DAKT
#Thank you, Candice.
Good morning, everyone.
Thank you for participating in our second 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 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 the economic conditions, 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.
Orders for the second quarter of fiscal 2018 were $142 million as compared to last year's second quarter of $117 million.
Most of this order fluctuation is attributable to the volatility in our large project and account-based business in Live Events, International and Commercial 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 for in size for national or global customers, mostly in our out-of-home advertising space.
Our business also fluctuates seasonally based on the sports market and construction cycle, and is dependent on various schedules based on our customers' needs.
Orders also for the quarter were impacted by softer demand in the Commercial on-premise displays.
For the year, orders are up slightly by 1.1%.
Sales for the second quarter of fiscal 2018 were relatively flat at $169 million as compared to $170 million last year for the second quarter.
Sales increased in Live Events, High School, Park and Recreation and Transportation business units and decreased in the Commercial and International business units quarter-over-quarter.
Live Events contributed to the sales increase as the number of projects for professional sports and colleges and universities work was up as compared to last year.
Continued market demand and deliveries timings also contributed to sales increases in the Transportation and High School, Park and Recreation business units.
Commercial business unit sales declined compared to last year due to the softer demand in the on-premise display business, a reduction of shipments in orders in the Spectacular niche, which was partially offset by an increase in our billboard niche due to the timing of deliveries.
International business unit sales followed the decline in orders.
Gross profit was 25.2% during the second quarter of fiscal 2018 as compared to 26.1% during the second quarter of fiscal 2017 and remained flat on a year-to-date basis.
Gross margin percentages for the quarter were negatively impacted by the additional warranty expenses mentioned in the release, offset by a positive onetime $1.2 million gain from the sale of our nondigital operating business and also due to the improved productivity and sales mix.
Total warranty as a percent of sales was 3.9% during the second quarter of fiscal 2018 as compared to 2.7% last year during the same period.
Operating expenses increased $1.5 million or around 4.8% during the second quarter of fiscal 2018 as compared to the same year last ---+ same period last year due to the large degree from the increase in product development expenses.
Product development expense increased by $1.8 million for additional resources focused on speeding up the development of display and control solutions out to the market.
Selling expenses decreased quarter-over-quarter, mostly due to lower bad debt expense and commission expenses.
And general and administrative expenses remained relatively flat quarter-over-quarter.
Our overall effective tax rate was 24.6% as compared to 30.1% last year.
The primary factors impacting our effective tax rate is due to our ---+ an increase in the expected research and development tax credits because of the increased velocity in product development this year as well as utilizing a portion of our warrant valuation allowance against ---+ on net operating losses.
We forecast the forward-looking effective annual rate to be approximately 30%.
As we have previously discussed, our effective tax rate can fluctuate depending on tax ---+ changes of tax legislation and on the geographic mix of taxable income.
Our cash and marketable securities position was at $61.5 million at the end of the quarter.
We reported a positive free cash flow of $3.6 million as compared to positive free cash flow of $10.5 million for the same period in fiscal 2017.
Capital expenses for the first 6 months of the year were $7.7 million as compared to $4.6 million last year.
Primarily ---+ primary use of the capital include manufacturing equipment, research and development, testing equipment in facilities, demonstration equipment for new products and information technology infrastructure.
We expect capital expenditures to be less than $25 million for the fiscal year.
We made no repurchases of stocks during the first 6 months of the year.
Looking ahead, our third quarter is historically a lighter quarter for sales and profits due to the seasonality of our business of sports, outdoor construction and the impact of 2 major holidays in the U.S. We are starting fiscal 2018 third quarter with a higher backlog than last year and an active order pipeline.
Based on current estimates of production and deliveries for the quarter, we estimate third quarter sales to be at a level higher than last year's third quarter.
However, sales could change pending project bookings and customer schedule changes.
I'll now turn the call over to <UNK> <UNK>, our Chairman, President and CEO, for commentary on our business.
Thank you, <UNK>.
Good morning, everyone.
We had a positive financial performance for the first half of fiscal 2018, reflected in increases in sales, operating income and net income.
Order bookings paced similarly to last year at $342 million overall for Daktronics.
Looking deeper into the business units, order bookings on a year-to-date basis were up in Live Events business unit for continued demand for upgrading or new installations throughout professional sports, including the NFL, NHL and ML<UNK>
We continue to see demand in the marketplace from facilities using our solutions to enhance the fan experience or the entertainment factor, using increasing higher resolution display products.
We are seeing this both in upgrades or refurbishments for existing facilities as well as planning for new venues.
High School, Park and Recreation orders remained flat for the first 6 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.
Once again, these trends exist when refurbishing existing systems as well as the new locations.
Commercial business orders ---+ business unit orders decreased this year as compared to the same time frame last year.
The major factors contributing to this difference were the competitive environment in the on-premise niche, fewer national account based on-premise opportunities and volatility of large custom projects in the Spectacular niche.
Digital billboard orders were up slightly year-over-year.
While it was a slower start for orders, 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 active in the Spectacular area of our business as well.
We are seeing strong activity for replacing or refurbishing existing systems as well as the placement of systems in new locations across our Commercial segments.
Orders in our International business unit are lagging year-over-year, primarily due to the irregular nature of large projects.
This inherent variability affects timing of both orders and sales, and sales was also impacted in this period.
Transportation business unit orders have decreased on a comparative 6-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 and advertising applications.
The higher sales level for the year improved gross margins 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 nondigital business.
Unfortunately, these increases were offset by higher warranty expenses, which made our overall gross profit relatively flat year-over-year.
The increase in warranty cost is not the result of a new issue but is based on our decision to preserve market leadership by more quickly addressing certain field issues to keep our customer relationship strong.
During fiscal 2017, we made progress on increasing product development velocity and expect to continue this throughout fiscal 2018 and likely into fiscal 2019.
While these efforts will increase development expenses as a percent of sales in the near term, 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, 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 remain 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 continue to enhance and develop product lines and comprehensive solutions for our broad market base as well as specific customer needs.
This allows for success in markets during 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.
And from the active support from initial project planning through intended use of a system leads to satisfied customers and repeat business aligned with the natural replacement cycle.
While optimistic about our long-term future, various geopolitical, economic and competitive factors may impact order growth.
Our business will continue to be lumpy.
With the ---+ while these areas can impact a specific fiscal period, we continue to pursue long-term profitable growth.
While the path may 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 any questions.
I would believe our Live Events marketplace as far as top line has been sustained over the past 3 years or possibly more.
And I think that continues to be a strong marketplace for Daktronics.
It continues to be highly competitive and it's a different set of customers season by season over ---+ even though the marketplace is the same leagues or types of venues.
So I would predict, <UNK>, that we continue to see good performance by Daktronics in this marketplace and we believe that our reputation in this area is ---+ remains strong and we have a good chance at continuing our previous performance.
We are dealing with not a new issue but an issue we've talked about maybe more than a year in the past.
And we made a conscious decision this quarter to address certain field issues in certain areas more aggressively.
That's really to retain customer satisfaction.
And we have reserved, we believe, appropriately for that and won't see that as a continued expense in future quarters.
Yes, that's a good question, <UNK>.
We see that, that business continues to adopt the technology, but for some reason there wasn't as much activity in the first half of this year.
We continue to see optimistic ---+ optimism from that marketplace.
We use a reseller market as well as some direct sales through national accounts and we believe that will be an ongoing positive business for us in the future.
I appreciate everybody for signing in today, and I hope you have a great holiday season.
And we'll talk again in a few months.
Thank you.
