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Daktronics Inc (NASDAQ:DAKT)
Q2 2020 Earnings Call
Nov 27, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Daktronics Fiscal Year 2020 Second Quarter Earnings Results Conference Call. [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.

Sheila Anderson -- Chief Financial Officer and Treasurer

Thank you. Good morning, everyone. Thank you for participating in our second quarter earnings conference call.

I would like to review our disclosures cautioning investors and participants that in addition to 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 conditions, changes in the competitive and market landscape including impacts of global trade discussions and policies, management of growth, timing and magnitude of future orders and contracts, fluctuations of margins, the introduction of new products and technologies 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 financial results for the second quarter and year-to-date of fiscal 2020, and the related time comparisons to fiscal 2019. As a reminder, fiscal 2020 is a 53-week year and fiscal 2019 was a 52-week year. The extra week of fiscal 2020 fell within the first quarter, resulting in six months ended being 27 weeks versus 26 weeks. Sales, orders and all areas of operating expenses were impacted with the additional week in the six-month comparison.

For the second quarter, overall orders remained relatively flat as compared to last year's second quarter. Orders increased in the International and High School Park and Recreation business units and decreased in the Transportation, Commercial and Live Events business units. For the year, orders were up 8.9 %. Live Events and International orders increased which were partly offset by declines and Transportation and High School Park and Recreation orders.

Commercial orders were flat year-over-year. The volatility of orders' timing for large projects and global accounts varies according to the needs of our customers and is the primary reason for changes in the quarterly and year-to-date comparisons. Each business unit was impacted by the additional week in the fiscal 26-month results.

For comparison, orders paced as at $12.5 million per week in fiscal 2020 as compared to $12 million during the same time last year or about a 4.8% increase. On a year-to-date basis, some additional highlights in the business units, with the largest level of order changes.

In Live Events, orders increased because of being a successfully winning several projects in the active college and university market, and winning multi-million dollar projects at a professional baseball stadium.

In the International business unit, we marketed to customers and geographies outside the U.S. and Canada, including areas like transportation and governmental sports and commercial. For the first half of the year, we have had continued success in global and regional out of home advertising customers as they continue to build out their digital networks, and have had continued success in projects for malls and casinos, sports complexes, and transportation stations around the world.

While High School Park and Recreation is down in orders for the year as compared to last year's record level, the market remains active and interested in larger video systems and in standard scoring and audio applications. Sales for the second quarter of fiscal 2020 increased 1.3% and were $175 million as compared to $173 million last year. Net sales increased in Live Events, Transportation and International, and decreased in the Commercial, High School Park and Recreation areas. This change in sales correlates to the change in orders already described and the related timing of these orders and backlog into sales.

On a year-to-date basis, sales were up in all business units due to the increased backlog coming into the year along with the order changes already noted. For comparison to the 27-week, 26-week, six months ended sales revenue paced at $13.2 million per week in fiscal 2020 as compared to $12.6 million during the same time last year, or around a 4.6% increase using this comparison.

Gross profit for the quarter as a percentage of net sales was 22.9% as compared to last year's 24.8%. The drop for the quarterly comparison was a result of additional project delivery costs and tariffs as compared to the last year during the same quarter. Tariffs were approximately $1.4 million for the quarter. Gross profit for the year was 24.1% as compared to 24.8% in fiscal '19. The approximate amount of tariff cost for the six months ended were $3 million as compared to $0.3 million last year at the same time. Our warranty as a percentage of sales decreased to 2.2% as compared to 2.5% for both the quarterly and annual comparisons.

Operating expenses for the second quarter of fiscal 2020 were $35.3 million compared to $33.7 million in the second quarter of fiscal 2019, or an increase of 4.5% primarily due to our continued strategic initiative and investing in new products and technologies and related to personnel costs. We are evaluating and engaging in our operational improvements to reduce the efforts of delivery, making investments in tools and systems to support and leverage future growth as well. On a year-to-date basis, operating expenses have increased 7.7%, primarily due to the extra week and continued to improve investment in development, personnel-related expenses, and increased marketing efforts.

We calculate the provision for income taxes during the interim periods by applying an estimate of the annual effective tax rates to the year to our -- to a year-to-date income or loss, excluding unusual and frequently occurring discrete items for that reporting period. The effective tax rate can fluctuate depending on changes in tax legislation, actual geographic mix of taxable income and levels of tax credits as compared to actual tax income.

The effective tax rate benefit for the second quarter of fiscal 2020 was 63.8% as compared to an effective tax expense of 5.8% a year earlier, and 14.5% benefit as compared to the minimal tax rate last year on a year-to-date basis. This difference in effective tax rate was primarily driven by larger estimated tax credits in relation to the estimated pre-tax book income in each period. We estimated an effective tax rate benefit of approximately 14.5% for the rest of fiscal 2020.

