DAKT
#Thank you Latoya.
Good morning everyone.
Thank you for participating in the third-quarter earnings conference call.
I would like to review our disclosure cautioning investors (technical difficulty) that, in addition to statements of historical fact, 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, management of growth, timing and magnitude of (technical difficulty) contracts, fluctuations in margins, introduction of new product and technology, and other important factors as noted in detail in our 10-K and 10-Q SEC filings.
At this time, I would like to turn the call over to <UNK> <UNK>, our Chairman, President and CEO, for a few comments.
Thanks <UNK>.
Good morning everyone.
As highlighted in our press release, order volume was strong for the third quarter, and we noted a couple of great quarter events for the quarter.
This supports the success of our commitment to serve customers, and maximize their business with our products, engineering and service capability.
Some highlights of unique project includes the replacement of the entire surface of Piccadilly Circus (technical difficulty) its iconic location in London.
The new display will replace all current video signage with one (technical difficulty) system.
While one surface, Piccadilly operators will have great flexibility in using this canvas to create actual and informative imagery as either a single 4K screen or as many different displays.
We continue to see growth in both the size and usage of video screens worldwide.
During the quarter, we completed installation for Qudos Bank Arena, our largest center-hung LED video system in the Southern Hemisphere.
This trend is also reflected in our High School Park and Recreation business unit with greater numbers of larger systems.
We installed the largest video display in a Wisconsin high school and have had success in many different ---+ in many parts of the country this year in providing video systems in high schools.
The order for Nevada Department of Transportation Project NEON includes multiple, large, full-color displays that extend across six lanes of traffic and includes dynamic messaging capability to show incident and speed information.
We continue to have success in our commercial business unit with an 8.9% increase in orders for the quarter and a 20.2% increase on a year-to-date basis.
Spectacular niche in commercial predominantly led to improved order volume year-to-date.
We are seeing greater quoting activity in this market and more customers are moving forward on decisions this year as compared to last.
The billboard niche has also seen some improvement on a year-to-date basis.
On-premise orders have increased from digital technology adoption and addition of orders from in-store digital media solutions sold through ADFLOW, the company we acquired last year during the fourth quarter.
Our defense business unit orders were up for the quarter but remain down on a year-to-date basis.
Minor League Baseball facilities orders led to third-quarter order improvement compared to last year during the same quarter.
We believe overall market activity to be down in this unit through the first three quarters of FY2017.
We booked one project over $5 million this year when generally more than a handful are available in the market.
While unusual for this time of year, the outlook and activity in the market remains strong.
As an example, we have been awarded two large projects in the fourth quarter, one for the Milwaukee Bucks and one with the Detroit Lions at Ford Field.
The Bucks display will be the largest center-hung in basketball and enhanced fan engagement during the games.
The Lion's new products will also elevate their fans' game day experience and increase even presentations to another level.
For more details on the financial results, I'll turn it back to <UNK>.
Thank you <UNK>.
Orders increased 22.6% for the quarter for reasons <UNK> highlighted.
For the year, order volume has increased 4.3%.
While orders were strong, our buildable backlog available in the third quarter was lower as compared to last year, causing the 6.5% decline in sales.
Decreases occurred in Live Events, Transportation and International business units.
Buildable backlog is defined as contracted orders with customer design approvals and site readiness as aligned with optimizing our factory production level.
It's not unusual to have lower buildable backlog during the third quarter due to the sports seasonality of our business, two holidays impacting production work days, and a slowdown in construction activity in the winter months.
Gross profit improved to 20.1% during the third quarter of fiscal 2017 as compared to 17.8% in the third quarter of fiscal 2016.
Gross margins percentages were favorably impacted by lower warranty costs as a percentage of sales, improved productivity, and favorable sales mix.
Total warranty as a percent of sales was 2.9% for the quarter as compared to 4% last year.
We continue to serve customers impacted by the warranty items discussed during fiscal year 2016 and monitor those reserves.
Operating expenses increased $2.7 million, or 9.7%, to $30.3 million for the quarter.
Selling expenses increased $0.9 million, primarily due to the addition of ADFLOW's costs in comparison to last year, and increases in personnel costs and other selling areas.
General and administrative expenses increased $0.7 million due to a rise in personnel costs and increases in professional fees.
Signage development increased $1.1 million due to additional resources allocated to our product development functions to increase velocity of solution development.
Our overall tax rate benefit was 27.9% as compared to the benefit of 64% last year during the same quarter.
The United States research and development credits reinstatement last year during our third-quarter caused that large catch up in benefits during the quarter.
We forecast the forward-looking effective annual rate to be approximately 30% to 32%.
Our effective rates can fluctuate depending on changes in tax legislation and the global mix of taxable income.
