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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 28, 2001
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Commission file number
0-23246
DAKTRONICS, INC.
(Exact name of registrant as specified in its charter)
South Dakota 46-0306862
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
331 32nd Avenue Brookings, SD 57006
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (605) 697-4000
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(Former name, address, and/or fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 31, 2001
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Common Stock, No par value 18,143,464
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Daktronics, Inc. and Subsidiaries
Table of Contents
Part I. Financial Information Page(s)
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Item 1. Financial Statements
Consolidated Balance Sheets -
July 28, 2001 and April 28, 2001 ...................... 3-4
Consolidated Statements of Income -
Three months ended
July 28, 2001 and July 29, 2000 ....................... 5
Consolidated Statements of Cash Flows-
Three months ended
July 28, 2001 and July 29, 2000 ....................... 6
Notes to Consolidated Financial Statements ............ 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......... 9-12
Item 3. Quantitative and Qualitative Disclosures
about Market Risk ..................................... 12
Part II. Other Information
Signatures ............................................................ 13
2
Part I.
Item 1.
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
JULY 28,
2001 APRIL 28,
ASSETS (UNAUDITED) 2001
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CURRENT ASSETS
Cash and cash equivalents ..................................... $ 797 $ 2,896
Accounts receivable less allowance
for doubtful accounts of $302 at
July 28, 2001 and $271 at April 28, 2001 .................... 22,092 21,090
Current maturities of long-term
receivables ................................................. 1,452 2,030
Inventories ................................................... 21,373 19,719
Costs and estimated earnings in
excess of billings on uncompleted
contracts ................................................... 16,753 10,890
Prepaid expenses and other .................................... 489 529
Income taxes receivable ....................................... -- 97
Deferred income taxes ......................................... 2,103 2,103
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Total current assets ........................................ 65,059 59,354
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LONG-TERM RECEIVABLES
AND OTHER ASSETS
Advertising rights ............................................ 1,245 1,281
Long-term receivables,
less current maturities ..................................... 5,064 5,269
Goodwill, net of accumulated amortization ..................... 1,425 1,469
Intangible and other assets, other than goodwill, net ......... 880 970
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8,614 8,989
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PROPERTY AND EQUIPMENT, at cost
Land ........................................................ 542 542
Buildings ................................................... 11,917 9,451
Machinery and equipment ..................................... 20,293 19,308
Office furniture and equipment .............................. 8,516 7,487
Transportation equipment .................................... 2,268 1,901
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43,536 38,689
Less accumulated depreciation ............................... 17,853 16,818
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25,683 21,871
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$ 99,356 $ 90,214
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The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in thousands)
JULY 28,
2001 APRIL 28,
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) 2001
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CURRENT LIABILITIES
Notes payable, bank ..................................... $ 8,713 $ 7,911
Current maturities of
long-term debt ........................................ 3,935 3,883
Accounts payable ........................................ 13,142 10,199
Customer deposits ....................................... 2,526 1,236
Accrued expenses ........................................ 6,208 6,981
Billings in excess of costs and
estimated earnings on uncompleted contracts ........... 2,863 2,177
Income taxes payable .................................... 644 --
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Total current liabilities ............................. 38,031 32,387
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LONG-TERM DEBT
less current maturities ................................. 11,591 10,344
DEFERRED INCOME ........................................... 886 531
DEFERRED INCOME TAXES ..................................... 1,039 1,050
MINORITY INTEREST IN SUBSIDIARY ........................... 74 79
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SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized 30,000,000 shares
Issued July 28, 2001 18,110,384 shares;
April 28, 2001 18,016,066 shares ...................... 13,232 12,900
Additional paid-in capital .............................. 341 341
Retained earnings ....................................... 34,174 32,600
Less cost of treasury stock, 19,680 shares .............. (9) (9)
Foreign currency translation adjustment ................. (3) (9)
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47,735 45,823
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$ 99,356 $ 90,214
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The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED
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JULY 28, JULY 29,
2001 2000
(13 WEEKS) (13 WEEKS)
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Net sales ..................................................... $ 40,247 $ 34,536
Cost of goods sold ............................................ 28,283 24,211
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Gross profit .............................................. 11,964 10,325
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Operating expenses:
Selling ..................................................... 5,536 4,461
General and administrative .................................. 2,089 1,212
Product design and development .............................. 1,658 1,304
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9,283 6,977
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Operating income .......................................... 2,681 3,348
Nonoperating income (expense):
Interest expense ............................................ (401) (286)
Other income, net ........................................... 79 230
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Income before income taxes and minority interest .......... 2,533 3,488
Income tax expense .......................................... 964 1,366
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Income before minority interest ........................... 1,569 2,122
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Minority interest in loss of subsidiary ..................... (5) --
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Net income ................................................ $ 1,574 $ 2,122
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Earnings per share:
Basic (1) ................................................. $ .09 $ .12
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Diluted (1) ............................................... $ .08 $ .11
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(1) Share and per share amounts for the three months ended July 29, 2000 have
been restated to reflect a two-for-one stock split in the form of a stock
dividend (Note A).
