Daktronics, Inc. (DAKT) Q3 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Daktronics Fiscal Year 2018 Third Quarter Earnings Results Conference Call. As a reminder, this conference is being recorded today, Tuesday, February 20, 2018, and is available on the Company’s website at www.daktronics.com. At this time all participants are in a listen only mode. [Operator Instructions] I would now like to turn the conference over to Ms. Sheila Anderson, Chief Financial Officer for Daktronics, for some introductory remarks. Please go ahead, Sheila.

Thank you. Good morning, everyone. Thank you for participating in our third quarter earnings conference call. I would like to review our disclosures cautioning investors and participants that in addition to the statements of historical facts, we will be discussing forward-looking statements reflecting our expectations and plans about our future financial performance and future business opportunities. All forward-looking statements involve risks and uncertainties, which may be out of our control and may cause actual results to differ materially. Such risks include changes in economic condition, changes in the competitive and market landscape, management of growth, timing and magnitude of future contracts, fluctuations of margins, the introduction of new products and technology and other important factors, as noted and detailed in our 10-K and 10-Q SEC filings. With that, let me highlight some of the financials for the quarter. Orders for the third quarter of fiscal 2018 were $126 million as compared to last year’s third quarter of a $143 million. Most of the order fluctuation this quarter is attributable to the timing volatility of large projects and account based business in the Commercial, Live Events, Transportation and International business units. As a reminder, both orders and net sales fluctuate due to the impact of our large project and account-based business. Large projects include multimillion dollar orders of display systems for professional sports facilities, colleges and universities, and spectacular projects. Account-based orders can also be multimillion dollars in size for national or global customers, most in the out-of-home advertising space. Our business also fluctuates seasonally, based on the sports market and construction cycles and is dependent on various schedules based on our customers’ needs. Sales for the third quarter of fiscal 2018 were $130 million as compared to $116 [ph] million last year. Sales increased in Live Events, Transportation and International business units and decreased in the Commercial and High School Park and Recreation business units quarter-over-quarter. Live Events contributed to the sales increase as the number of projects for professional sports was up as compared to last year, specifically projects for spring baseball facilities. Continued market demand and delivery timings also contributed to sales increases in Transportation and International business units. Commercial business unit sales declined compared to last year due to lower order volumes of on-premise displays, the timing and delivery of large projects in the spectacular niche, partially offset by an increase in the billboard niche due to timing of customer demands as compared to last year. High School Park and Recreation business unit sales decreased compared to last year due to timing as well as customer demand. Gross profit was 21.9% during the third quarter as compared to 20.1% during the third quarter of fiscal 2017 and was 24.5% compared to 24.1% on a year-to-date basis. Gross margin percentages for the quarter were positively impacted by the higher sales volumes, improved productivity, and favorable sales mix. Total warranty as a percent of sales remained relatively flat quarter-over-quarter and increased to 3.3% during the nine months ended of fiscal 2018 as compared to 2.8% last year, which was due to the additional warranty cost we booked during the second quarter of fiscal 2018. Operating expenses increased $1.6 million or 5.5% during the third quarter of fiscal 2018 compared to the same period last year, due to a large degree from our increase in product development expenses. They increased $1.3 million for additional resources focused on speeding up the development of display control solutions to the market. Selling expenses increased quarter-over-quarter, mostly related to increased personnel expenses, travel and entertainment expenses, commission expenses, and convention and advertising expenses. General and administrative expenses decreased quarter-over-quarter, mostly related to decreases in personnel expenses. Our overall effective tax rate expense was 67% as compared to a benefit of 27.9% last year. The primary factor impacting our effective tax rate was due to the U.S. Tax Cuts and Jobs Act of 2017. Most notably, the tax act reduced the statutory federal income tax rate for corporations from 35% to 21%. In addition to the effect of the lower overall federal tax rate, the tax act resulted in a $4.2 million provisional one-time tax expense for the estimated remeasurement of our net deferred tax assets and estimated one-time transition tax on certain undistributed earnings of our foreign subsidiaries during the third quarter of fiscal 2018. This impact accounted for effectively $0.10 of loss per share. We expect our effective tax rate to be approximately 30% for the fourth quarter but could be impacted by any changes to our provisional assumptions for this new law. Looking ahead to future fiscal years, we expect the effective tax rate to be less than 21%. As we have previously noted, our effective tax rate can fluctuate depending on changes in tax legislation and the geographic mix of taxable income. Taking all this into account, we experienced a loss during the third quarter, primarily due to the reasons noted, the seasonality of the third quarter for sales and because of the tax impact for this year for that new legislation. While the loss is undesirable, we continue to monitor and manage our cost infrastructure to the opportunities we foresee and continue to focus on serving customers with industry leading solutions while generating profitable growth. Our cash and marketable securities position was $73 million at the end of the quarter. We recorded positive free cash flow of $18.2 million as compared to positive free cash flow of $38.8 million for the same period of fiscal 2017. This fluctuation in free cash flow is the result of timing differences in our operating assets and liabilities, primarily for reduced accounts payable, increase in inventory and income tax payments, and a $4 million increase in capital spending this year as compared to last year during the same nine months. Capital expenditures for the first nine months of fiscal 2018 were $10.9 million as compared to $6.7 million last year. Primary uses of the capital included manufacturing equipment, research and development testing equipment and facilities, demonstration equipment for new products and information technology infrastructure cost. We expect capital expenditures to be less than $20 million for this fiscal year. We made no repurchases of stock during the first nine months of the year. Our backlog is a $151 million going into the fourth quarter. Much of this backlog is projected to be realized over the coming few quarters. For the fourth quarter, we are currently estimating our sales to be comparable to last year. However, sales could change pending project bookings and customer schedule changes. I’ll now turn the call over to Reece Kurtenbach, our Chairman, President and CEO, for commentary on our business.