Taking it all into account, we experienced a loss during the third quarter primarily due to that increase in sales for reasons noted and the different situation in our tax provision as compared to last year.
While the loss is undesirable, we continue to monitor and manage our cost infrastructure to the opportunities we foresee and continue our focus on serving customers with industry-leading solutions while generating profitable growth.
Our cash and marketable securities position was $76.6 million at the end of the quarter.
We reported positive free cash flow of $38.8 million on a year-to-date basis as compared to negative free cash flow last year of $10.8 million for the same period.
The increase in free cash flow was primarily due to improved profits for the year, improved operating net inflows due to the timing of receivables and project cash receipts net of payments up for inventory due to the decrease in inventory and due to reduced capital spending.
We expensed $6.7 million for capital expenditures for the year as compared to $13.4 million at the same time last year.
We expect our capital usage to be less than $15 million for fiscal 2017.
Primary uses of capital include manufacturing equipment for new or enhanced production, product development testing equipment and facilities, demonstration equipment for new products, and information technology infrastructure.
We made no repurchases of stock during this past quarter.
Looking ahead to the fourth quarter, we have a strong backlog and pipeline.
We expect to work through the $170 million backlog over the coming quarters.
For the fourth quarter, we expect a slight sales improvement and slight increase in operating expenses as compared to the fourth quarter of fiscal 2016.
For gross margins, we estimate improvements over the third quarter due to the increased sales volume and improved rates over the fourth quarter of last year due to the warranty issue experienced last year.
With that, I'll turn it back to <UNK> for additional comments on our outlook.
Thank you <UNK>.
Our outlook remains similar to past discussions.
All indications for market activity and estimates from industry research point to an expanding digital marketplace.
Our international business unit has already exceeded the entire fiscal 2016 order volume at the end of the third quarter.
International orders are challenging to predict due to many global factors, but, over the long term, we expect to grow both in this market and in our market share in this business unit.
High school park and recreation started the year at a great pace, and we expect to see a strong market here of larger orders due to the adoption of video systems.
We expect live event sales to continue to be similar to past years' levels based on anticipated activity within this customer base but predict orders to be slightly down for the year.
Transportation has room to grow with the demand picture.
There appears to be stability in federal funding and we have success in winning statewide procurement projects and other infrastructure road projects.
In our commercial business unit, our spectacular segment has many opportunities in our pipeline that position us for an increase year-over-year and into the future.
In our billboard segment, we expect similar to slightly improved volumes based on overall activity we see in the national and local third-party advertisers, demand for replacement and new digital billboard deployment.
In our on-premise segment, we are actively promoting our indoor network solutions and new product lines and expect increases in this business.
We have some progress on increasing product development velocity and expect to continue this into the future.
While these efforts will increase development expenses, we believe this investment is necessary to drive forward new solutions to meet customer needs and to expand our global market share.
Rollouts of products and new control solutions are expected through the coming year.
While the path will not always be smooth, the growing market and our industry leading solutions position us to generate long-term profitable growth.
With that, I would ask the operator to open it up for any questions.
I think we had expected very similar to slightly down coming into the quarter, and it really just went to the timing of order bookings as well as the production schedule.
So, it's nothing alarming, just differences to our prediction.
There wasn't anything material that was in that expectation besides what you stated at the beginning where our revenues were down a bit, which caused us not to have the ability to cover some of our fixed costs.
And we had maybe a few hundred thousand dollars of additional warranty charges, so warranty as a percent of sales was up a little bit, 2.9%, which reflected the 2% or less.
So that had a little bit of an impact as well.
Our revenues may not quite reach those at the beginning of the first part of the year, so that would challenge the gross margin a bit (multiple speakers) the same level.
In the commercial area, the change was really in our spectaculars segment.
So the order of growth in that area, we saw performance in all areas, but the main growth area was in spectaculars.
In our international business, it was ---+ I don't think any one segment stands out.
We had good performance in all of our different segments internationally.
And I don't ---+ I'm trying to think regionally if there was one region that was ---+ they are both doing quite well, APAC and EMEA.
On the MLB side, there wasn't really a significant project left in Q3 for this spring.
So, as we look forward into next year, I think some of the comments we made in our call is that we think, the spectaculars business, there still appears to be a lot of activity in that business.
Our on-premise, especially with the addition of the ADFLOW acquisition, we think there's optimism there.
Our international business is much harder to predict, but, in general, our market share is much lower internationally than it is in the US.
So we would see that as an area for growth.
Even though all of these tend to be not smooth, many small orders, it's lumpy with a few large orders every quarter.
We continue to evaluate that on a quarter-by-quarter basis with our Board of Directors, so we don't have any real guidance to give on whether we would have activity there in the next quarter.
Thank you, everybody, for attendance this morning.
I hope you have a great spring.
We look forward to talking again in June.
Thank you.