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
THREE MONTHS ENDED
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JULY 28, JULY 29,
2001 2000
(13 WEEKS) (13 WEEKS)
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................... $ 1,574 $ 2,122
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ................................................ 1,035 734
Amortization ................................................ 67 66
Minority interest in loss of subsidiary ..................... (5) --
Provision for doubtful accounts ............................. 75 36
Deferred taxes .............................................. (11) --
Net change in operating assets and
liabilities ............................................... (2,421) (427)
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Net cash provided by
operating activities ..................................... 314 2,531
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment .............................. (2,697) (1,663)
Minority investment in subsidiary ............................... (5) --
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Net cash (used in)
investing activities ..................................... (2,702) (1,663)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on note payable .................................. 802 1,559
Principal payments on
long-term debt ............................................. (851) (564)
Proceeds from exercise of stock options ........................ 332 5
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Net cash provided by
financing activities ....................................... 283 1,000
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Effect of exchange rate changes on cash .................... 6 --
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Increase (decrease) in cash and cash equivalents ........... (2,099) 1,868
Cash and cash equivalents:
Beginning ....................................................... 2,896 1,217
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Ending .......................................................... $ 797 $ 3,085
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Supplemental schedule of Noncash Investing and Financing Activities
Purchase of building and equipment
through contract for deed .................................... $ 2,150 $ --
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
DAKTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)
NOTE A. GENERAL
The consolidated financial statements include the accounts of
Daktronics, Inc. and its subsidiaries (Company). Intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with instructions for Form 10-Q and,
accordingly, do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, the unaudited financial statements contain all adjustments,
consisting of normal recurring accruals, necessary to present fairly the
consolidated financial position of the Company as of July 28, 2001 and the
results of its operations and cash flows for the three months ended July 28,
2001 and July 29, 2000. These results may not be indicative of the results to be
expected for the full fiscal year.
These statements should be read in conjunction with the financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended April 28, 2001, previously filed with the Securities and
Exchange Commission (SEC).
Earnings per common share have been computed on the basis of the
weighted-average number of common shares outstanding during each period
presented. A reconciliation of the income and common stock share amounts used in
the calculation of basic and diluted earnings per share (EPS) for the three
months ended July 28, 2001 and July 29, 2000 follows:
Per
Net Share
Income Shares Amount
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For the three months ended July 28, 2001:
Basic EPS .................................... $ 1,574 18,045,481 $ 0.09
Effect of dilutive securities:
Exercise of stock options and warrants ..... -- 1,407,703 0.01
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Diluted EPS .................................. $ 1,574 19,453,184 $ 0.08
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For the three months ended July 29, 2000:
Basic EPS .................................... $ 2,122 17,729,830 $ 0.12
Effect of dilutive securities:
Exercise of stock options .................. -- 854,022 0.01
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Diluted EPS .................................. $ 2,122 18,583,852 $ 0.11
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On December 7, 1999 and May 24, 2001, the Company declared a
two-for-one stock split in the form of a stock dividend of one share of common
stock for each one share outstanding, payable to shareholders of record on
December 20, 1999 and on June 11, 2001, respectively. All data related to common
shares has been retroactively adjusted based upon the new shares outstanding
after the effect of the two-for-one stock split for all periods presented.
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NOTE B. INVENTORIES
Inventories consist of the following:
July 28, April 28,
2001 2001
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Raw materials ........ $ 9,846 $ 9,610
Work-in-process ...... 4,462 2,439
Finished goods ....... 7,065 7,670
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$ 21,373 $ 19,719
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NOTE C. LITIGATION
There are no pending material legal transactions against the Company.
NOTE D. RECENT ACCOUNTING PRONOUNCEMENTS
In July, 2001, the Financial Accounting Standards Board (FASB) issued
two statements - Statement 141, BUSINESS COMBINATIONS, and Statement
142, GOODWILL AND OTHER INTANGIBLE ASSETS, which will impact the
Company's accounting for its reported goodwill.