Thank you, Sheila. Good morning, everyone. We had a positive financial performance for the first nine months of fiscal 2018 reflected in increases in sales, gross profit and operating income. Order bookings on a year-to-date basis was $421 million overall for Daktronics as compared to $425 million last year. This is not unusual due to the lumpy nature of our businesses. Looking deeper into the business units, order bookings on a year-to-date basis were up in the Live Events business unit for continued demand for upgraded or new installations throughout professional sports including the MLB and NBA. We continued to see demand in the marketplace from facility operators using our solutions to enhance the fan experience or the entertainment factor using increasing amounts of high resolution display products. We are seeing this both in upgrades or refurbishment for a existing facilities as well as planning for new venues. Orders increased in our International business unit year-over-year, primarily due to an increase in out-of-home sales as compared to last year where we had more sports projects. This inherent variability can affect both orders and sales. Commercial business unit orders increased this year as compared to the same timeframe last year. The major factors contributing to this difference were the competitive environment and the on-premise niche, fewer national account-based on-premise opportunities in the market during this time period, and the competitive environment and fluctuation caused by the volatility of large custom projects in the spectacular niche. Digital billboard orders were down slightly year-over-year. While orders remained soft through the first nine months, the marketplace continues to adopt digital technology for on-premise and third-party advertising applications, and we see this continuing in the future. The pipeline of opportunities is active in the national account on-premise business and spectacular area of our business as well. We have seen strong activities for replacing, refurbishing existing systems as well as the placement of systems in new locations across our Commercial segment. Transportation business unit orders have decreased on a comparative nine-month year-over-year basis. But, we believe this decline is due to the general volatility of timing and not an indication of changes in overall market activity or our market share. Opportunities continue to surface due to stabilization of Transportation funding and increased customer demand for mass transit systems in advertising applications. High School Park and Recreation orders remained relatively flat for the first nine months year-over-year. This market continues to trend towards more sophisticated video systems, which have higher average selling prices in addition to continued needs outside of the sports venues to communicate with students, parents and visitors. These trends exist where -- when refurbishing existing systems as well as the new locations. The higher sales levels for the year improved gross margin through gains in manufacturing productivity. We also saw improvement in gross margins on large projects and selected price increases in certain markets. In addition, profitability improved by selling our non-digital business. Unfortunately, these increases were partially offset by higher warranty expenses we booked in the second quarter of fiscal 2018. We continue to make progress on increasing product release velocity and expect to continue this into fiscal 2019. Over the coming months, we continue to release our latest generation of technology featuring narrow pixel pictures, new features in our control systems and interactive content features. We will also continue development for modules using chip-on-board technology. While these efforts will increase development expenses as a percent of sales in the near term, we believe this investment is appropriate to drive forward new solutions to meet customer needs and to expand our global market share. Rollouts of products including display and control solutions are expected throughout the coming year. We expect continued success in growing our business over the long term for the following reasons. We continue to be confident in the expanding global digital marketplace through adoption of digital systems across the sectors we serve. These products have a known end-of-life that will drive continued business to replace or refurbish the installed base. We provide proactive support from initial project planning throughout the intended use of the system, leading to satisfied customers and repeat business aligned with this natural replacement cycle. We continue to enhance and develop product lines and comprehensive solutions for our broad market base and specific customer needs. This allows for success in markets through natural ups and downs of each segment. In addition to our comprehensive product lines, we are committed to earning customers for life, driving continued investments in quality, reliability and other performance enhancements to meet our customers’ needs today and over the long term. While optimistic about our long-term future, various geopolitical, economic and competitive factors may impact order growth. Our business will continue to be lumpy. While these areas can impact a specific fiscal period, we continue to pursue long-term profitable growth. Overall, our outlook for fiscal 2018 and beyond remains similar from a quarter ago. Our International business unit continues to be poised for growth through increased adoption of digital systems as well as increase in market share for our focused segments of sport, out-of-home, spectacular and Transportation. We expect continued demand for large size orders due to the adoption of video and sporting applications in the High School Park and Recreation market, allowing for growth. Transportation has growth opportunities due to continued investment in the U.S. Transportation systems and the stability in federal funding. In our Commercial business unit we see opportunities for growth, mainly driven by digital opportunities in the spectacular segment, both new and replacement systems for our national account-based businesses, expansion of solutions for indoor applications, and continued activity in the billboard segment. We expect Live Events sales to maintain order levels of prior years. While the path will not always be smooth, we believe the growing market and our industry-leading solutions position us to generate long-term profitable growth. With that, I would ask the operator to please open up the line for questions.

