Daktronics, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended November 2, 2019, representing fiscal 2020 second quarter. The request metadata identifies “2018 Q2,” but the filing itself is for fiscal 2020 Q2 and compares against October 27, 2018. Fiscal 2020 includes 27 weeks in the first six months versus 26 weeks in the prior-year period.
Business context
Daktronics designs and manufactures electronic scoreboards, programmable display systems and large-screen video displays for commercial, live-event, school and recreation, transportation, and international markets. The company reports five segments: Commercial, Live Events, High School Park and Recreation, Transportation, and International.
Key financial metrics
| Metric | Three months ended Nov. 2, 2019 | Three months ended Oct. 27, 2018 | Six months ended Nov. 2, 2019 | Six months ended Oct. 27, 2018 |
|---|---|---|---|---|
| Net sales | $174.9 million | $172.7 million | $355.2 million | $326.9 million |
| Gross profit | $40.1 million | $42.8 million | $85.6 million | $81.0 million |
| Gross margin | 22.9% | 24.8% | 24.1% | 24.8% |
| Operating income | $4.8 million | $9.0 million | $12.4 million | $13.1 million |
| Operating margin | 2.8% | 5.2% | 3.5% | 4.0% |
| Net income | $7.3 million | $8.6 million | $14.3 million | $13.2 million |
| Diluted EPS | $0.16 | $0.19 | $0.32 | $0.29 |
Six-month net sales increased 8.7%, while orders increased 8.9% to $338.6 million. On a weekly basis, management reported sales run-rate growth of approximately 4.6% and order run-rate growth of approximately 4.8%, partly mitigating the additional week in the current-year period.
- Cash flow: Operating cash flow was negative $10.3 million versus positive $22.6 million in the prior-year period, primarily due to a $37.5 million increase in accounts receivable and other working-capital changes.
- Investing and financing: Investing activities provided $12.3 million, principally from $22.8 million of marketable-security maturities and sales, offset by $9.8 million of capital expenditures. Financing activities used $8.3 million, including $4.5 million of dividends, $1.7 million of share repurchases, and $1.9 million of principal payments.
- Liquidity: Cash, cash equivalents and restricted cash totaled $29.3 million at November 2, 2019, compared with $35.7 million at April 27, 2019. Marketable securities totaled $3.6 million. Working capital was $126.6 million.
- Debt and credit: No advances were outstanding under the company’s $35.0 million U.S. revolving facility; approximately $9.6 million of letters of credit were outstanding. A separate $20.0 million international facility expired on November 15, 2019 without renewal. On that date, the company amended its U.S. credit agreement, extending maturity to November 15, 2022 and modifying covenants.
- Backlog and performance obligations: Product order backlog was approximately $182 million, compared with $150 million a year earlier and $207 million at the end of the prior quarter. Total remaining performance obligations were $239.9 million, of which approximately $202.7 million was expected to be recognized within 12 months.
Material changes versus the prior comparable period
- Quarterly revenue rose 1.3%, but gross profit declined 6.2% and operating income declined 46.5%, primarily because of lower margins and higher operating expenses.
- Quarterly gross margin decreased to 22.9% from 24.8%. Management attributed the decline largely to approximately $1.1 million of additional tariff costs, approximately $3.0 million of project-delivery costs and an existing litigation claim estimate.
- Quarterly product design and development expense increased 12.0% to $10.1 million; general and administrative expense increased 4.6% to $9.0 million.
- Six-month gross profit increased 5.7%, but gross margin declined to 24.1% from 24.8%, reflecting approximately $2.6 million of additional tariff costs and approximately $3.0 million of project-delivery and litigation-related costs.
- Quarterly Commercial revenue declined 13.9%, while Live Events, Transportation and International revenue increased 7.7%, 12.5% and 16.2%, respectively. Six-month revenue increased in all five segments.
- The effective tax rate was a benefit of 63.8% in the quarter and 14.6% for the six months, compared with a 5.8% expense and approximately 0% rate, respectively, in the prior-year periods. Management attributed the change primarily to differences in estimated tax credits.
- The company adopted the new lease standard in fiscal 2020, recognizing an $11.1 million operating lease right-of-use asset and $11.1 million of related current and noncurrent lease liabilities at adoption, with no reported effect on earnings, equity or cash flows.
Outlook, commentary, risks and unusual items
- Management expects continued investment in new and enhanced customer solutions, software and controller capabilities, and micro-LED technology. Fiscal 2020 capital expenditures were projected to be less than $25 million.
- The business is seasonal and sensitive to the timing of large, uniquely configured projects, sports schedules, outdoor construction conditions, customer delivery schedules and the slower third fiscal quarter.
- Management cited risks from tariffs, foreign-currency volatility, competition, declining product pricing, raw-material availability, single-source suppliers, warranty claims, project execution, and changes in government transportation spending.
- The company previously violated a bank covenant during the fourth quarter of fiscal 2019 but received a waiver. The subsequent credit-agreement amendment modified financial covenants and extended the U.S. facility.
- Accrued probable and reasonably estimable patent litigation costs increased to $2.0 million from $1.1 million at fiscal year-end. Outstanding performance-related letters of credit and surety bonds totaled $15.2 million and $8.4 million, respectively.
- Accrued warranty obligations totaled $26.0 million at November 2, 2019. Management reported no known customer indemnification claims and did not expect other unresolved legal matters to materially affect financial position or liquidity.
- Management stated that available working capital and financing sources should be adequate for foreseeable operating and strategic needs, although additional financing could be required if growth or strategic investments exceed expectations.
Important facts for investors to verify
- Reconcile the sharp quarterly margin and operating-income decline with tariff costs, project-delivery expenses, litigation accruals and segment mix.
- Monitor accounts receivable, working-capital consumption and the conversion of backlog and remaining performance obligations into revenue and cash.
- Review compliance with the amended credit-facility covenants, available borrowing capacity and the effect of the nonrenewed international facility.
- Assess exposure to tariffs, single-source suppliers, foreign exchange, warranty costs, project losses and outstanding performance guarantees.
- Evaluate the sustainability of the unusually large tax benefit and its effect on reported net income and EPS.
- Confirm future capital expenditures, share repurchases, dividends and continued investment requirements for micro-LED and other product development initiatives.