Daktronics, Inc. Announces Third Quarter Fiscal 2016 Results

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Feb 23, 2016

BROOKINGS, S.D., Feb. 23, 2016 (GLOBE NEWSWIRE) -- Daktronics, Inc. (NASDAQ:DAKT) today reported fiscal 2016 third quarter net sales of $123.8 million, an operating loss of $5.5 million, and a net loss of $2.0 million, or $(0.04) per diluted share, compared to net sales of $118.1 million, an operating loss of $1.6 million, and net income of $0.6 million, or $0.01 per diluted share, for the third quarter of fiscal 2015.  Fiscal 2016 third quarter orders were $116.9 million, compared to $125.7 million for the third quarter of fiscal 2015.  Backlog at the end of the fiscal 2016 third quarter was $176.3 million, compared with a backlog of $150.2 million a year earlier and $184.2 million at the end of the second quarter of fiscal 2016. 

Net sales, operating income, net income, and earnings per share for the nine months ended January 30, 2016, were $431.7 million, $6.2 million, $5.0 million, and $0.11 per diluted share, respectively.  This compares to $457.9 million, $24.3 million, $17.0 million, and $0.39 per diluted share, respectively, for the same period in fiscal 2015.  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 a 39-week versus a 40-week year-to-date comparison.

Free cash flow, defined as cash provided from or used in operating activities less capital expenditures, was a negative $11.1 million for the first nine months of fiscal 2016, as compared to a positive free cash flow of $16.0 million for the same period of fiscal 2015.  Net investment in property and equipment was $13.3 million for the first nine months of fiscal 2016, as compared to $11.3 million for the first nine months of fiscal 2015.  Cash and marketable securities at the end of the third quarter of fiscal 2016 were $56.3 million, which compares to $68.2 million at the end of the third quarter of fiscal 2015 and $83.1 million at the end of fiscal 2015.  

Orders for the third quarter of fiscal 2016 decreased 7.0 percent as compared to the third quarter of fiscal 2015.  Orders declined primarily due to lower orders in the billboard segment of the Commercial business unit.  Billboard segment orders historically are concentrated in a few national digital billboard customers, who have decreased spending during this year primarily due to changes in their capital allocation plans, the economy, and lengthened replacement cycles.  Live Events business unit orders were down compared to last year due to order timing differences of large projects.  Live Events significant orders included professional baseball systems for the Cleveland Indians, the Philadelphia Phillies, and the Texas Rangers; and sports systems for the University of Oklahoma, University of Mississippi, and Clemson University.  High School Park and Recreation orders increased due to winning a number of sports video projects.  The timing of awards of large projects and large account orders are difficult to predict, may not be repeatable, and are outside our control. This variation creates difficulty in comparability over the short-term.

Sales increased by 4.8 percent in the third quarter of fiscal 2016 as compared to the third quarter of fiscal 2015 due to a higher level of buildable backlog available coming into the quarter.  Live Events sales increased most significantly due to the production of orders in backlog awaiting newly released product enhancements.   Our sales were down in the Commercial billboard segment, consistent with the billboard order decline.

Gross profit percentage for the quarter declined as compared to last year primarily due to warranty charges, an increase in sales mix to larger projects with lower gross margin, and unabsorbed fixed costs due to lower production volumes as compared to other quarters.  We adjusted our warranty accruals by approximately $2.3 million during the quarter and $5.6 million year to date, due to a continued product issue primarily affecting out-of-home applications.  This higher than expected component failure is related to the mechanical attachment of the component to the circuit card and is concentrated on displays shipped prior to 2012.  While we have estimated costs for probable failures, it is difficult to project future failure rates, and our estimates may change as time passes.  Large projects sales accounted for approximately 18% of fiscal 2016 third quarter.  We historically face stronger competition on large multi-million projects and generally these projects include an element of subcontracting which typically earns a lower margin. The third quarter is historically our lowest quarter for sales due to the holidays and seasonality of the sports business.  These factors impact profitability as many of our costs are fixed and are difficult to reduce within a quarter.

Operating expenses increased by 3.5 percent primarily due to higher general and administrative expenses for information technology maintenance.

For the third quarter, an income tax benefit of $3.5 million was recorded for the quarter.  This benefit resulted primarily from the reinstated research and development credit in the United States, which resulted in $2.0 million of tax benefit.

Free cash flow was negative for the first nine months of the year as purchases of property and equipment exceeded cash flow from operations.  Cash outflow from operations was impacted by lower net income and due to normal fluctuations in working capital.

Reece Kurtenbach, chairman, president and chief executive officer stated, "Our third quarter is historically a lighter quarter for sales and profits due to the seasonality of our business in sports, impact of weather and outdoor construction cycles, and the decrease in production days available due to holidays in the quarter.  While this year was no exception, we are disappointed in our financial performance.  Sales increased over last year due to the orders we delayed production on from the second quarter.  However, profitability dropped significantly due to sales mix and because of ongoing warranty charges. We have implemented countermeasures to reduce the overall financial impact of the warranty issue.  We are addressing issues in the field by deploying preventative maintenance and/or repairing affected sites to optimize our customers' experience.  Further warranty costs could be incurred before fully resolved."


