DAKT
#Thank you, operator.
Good morning everyone.
Thank you for participating in our third quarter earnings conference call.
I would like to review our disclosure 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 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, management of growth, timing and magnitude of future contracts, fluctuations of margin, the introduction of new products and technology, and other important factors as noted and detailed in our 10-K and 10-Q SEC filings.
Fiscal 2016 is a 52-week year and fiscal 2015 was a 53-week year.
The extra week of fiscal 2015 fell within the first quarter resulting in the year-to-date results comparison to be a 39-week versus 40-week comparison.
At this time, I would like to introduce <UNK> <UNK>, our Chairman, President, and CEO, for a few comments.
Thanks, <UNK>.
Good morning everyone.
Our backlog was solid as we entered into the third quarter.
While a portion of backlog is for projects we don't plan to convert into sales until FY17, we had a large book of sports business ready to build, and were able to convert nearly $22 million of this backlog to sales during the quarter.
You may remember, we had delayed some of this build from second quarter since these projects had flexible lead times.
We could then take advantage of new product enhancements in our module designs, while still meeting our customer commitments.
This allowed us to achieve a 4% increase in sales for the quarter as compared to last year.
Our third quarter remains historically lighter for sales and profit due to the seasonality of our business in sports, impact of weather on construction cycles, and the decrease in production days available due to holidays in the quarter.
Profitability is also historically impacted during the third quarter because of the cost of the capacity we carry through the quarter, yet still need to meet demand for the remainder of the year.
Our order bookings in our business are inherently volatile due to our project-based and large account-based businesses.
This creates unevenness in order flow, creating difficulties in making comparisons over the short-term.
Order bookings were down for the third quarter, with the biggest decrease in our Commercial business unit.
For the quarter, orders in our billboard niche were down over 50%, causing the decline in Commercial as compared to last year.
Orders in our on-premise segment of Commercial remained strong.
Year-to-date, orders are down 4% overall.
Commercial orders are down $30 million due to the decrease in orders in out-of-home advertising and in the spectacular niche, offset by the increase in orders in our on-premise segment.
Our billboard business has been down this year across our major customer accounts and local independent billboard operators.
We believe this lag is partially due to customer capital allocation decisions and due to high overall satisfaction with our product lifetime, leading to increased product replacement cycle.
We continue to maintain strong relationships with key national billboard companies and expect demand to pick up in the coming months as deployment activities pick up again in the spring.
We focus on large multimillion dollar projects in our spectacular niche and have seen many projects push out in this segment.
Many of the projects we expected to be completed by now have not yet been awarded, and we continue to see delayed decisions from customers due to the complexities in design, permitting, or obtaining capital needed.
International orders for the year are down nearly $12 million.
While some difference is due to the natural volatility in large projects, we suspect that the volatility in the world economy, regional political relationships, and the US dollar is also having an impact.
We are down primarily in out-of-home and spectacular niches internationally, while the transportation niche has been quite successful.
Live Events orders continued to exceed last year on a year-to-year basis.
A large impact to profitability in the quarter was warranty expenses.
In the past year, we have experienced failures on modules installed in certain outdoor environments used in 24/7 applications.
While we have deployed a firmware update to mitigate this issue at a number of at-risk sites, we continue to experience failures and have or plan to repair modules for certain locations.
We believe we are taking appropriate preventative measures and corrective actions to deliver to our customers the quality experience we promised while minimizing the cost impact of the company.
However, the issue is complex and could be more prevalent than these estimates entail.
While we have reserved all probable warranty claims, we are unable to estimate total claims where there is reasonable possibility of further expenses due to the complexities and uncertainties in the failure rates.
We believe this could lead us to incur additional warranty expenses in future quarters.
We are continuing to refine our reliability models to better predict future performance on the impacted population of installations.
While these models are helpful in our analysis, we are a few months away from having enough data to create a reserve for the remaining life of our displays operating under these conditions in the field.
Because of this, I suspect we may have similar warranty charges in future quarters.
We have qualified our new designs to higher levels of long term reliability to avoid these issues in the future.
