.2% margin |
| Operating income | $9.5 million | $7.6 million |
| Net income | $7.5 million | $7.0 million |
| Diluted EPS | $0.17 | $0.16 |
| Cash provided by operating activities | $8.5 million | $(18.2) million |
| Capital expenditures | $3.2 million | $5.9 million |
Net sales decreased 20.3%, while operating income increased 25.4% and net income increased 6.2%. The effective tax rate rose to 16.4% from 12.6%.
Segment sales declined across all business units: Commercial decreased 21.6%, Live Events 13.2%, High School Park and Recreation 5.0%, Transportation 23.8% and International 48.2%. Orders decreased 34.8% overall to $122.2 million. Product backlog was approximately $192 million at August 1, 2020, compared with $207 million a year earlier and $212 million at fiscal year-end.
Financial position, liquidity and debt
- Cash, cash equivalents and restricted cash totaled $44.7 million at August 1, 2020, up from $40.4 million at May 2, 2020.
- Working capital was $118.3 million, compared with $106.0 million at fiscal year-end.
- The company drew $15.0 million under its revolving credit facility to preserve liquidity. The facility remains $35.0 million, including up to $15.0 million for letters of credit, and matures November 15, 2022.
- The company reported compliance with applicable bank covenants as of August 1, 2020. A subsequent August 28, 2020 amendment added a liquidity covenant and revised other financial covenants.
- Letters of credit and surety bonds outstanding were $14.8 million and $35.1 million, respectively. The filing also reports approximately $8.0 million of other bank guarantee instruments.
- There were no dividends paid or share repurchases during the quarter. Dividends and repurchases were suspended for the foreseeable future.
Material changes versus the prior comparable period
- Revenue and orders fell materially because of reduced customer spending and pandemic-related disruption, compounded by one fewer reporting week.
- Gross margin declined modestly because lower volume increased the impact of relatively fixed infrastructure costs. Higher service-agreement margins from reduced on-site activity were not expected to be sustainable.
- Operating expenses declined: selling expense decreased to $11.6 million from $18.3 million, general and administrative expense to $7.1 million from $9.1 million, and product design and development expense to $7.5 million from $10.5 million.
- Cost reductions included a voluntary retirement and exit program involving 60 employees and a reduction in force affecting 108 employees. Related costs were approximately $1.2 million, partially offset by $0.6 million of governmental wage subsidies; the notes separately report $0.9 million of voluntary program costs and $1.4 million of severance.
- Operating cash flow improved by $26.8 million year over year, primarily because of working-capital changes and lower cash requirements associated with order activity.
- Other expense, net was $0.6 million versus other income of $0.2 million, reflecting foreign-currency volatility and increased losses from equity-method affiliates.
Outlook, risks and unusual items
Management expects the COVID-19 pandemic to adversely affect revenue and results throughout fiscal 2021, but stated that the magnitude and duration cannot be predicted. Customers across commercial, live events, transportation, international and other markets delayed discretionary spending because of reduced advertising, event, travel and tax-related revenues.
Management is reducing staffing, compensation, travel, capital spending and other costs; pursuing financing sources; and using governmental programs to preserve liquidity. Fiscal 2021 capital expenditures are projected at approximately $15 million. Management believes available working capital and financing sources will be adequate for foreseeable operating needs, but acknowledged that additional financing may not be available on favorable terms or at all.
- COVID-19 may reduce demand, impair customer payment capacity and increase expected credit losses.
- Backlog and remaining performance obligations may be subject to cancellations, deferrals and scope changes. Remaining performance obligations totaled $245.8 million, of which approximately $204.9 million was expected to be recognized within 12 months.
- Single-source suppliers, tariffs, raw-material availability, shipping disruptions and foreign-currency movements may affect costs and delivery schedules.
- Warranty obligations totaled $27.1 million, including $16.4 million classified as long term.
- The company accrued $2.1 million for a probable and reasonably estimable patent litigation settlement. Management did not expect other unresolved proceedings to have a material effect.
- No additional interim goodwill impairment analysis was performed in the quarter because management identified no new impairment indicators.
- The company adopted new credit-loss and goodwill-accounting standards without a material reported impact.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this filing is for the quarter ended August 1, 2020, not 2019 Q1.
- Review the August 28, 2020 credit-agreement amendment, including the new liquidity covenant and revised financial covenants.
- Assess whether the $15.0 million credit draw, suspended dividends and repurchases, and cost reductions are sufficient under prolonged pandemic disruption.
- Monitor order intake, backlog conversion and cancellations, particularly in Live Events, Commercial and International markets.
- Evaluate the sustainability of the quarter’s improved operating income and service-related gross-margin benefit.
- Track receivable collectability, warranty claims, performance guarantees, patent litigation and potential goodwill impairment.