Daktronics, Inc. Fiscal 2019 Form 10-K Summary
Reporting period: Fiscal year ended April 27, 2019, consisting of 52 weeks. The request metadata identifies “2017 Q4,” but the supplied filing is Daktronics’ fiscal 2019 annual report, not a fiscal 2017 quarterly filing.
Business Context
Daktronics designs, manufactures, installs and services electronic scoreboards, programmable displays, large-format LED video systems, transportation signs, advertising displays, software and related control systems. Its five reportable segments are Commercial, Live Events, High School Park and Recreation, Transportation, and International. The company employed approximately 2,722 people globally, including 2,412 full-time and 310 part-time or temporary employees at year-end.
Financial Performance and Liquidity
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $569.7 million | $610.5 million | Down 6.7% |
| Gross profit | $130.3 million | $145.7 million | Down 10.6% |
| Gross margin | 22.9% | 23.9% | Down 100 bps |
| Operating income (loss) | $(4.7) million | $12.5 million | Declined $17.2 million |
| Operating margin | (0.8)% | 2.0% | Down 280 bps |
| Net income (loss) | $(1.0) million | $5.6 million | Declined $6.5 million |
| Diluted EPS | $(0.02) | $0.12 | Declined $0.14 |
| Operating cash flow | $29.5 million | $30.4 million | Down 2.7% |
Fiscal 2019 ending cash, cash equivalents and restricted cash were $35.7 million, compared with $29.8 million a year earlier. Marketable securities were $26.3 million. Working capital was $119.6 million, down from $132.8 million. Total assets were $349.2 million and shareholders’ equity was $187.7 million.
The company reported no advances under its $35.0 million U.S. revolving facility or its $20.0 million international revolving facility. Letters of credit outstanding were approximately $13.3 million in total. Interest-bearing debt was not material based on the disclosed balances, but the facilities mature in November 2019 and the company expected to enter into replacement agreements.
Capital expenditures were $17.3 million, investing cash outflow was $11.8 million, and financing cash outflow was $11.9 million. The company paid $12.6 million in dividends, or $0.28 per share, and projected fiscal 2020 capital expenditures of less than $25 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because Live Events sales fell 27.7% to $171.0 million, reflecting fewer large professional sports project wins and unfavorable project timing.
- Commercial revenue increased 10.6% to $148.8 million, supported by spectacular projects, on-premise demand and out-of-home advertising installations.
- Transportation revenue increased 8.1% to $64.4 million, while High School Park and Recreation increased 4.1% to $91.2 million and International increased 2.0% to $94.3 million.
- Orders increased 4.4% to $608.9 million. Remaining performance obligations increased to $257.0 million from $219.0 million, with approximately $223.1 million expected to be recognized within 12 months.
- Gross margin declined due to lower volume over relatively fixed infrastructure costs, a $3.4 million combination of expenses for an unprofitable project and litigation claim, and higher commodity and tariff costs.
- Fiscal 2019 incurred approximately $3.8 million of additional component costs from shortages and price volatility and $2.5 million of tariff-related expenses. Management estimated total adverse impact from price changes and tariffs at approximately $6.3 million.
- The company acquired the net assets of AJT Systems, Inc. for approximately $2.3 million of net cash consideration. AJT develops real-time live-to-air graphics and video server systems.
- Warranty accruals declined to $24.5 million from $30.0 million. The company recorded $2.4 million of additional expense related to a legacy out-of-home display issue, compared with $4.5 million in fiscal 2018.
- The company violated a bank covenant during the fourth quarter but received a waiver for the fiscal year ended April 27, 2019.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific fiscal 2020 revenue or earnings guidance. It expects fiscal 2020 to contain 53 weeks, with increased selling, general and administrative, and product design expenses from the additional week. Management expected an effective tax rate of approximately 21% for fiscal 2020 and continued investment in video technology, software, controllers, manufacturing capacity, quality and information infrastructure.
Management expects long-term growth from adoption of LED and micro-LED technologies, digital billboards, commercial spectaculars, transportation systems, sports venue upgrades and high-school video systems. Near-term forecasting remains difficult because of discretionary customer spending, large-project timing, replacement cycles, competitive bidding and transportation funding.
- Supply-chain disruption, component shortages, commodity inflation and additional tariffs could pressure margins and delay production.
- Custom fixed-price contracts expose the company to cost overruns, project delays, liquidated damages and losses on unprofitable projects. Six loss contracts were in progress at year-end, with provisions totaling $2.4 million.
- Warranty obligations remain material, with approximately $24.5 million accrued and $0.98 million remaining for the identified legacy equipment service agreement issue.
- Performance guarantees included $13.3 million of standby letters of credit and bank guarantees and $9.9 million of surety bonds.
- The company was subject to ordinary-course litigation. A customer withheld $2.0 million, but the company provided additional products and services at a $1.5 million loss and was paid in full after year-end.
- Foreign currency exposure affected results; 19% of fiscal 2019 sales were denominated in currencies other than the U.S. dollar. A 10% change in exchange rates was estimated to affect pretax income by approximately $1.0 million.
- Dividend payments remain subject to board approval, liquidity, strategic investment needs and credit-facility covenants.
Important Facts for Investors to Verify
- Reconcile the requested “2017 Q4” period with the supplied fiscal 2019 annual filing before using the figures.
- Review the terms and replacement status of the credit facilities maturing in November 2019, including covenant compliance after the fiscal-year waiver.
- Assess whether the $257.0 million remaining performance obligation balance converts to revenue and profit as expected, given cancellation, delay and margin risks.
- Monitor gross-margin recovery, particularly the effects of tariffs, component availability, fixed-cost absorption and custom-project execution.
- Evaluate the adequacy of the $24.5 million warranty accrual and the resolution of remaining legacy out-of-home obligations.
- Confirm fiscal 2020 capital spending, tax-rate expectations, dividend policy and the contribution from the AJT Systems acquisition.