Kurtenbach added, "Our financial performance on a year to date basis is lower than expected but we see ways to improve in the future.  Our order pipeline remains active in all markets.  In the short-term however, it is unclear how the uncertainty in the global economy may affect the timing and size of projects.  In the long-term, we remain optimistic about the growing digital marketplace.   Our competitive advantages remain strong, but as with any growing market, this potential attracts additional competitors.  To meet and exceed customer and market demands for long-term success, we believe solution development investments are critical.  Our near-term efforts are focused on ultra-high definition, software integration, control systems, and a new generation of outdoor products.  We will continue to develop these solutions using proven designs and leveraging the strength of our quality and reliability capabilities.  Until the short-term order picture becomes clearer, we are focused on maintaining or reducing costs to improve profitability."

Webcast Information

The company will host a conference call and webcast to discuss its financial results today at 10:00 a.m. (CST).  This call will be broadcast live at http://investor.daktronics.com and available for replay shortly after the event.

About Daktronics

Daktronics has strong leadership positions in, and is the world's largest supplier of, large-screen video displays, electronic scoreboards, LED text and graphics displays, and related control systems.  The company excels in the control of display systems, including those that require integration of multiple complex displays showing real-time information, graphics, animation, and video.  Daktronics designs, manufactures, markets and services display systems for customers around the world in four domestic business units:  Live Events, Commercial, High School Park and Recreation, and Transportation, and one International business unit.  For more information, visit the company's website at: www.daktronics.com, email the company at investor@daktronics.com, call (605) 692-0200 or toll-free (800) 843-5843 in the United States, or write to the company at 201 Daktronics Dr., P.O. Box 5128, Brookings, S.D. 57006-5128.

Safe Harbor Statement

Cautionary Notice: In addition to statements of historical fact, this news release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and is intended to enjoy the protection of that Act.  These forward-looking statements reflect the Company's expectations or beliefs concerning future events.  The Company cautions that these and similar statements involve risk and uncertainties which could cause actual results to differ materially from our expectations, including, but not limited to, changes in economic and market conditions, management of growth, timing and magnitude of future contracts, fluctuations in margins, the introduction of new products and technology, the impact of adverse weather conditions, and other risks noted in the company's SEC filings, including its Annual Report on Form 10-K for its 2015 fiscal year.  Forward-looking statements are made in the context of information available as of the date stated.  The Company undertakes no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.

Daktronics Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
  Three Months Ended Nine Months Ended
  January 30,
 January 31,
 January 30,
 January 31,
Net sales $123,816  $118,123  $431,705  $457,856 
Cost of goods sold 101,787  93,061  338,662  348,514 
Gross profit 22,029  25,062  93,043  109,342 
Operating expenses:        
Selling expense 13,784  13,694  42,873  43,405 
General and administrative 7,908  7,133  24,194  22,890 
Product design and development 5,883  5,820  19,826  18,773 
  27,575  26,647  86,893  85,068 
Operating (loss) income (5,546) (1,585) 6,150  24,274 
Nonoperating income (expense):        
Interest income 230  250  794  825 
Interest expense (113) (59) (203) (183)
Other (expense) income, net 7  179  (667) (218)
(Loss) income before income taxes (5,422) (1,215) 6,074  24,698 
Income tax (benefit) expense (3,469) (1,776) 1,083  7,655 
Net (loss) income $(1,953) $561  $4,991  $17,043 
Weighted average shares outstanding:        
Basic 44,021  43,612  43,933  43,435 
Diluted 44,021  43,991  44,357  44,204 
Earnings per share:        
Basic $(0.04) $0.01  $0.11  $0.39 
Diluted $(0.04) $0.01  $0.11  $0.39 
Cash dividend declared per share $0.10  $0.10  $0.30  $0.30 

Daktronics Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands) 
 January 30,
 May 2,
Cash, cash equivalents and restricted cash$31,871  $57,780 
Marketable securities24,471  25,346 
Accounts receivable, net73,430  80,857 
Inventories, net68,713  64,389 
Costs and estimated earnings in excess of billings30,815  35,068 
Current maturities of long-term receivables3,703  3,784 
Prepaid expenses and other assets5,812  6,663 
Deferred income taxes10,569  10,640 
Income tax receivables10,419  5,543 
Total current assets259,803  290,070 
Long-term receivables, less current maturities5,023  6,090 
Goodwill5,316  5,269 
Intangibles, net1,681  1,824 
Investment in affiliates and other assets2,186  2,680 
Deferred income taxes751  702 
 14,957  16,565 
Land2,138  2,147 
Buildings65,155  64,186 
Machinery and equipment86,104  80,664 
Office furniture and equipment15,840  15,823 
Computer software and hardware53,784  51,083 
Equipment held for rental803  803 
Demonstration equipment7,502  7,299 
Transportation equipment6,483  6,012 
 237,809  228,017 
Less accumulated depreciation164,431  155,173 
 73,378  72,844 
TOTAL ASSETS$348,138  $379,479 