For more details on the financial results, I will turn it back to <UNK>.
Thank you, <UNK>.
Sales for the third quarter of fiscal 2016 increased to $123 million, as compared to $118 million last year.
As on previous years, due to the seasonality within our business, the third quarter is generally the lightest quarter for revenues.
This past quarter, sales were up primarily in our Live Events business as we continue to build out the backlog from prior quarters.
We were able to make great progress on the Vikings Stadium, the Cleveland Indians, and the Las Vegas Arena, for example.
The increase in Live Events offsets the declines in the Commercial and International business units.
For the third quarter, gross profit was 17.8% this year and down as compared to 21.2% last year.
Gross profit was impacted by the number of multimillion dollar projects in the quarter which, while profitable, are less profitable than other orders due to the competitive nature and bid process in that market.
The warranty impact was approximately $2.3 million, which caused a decrease in gross profit percent of 1.9%.
Total warranty as a percent of sales was 4% for the quarter.
As <UNK> discussed, we will continually monitor our warranty claims and provide a reserve for estimated costs upon initial sales recognition.
We determined with respect to claims that we needed to increase the reserves in this quarter for the probable costs we know today.
We will continue to monitor and adjust reserves as necessary.
Gross profit improved in Transportation and High School Park and Recreation business units due to increased volumes and higher margins on the sales mix.
Gross profit decreased in the Commercial business units for the warranty impact, decrease in utilization of the fixed cost infrastructure due to lower sales, and in Live Events due to the mix of lower margin projects realized into sales.
Operating expenses for the third quarter were $27.6 million as compared to $26.6 million last year.
The increase relates primarily to information technology maintenance costs in the general and administrative areas.
We are entering the fourth quarter with a $177 million backlog.
Approximately $50 million of this backlog relates to projects with customer needs beyond the fiscal year, and we expect to convert sales beyond fiscal 2016 into 2017 primarily in the Live Events and Transportation markets.
In addition, we have experienced the lagging of orders and our uncertain order volumes in Commercial and International business units.
This lag and the current planned schedule for production of booked orders cause us to expect revenues to be slightly lower than last year fourth quarter.
Gross profit predictions also remain dynamic pending the conversion of sales, but we expect gross profit to be similar to slightly down from last fiscal year fourth quarter as well.
We anticipate operating expenses in dollars to be up slightly as compared to the fourth quarter of fiscal 2015, for general increases in personnel costs, information technology maintenance cost and increased design and development activities.
Our overall effective tax rate for the third quarter was a benefit of 64% due to our operating loss and due to the reinstatement of the research and development credit.
Going forward, the research and development credit was made permanent which will avoid these catch-ups we have historically had due to the law changes.
We forecast an effective annual tax rate of approximately 36%.
Our tax rate can fluctuate depending on changes in tax legislation and the geographic mix of taxable income.
We reported negative free cash flow of $10 million for the first nine months of fiscal 2016 compared to positive free cash flow of $16 million for the same period of fiscal 2015.
The cash usage was primarily due to lower net income levels and timing increases in working capital due to project cash receipt and payments for inventory.
Our cash and marketable securities positions remain positive at $56 million at the end of the quarter.
We expect our capital usage to be approximately $20 million for fiscal year 2016.
Use of capital expenses is for manufacturing equipment for new or enhanced product production, expanded capacity investments in quality and reliability equipment, demonstration equipment for new products, and continued information system infrastructure investments.
With that I'll turn it back to <UNK> for additional comments on our outlook.
Thanks, <UNK>.
The world economy remains dynamic with oil prices, uncertainty in interest rates, currency fluctuations, regional political unrest, to China's growth or lack of growth rates.
It appears that this volatility has created some uncertainty in our marketplaces.
In addition, we continue to compete in a dynamic competitive environment, with each company working to find their niche in this growing market.
While these challenges may have some short-term impacts on orders, we have faced similar competitive challenges in our history and we believe the long-term outlook is still good.
Our strategy is to continue to focus on things we can control, serving our customers in the growing market with high quality and reliable solutions which meets their business needs over the long term.