Our cash and marketable securities position was up $33 million at the end of the quarter, we used $10 million of cash from operations correlating with the increase in inventory to support production of backlog in future quarters, and was primarily attributed to the increase in receivables and contract assets for projects and process at the end of October. We used $9.7 million for investments in capital for new production system capabilities and information systems, infrastructure, and $20.6 million of product development. We used $4.5 million for dividends and $1.7 million for stock repurchases so far during this year.

We expect capital expenditures to be $20 million to $25 million for fiscal 2020, and to be used primarily for new production equipment for new products, related reliability of lab equipment and manufacturing facility improvements, along with investments in our information technology, infrastructure and systems.

Our product backlog at -- is at $182 million, which we expect to convert to sales over the coming two to three quarters. We expect sales for the third quarter of fiscal 2020 to be more of the last year's third quarter due to the larger backlog, but of course, sales could change depending on project bookings and customer schedule changes.

I'll now turn it over to Reece Kurtenbach, our Chairman, President, and CEO, for a few additional comments.

Reece A. Kurtenbach -- President and Chief Executive Officer

Thank you, Sheila. Good morning, everyone. As Sheila highlighted, we had a strong start for orders in fiscal '20, growing as the overall market also growth. We continue to invest in development and have more solutions to market to more customers than ever before. This work, coupled with our other investments to increase our capabilities in sales, manufacturing, and service poised us for long-term profitable growth. As an example, our sales team and service networks reach around the globe and our valuable assets for both our sales partners and end customers.

Solutions like our narrow pixel pitch displays are being adopted by new and existing customers around the world. Especially for these new indoor product lines, we continue to explore and develop new channels to sell through, often with integrators that can incorporate our products into locations like corporate offices, control centers, and retail stores.

Our control and content management offerings have also been enhanced, improving the way our customers utilize our systems and providing greater ease of use to help them inform and entertain their audiences. This has created demand for both control system upgrades as well as new system purchases.

To highlight the success in this area, we recently completed an installation in Las Vegas at [Indecipherable] casinos, sportsbook area, and look forward to installing other similar installations. We're also focusing on our ability to provide narrow pixel pitch technology to public sector, including federal and Department of Defense applications. These solutions aligned with the needs and applications of government network operation centers, command centers, situation rooms, conference rooms, theaters, and offices.

Like many other U.S. companies, we are in the midst of a dynamic and volatile global trade environment. Today, we are most impacted by the administrations of both China and the United States, and the different measures to impose trade barriers between these countries as well as the current [Indecipherable] surrounding these activities.

We continue to monitor and evaluate this situation from multiple perspectives, and we will continue to adjust our sourcing and production methodologies to minimize impact to our customers and to Daktronics while providing high quality, high-value solutions at a competitive price. However, in our current view, we estimate the tariffs on components could impose more than $10 million in costs for us this year.

We do remain positive regarding the overall outlook of the business and growth for the industry for fiscal 2020 and beyond. We predict applications of digital solutions will continue to grow and expand in all business units. Specifically, in International with our establishment of localized sales and service channels, our sales focused on increasing market share and our current outlook on known opportunities, we expect growth in sport, out-of-home, spectacular and transportation areas outside the U.S. and Canada.

Looking into the Live Events business, we expect some growth over the long-term. However, we predict a similar-sized business as previous year's, driven by replacement cycles and new product uses. One caveat is that this business is lumpy, primarily consisting of larger contracts and can be highly competitive creating some variation from year-to-year.

We expect sustained demand for larger-sized orders due to the adoption of video and sporting applications in the High School Park and Recreation market, and in our Commercial business unit, we see growth opportunities because of expansion of solutions of indoor applications, continued replacement and new investment activity in the out-of-home and retail segments, and opportunities in the spectacular segment. The spectacular segment includes multi-million dollar projects that are discretionary choices by customers, which can cause up and down -- ups and downs in timing and trends.

The Transportation business in the U.S. and Canada remained strong due to continued investment in the U.S. transportation systems, the stability in federal funding and increase in advertising and on-premise promotional application needs in mass transit facilities.

In all of our markets, we have a natural replacement cycle and strive to serve our customers with their needs today as well as in the future. We have recently introduced indoor narrow pixel pitch offerings and see a receptive market for these products across our business. We continue to foster and build out indirect sales channels. Our range of solutions and global capabilities make us the industry's most experienced digital display provider. And to support our customers over the long term, we are focused on developing and releasing innovative solutions and services tailored to different applications in each segment.