[Operator Instructions] Our first question comes from the line of Greg Pendy with Sidoti, your line is now open.

Hi, guys. Thanks for taking my call. Just two quick questions. One, just on the tax going down, I think you said to 21%, is that just the federal and will it be sort of -- will it be a little bit higher due to state on top of that?

We expect that will be all-in rates that include state. We also continue -- we’ll continue to get R&D tax credit as well. So, we’re optimistic about our overall effective tax rate that’s all-in.

Okay. Thank you. And I guess, the second question, I can see where your gross margins, I guess, you mentioned the higher volumes helped inefficiencies on a year-over-year basis. I didn’t hear -- did you give us a warranty expense number, or can you at least tell us was that within your targeted range, which I think has been 1.5, maybe 2% of sales?

We were actually a bit over, we were at 2.9% of sales in Q3 as compared to last year, but we have a same amount as a percent of sales during the quarter.

So, it’s basically flat year-over-year, the warranty expense, as a percentage of sales. Did I catch that right?

As a percent of sales, we’re up just a little bit on a year-to-date basis, 3.3% as compared to 2.8% last year.

Okay, perfect. Thank you.

Thank you. [Operator Instructions] And I’m showing no further questions in queue at this time. I would like to turn the conference back over to Reece Kurtenbach for closing remarks.

We appreciate everybody attending our call this morning. Hope you’ve had a nice winter, and look forward to talking to you again in June.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes today’s program. You may now disconnect. Everyone, have a great day.