In the coming year, the economic environment may have an impact on large projects or opportunities in Commercial and International business.
However, we continue to work with our customers to help them realize their visions for successful use of their video systems.
We also continue to refine and enhance our global Transportation products and see opportunities in Europe and the Middle East, but those projects can take time to close and then delivery schedules can extend when revenue is recognized.
We continue to see strong demand in our Live Events, our High Schools Park and Recreation, and our Transportation businesses, and compete strongly in our product offerings by providing the full solutions our customers desire.
Transportation quoting in the North America is also strong due to the recent passing of the US Transportation Bill.
This allows for longer term planning at the state DOT levels and more availability of projects for the foreseeable future.
Seasonal variability and the influence of large projects in our business will continue to affect individual quarters and fiscal years.
As the order picture for the short term becomes clearer we continue to monitor and limit the amount of cost added for personnel, our largest non-inventory cost.
We also continue our strategies for continuous improvement and operational excellence, all of which will lower our overall cost to serve customers in the future.
We also will continue to utilize and improve our capabilities on quality and reliability during design and manufacturing of our products to lower overall cost of warranty.
Our market outlook over the coming year is positive.
We see continued adoption of our products in all of our major markets.
Our on-premise and out-of-home customers continue to turn to digital messaging solutions to advertise or communicate information to their audiences.
Unique projects, such as seen in Times Square or Las Vegas, continue to be considered by developers and venue owners to help attract large sustained audiences.
Our solutions in these markets have natural replacement cycles, as the products have a known end of life.
This provides us the outlook to continue to investment in customer-centric solutions to meet the demands of the market.
With that, I would ask the operator to please open it up for questions.
Yes.
We are anticipating slightly down from last year compared to last year's fourth quarter.
Yes, I think Live Events will be similar as compared to last year depending on the project cycle.
Some of that backlog I spoke about is a little bit of a longer lead time.
And then you're right, the Commercial market and International may be ---+ you might expect a bit down from last year during the same quarter.
Right.
I appreciate the question <UNK>.
We had teed up some designs ready to go into production in early to mid-summer and as we started to dive into this BGA issue that we have been having we chose to stay with the design we had and make it more reliable because we at least knew what that product would do; and that caused us to delay the release of a number of these products until early in our Q3.
And so that pushed out a number of activities that we had planned for our fiscal year and the cost of our products, which would help us improve our margins.
So we think we've made it through this hard period and are working to get these strategies in place for our product competitiveness.
There is certainly uncertainty in any estimate we make, but I'd say a couple of quarters is reasonable.
It's our understanding, <UNK>, that our share in the billboard market is relatively consistent and that there was a shift in capital spend at least in the last half of calendar 2015.
Hi, <UNK>.
Good morning, <UNK>.
I think that worldwide, out-of-home companies, especially in the billboard space, are using LED technology and it's proved to be profitable for them and we don't see another technology out there.
As I tried to indicate in some comments, some of our customers had planned to replace, but the products that we had in the field are still performing well and so they pushed out their replacement for a period of time.
How long they choose to do that is somewhat uncertain, but the LED technology is very popular in this business.
In a billboard application 24/7, it's seven to ten years.
We are doing many things internally.
As we indicated, there is a software upgrade we can do to these systems to give us better visibility and to control and mitigate.
This is an attachment, a mechanical attachment.
And then we have different ways to implement changes in the field.
And we've worked on how to do those changes to keep our costs down if we would choose to do work in the field.
Certainly, Data Display has been a nice acquisition for Daktronics and that integration is going well and I think some of the growth has to do with, they have access to products that Daktronics has as well as Daktronics has access to products and services that Data Display had.
Also, the overall mood in that market is up as they passed the US Transportation Bill.
So in North America at least, that's a real positive.
As well as in some of our other markets, they're continuing to invest in infrastructure.
I think all of that together gave us a positive look at Transportation this year.
Thanks everybody for your time this morning.
We appreciate your continued interest in what Daktronics does.
We have realized this has been a hard year, but like we said, we're optimistic about the future of our business and our ability to continue to perform in it.
So I hope everybody has a great week.
Thank you.