During fiscal 2020, we are continuing to invest in higher levels in our development, and are making investments in the technologies and techniques of using micro LEDs. These technologies will open up new markets and create competitive advantages for us while serving the needs of customers desiring to improve the way they connect and interact with their customers and audiences.

As we enter the second half of fiscal '20 with a strong backlog and a positive outlook, we are focused on increasing orders as we see a growing global customer base in commercial, sports and government markets. We plan to continue to invest in product development activities for new technologies and advanced manufacturing techniques. Finally, we are focused on carefully managing capacity and spend in our path of long-term profitable growth.

With that, I would ask the operator to please open the line for any questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Lisa Springer from Singular Research. Your line is now open.

Lisa Springer -- Singular Research -- Analyst

Thank you. Good morning. I wanted to ask about the -- if you could give us a little more color around the increase in product delivery cost. Was that across all business segments or focused in special segments?

Sheila Anderson -- Chief Financial Officer and Treasurer

It was primarily in our segments with the larger projects, so a little bit through Live Events, a little bit through Commercial. Those probably were the two more significant areas.

Lisa Springer -- Singular Research -- Analyst

And do you think that's going to be a challenge in the second half of the year as well, or do you expect that to improve?

Sheila Anderson -- Chief Financial Officer and Treasurer

I think we're continuing to improve our processes over time and that should improve itself.

Lisa Springer -- Singular Research -- Analyst

Okay, thank you.

Reece A. Kurtenbach -- President and Chief Executive Officer

Okay.

Operator

Our next question comes from the line of Greg Pendy from Sidoti. Your line is now open.

Gregory Pendy -- Sidoti and Company -- Analyst

First one, I just wanted to ask on Live Events, you're saying that you expect the business to be similar sized to the previous years. I mean last year, you had some pretty soft weakness, if I'm not mistaken, in the second half. Are you expecting when you say similar years, can we go back a few years? Are you talking specifically to 2019?

Reece A. Kurtenbach -- President and Chief Executive Officer

Yes. I think that market will go up and down depending on the projects that are available and the larger projects. And I would tend to draw some type of continuity across multiple years and take out a variance in one year here and there.

Gregory Pendy -- Sidoti and Company -- Analyst

Okay, got it. That's helpful. And then I just wanted to also, I guess, going into the tariffs, you're saying slightly more than $10 million, so is that a little bit more pressure than you're expecting in 1Q? I think you're expecting around $10 million on the component pressure.

Sheila Anderson -- Chief Financial Officer and Treasurer

I think actually that's a pretty dynamic area, so $10 million is probably a conservative area. We're continuing to focus on ways to minimize those costs in both the components like you mentioned and the pricing there as well as the tariff costs. So maybe, I'd say it's more around the $10 million area impact.

Gregory Pendy -- Sidoti and Company -- Analyst

Okay, that's great. And then one more final thing. Can you just talk a little bit about warranty expense? I think we're starting to anniversary some more normalized warranty expenses; just kind of how we should be thinking about that going forward?

Reece A. Kurtenbach -- President and Chief Executive Officer

Yes. Warranty is -- where we install our displays and the environments they're in, we don't expect that number to be zero. We would like to see that at 2% or less. And so as we're -- as you indicate, we're entering more of a range that is -- we think this is closer to a long-term sustainable up level.

Gregory Pendy -- Sidoti and Company -- Analyst

Okay, that's good. Thanks a lot. Very helpful. Thank you.

Reece A. Kurtenbach -- President and Chief Executive Officer

I appreciate the comments

Operator

I'm not showing any further questions at this time. I would now like to turn the call back to Reece Kurtenbach for any closing remarks.

Reece A. Kurtenbach -- President and Chief Executive Officer

Thanks, everyone for the participation on the call today. And that -- there is going to be a change going forward to adapt to the current environment, we're planning to host earnings calls semi-annually rather than quarterly on into the future. So future calls would take place at this time after our second quarter, generally in November of the year, and then after our year-end, which is generally near the end of May for that call.

We will continue to release quarterly results and a commentary and earnings releases, as well as our SEC filings, and we periodically appear at investor conferences through the years. So as you have any questions or comments on future releases or on today's discussion, please direct to Sheila as noted in the earnings release, or you can always email investor@daktronics.com.

With that, we hope everyone in the U.S., at least has a great Thanksgiving, and we wish you all a wonderful holiday season and a prosperous New Year. We'll talk to you in May.

Operator

[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

Sheila Anderson -- Chief Financial Officer and Treasurer

Reece A. Kurtenbach -- President and Chief Executive Officer

Lisa Springer -- Singular Research -- Analyst

Gregory Pendy -- Sidoti and Company -- Analyst

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