Daktronics Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
(in thousands)
 January 30,
 May 2,
Accounts payable37,903  52,747 
Accrued expenses23,967  26,063 
Warranty obligations14,171  11,838 
Billings in excess of costs and estimated earnings13,120  23,797 
Customer deposits (billed or collected)15,645  16,828 
Deferred revenue (billed or collected)10,145  9,524 
Current portion of other long-term obligations469  587 
Income taxes payable84  636 
Total current liabilities115,504  142,020 
Long-term warranty obligations14,929  14,643 
Long-term deferred revenue (billed or collected)4,464  3,914 
Other long-term obligations, less current maturities2,443  3,190 
Long-term income tax payable2,986  2,734 
Deferred income taxes1,841  939 
Total long-term liabilities26,663  25,420 
TOTAL LIABILITIES142,167  167,440 
Common stock50,498  48,960 
Additional paid-in capital34,637  32,693 
Retained earnings124,604  132,771 
Treasury stock, at cost(9) (9)
Accumulated other comprehensive loss(3,759) (2,376)

Daktronics Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
  Nine Months Ended
  January 30,
 January 31,
Net income $4,991  $17,043 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:    
Depreciation 12,381  11,056 
Amortization 104  169 
Amortization of premium/discount on marketable securities 77  132 
Gain on sale of property, equipment and other assets (50) (1,192)
Share-based compensation 2,244  2,341 
Gain on sale of equity investee (119)  
Excess tax benefits from share-based compensation (4) (35)
Provision for doubtful accounts (110) (295)
Deferred income taxes, net 860  353 
Change in operating assets and liabilities (18,181) (2,255)
Net cash provided by operating activities 2,193  27,317 
Purchases of property and equipment (13,389) (15,328)
Proceeds from sale of property, equipment and other assets 111  4,011 
Purchases of marketable securities (18,273) (10,647)
Proceeds from sales or maturities of marketable securities 19,069  10,256 
Acquisitions, net of cash acquired (2,183) (6,223)
Proceeds from sale of equity method investment 377   
Net cash used in investing activities (14,288) (17,931)
Payments on notes payable (33) (42)
Proceeds from exercise of stock options 610  2,424 
Excess tax benefits from share-based compensation 4  35 
Principal payments on long-term obligations (15) (1,185)
Dividends paid (13,158) (13,016)
Net cash used in financing activities (12,592) (11,784)
Beginning of period 57,284  45,054 
End of period $31,677  $41,751 

Daktronics Inc. and Subsidiaries
Net Sales and Orders by Business Unit
(in thousands)
 Three Months Ended Nine Months Ended
 January 30,
 January 31,
 January 30,
 January 31,
Net Sales:               
  Commercial$29,385  $37,762  $(8,377) (22.2)% $112,661  $121,472  $(8,811) (7.3)%
  Live Events51,067  33,496  $17,571  52.5% 149,750  171,811  $(22,061) (12.8)%
  High School Park and Recreation10,940  10,771  $169  1.6% 54,152  55,125  $(973) (1.8)%
  Transportation11,698  9,479  $2,219  23.4% 38,759  34,807  $3,952  11.4%
  International20,726  26,615  $(5,889) (22.1)% 76,383  74,641  $1,742  2.3%
 $123,816  $118,123  $5,693  4.8% $431,705  $457,856  $(26,151) (5.7)%
  Commercial$29,922  $39,327  $(9,405) (23.9)% $95,082  $125,603  $(30,521) (24.3)%
  Live Events43,075  46,158  $(3,083) (6.7)% 168,082  149,579  $18,503  12.4%
  High School Park and Recreation15,131  11,480  $3,651  31.8% 55,560  54,694  $866  1.6%
  Transportation12,401  13,522  $(1,121) (8.3)% 42,735  36,985  $5,750  15.5%
  International16,368  15,226  $1,142  7.5% 56,105  68,633  $(12,528) (18.3)%
 $116,897  $125,713  $(8,816) (7.0)% $417,564  $435,494  $(17,930) (4.1)%

Reconciliation of Free Cash Flow
(in thousands)
 Nine Months Ended
 January 30,
 January 31,
Net cash provided by operating activities$2,193  $27,317 
Purchases of property and equipment(13,389) (15,328)
Proceeds from sales of property and equipment111  4,011 
Free cash flow$(11,085) $16,000 

In evaluating its business, Daktronics considers and uses free cash flow as a key measure of its operating performance.  The term free cash flow is not defined under U.S. generally accepted accounting principles ("GAAP") and is not a measure of operating income, cash flows from operating activities or other GAAP figures and should not be considered alternatives to those computations.  Free cash flow is intended to provide information that may be useful for investors when assessing period to period results.

For more information contact:
Sheila Anderson, Chief Financial Officer
(605) 692-0200