Statement 141:
* Eliminates the pooling method for accounting for business combinations.
* Requires that intangible assets that meet certain criteria be reported
separately from goodwill.
* Requires negative goodwill arising from a business combination to be
recorded as an extraordinary gain.
Statement 142:
* Eliminates the amortization of goodwill and other intangibles that are
determined to have an indefinite life.
* Requires, at a minimum, annual impairment tests for goodwill and other
intangible assets that are determined to have an indefinite life.
* Requires the carrying value of goodwill which exceeds its implied fair
value to be recognized as an impairment loss.
Upon adoption of these Statements, the Company is required to:
* Re-evaluate goodwill and other intangible assets that arose from
business combinations entered into before July 1, 2001. If the recorded
other intangible assets do not meet the criteria for recognition, they
should be reclassified to goodwill. Similarly, if there are other
intangible assets that meet the criteria for recognition but were not
separately recorded from goodwill, they should be reclassified from
goodwill.
* Reassess the useful lives of intangible assets and adjust the remaining
amortization periods accordingly.
* Recognize any remaining negative goodwill as income.
The provisions of FASB Statement 141 apply to all business combinations
initiated after June 30, 2001 and all business combinations accounted for by the
purchase method for which the date of acquisition is July 1, 2001, or later. The
provisions of FASB Statement 142 will be implemented by the Company in the first
quarter of its fiscal year 2003 financial statements. The Company has not yet
completed its full assessment of the effects of these new pronouncements on its
financial statements and is uncertain as to the impact.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion highlights the principal factors affecting
changes in financial condition and results of operations.
This discussion should be read in conjunction with the accompanying
Consolidated Financial Statements and Notes to Consolidated Financial
Statements.
In addition to statements of fact, this report contains forward-looking
statements reflecting the Company's expectations or beliefs concerning future
events which could materially affect Company performance in the future. The
Company cautions that these and similar statements involve risk and
uncertainties including changes in economic and market conditions, seasonality
of business in certain market niches, impact of large orders, management of
growth, and other risks noted in the Company's SEC filings which may cause
actual results to differ materially. 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.
GENERAL
The Company designs, manufactures and sells a wide range of
computer-programmable information display systems to customers in a variety of
markets throughout the world. The Company focuses its sales and marketing
efforts on markets rather than products. Major categories of markets include
sport, business, and transportation.
The Company's net sales and profitability historically have fluctuated
due to the impact of large product orders, such as display systems for the
Olympic Games and major league sports, as well as the seasonality of the sports
market. The Company's gross margins on large product orders tend to fluctuate
more than those for small standard orders. Large product orders that involve
competitive bidding and substantial subcontract work for product installation
generally have lower gross margins. Although the Company follows the percentage
of completion method of recognizing revenues for these large orders, the Company
nevertheless has experienced fluctuations in operating results and expects that
its future results of operations may be subject to similar fluctuations.
The Company operates on a 52 - 53 week fiscal year, with fiscal years
ending on the Saturday closest to April 30 of each year. The first three
quarters end on the Saturday closest to July 31, October 31 and January 31.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales represented
by items included in the Company's Consolidated Statements of Income for the
periods indicated:
9
THREE MONTHS ENDED
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JULY 28, JULY 29,
2001 2000
(13 WEEKS) (13 WEEKS)
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Net sales ........................................... 100.0% 100.0%
Cost of goods sold .................................. 70.3% 70.1%
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Gross profit ........................................ 29.7% 29.9%
Operating expenses .................................. 23.0% 20.2%
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Operating income .................................... 6.7% 9.7%
Interest income ..................................... 0.4% 0.5%
Interest expense .................................... (1.0%) (0.8%)
Other income, net ................................... 0.2% 0.7%
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Income before income taxes and minority interest .... 6.3% 10.1%
Income tax expense .................................. 2.4% 4.0%
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Income before minority interest ..................... 3.9% 6.1%
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Minority interest in loss of subsidiary ............. 0.0% 0.0%
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Net income .......................................... 3.9% 6.1%
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NET SALES
Net sales were $40.2 million for the three months ended July 28, 2001
compared to $34.5 million for the three months ended July 29, 2000. The increase
was the result of increased sales in the business, sports and transportation
markets.
GROSS PROFIT
Gross profit increased to $12.0 million for the three months ended July
28, 2001 from $10.3 million for the three months ended July 29, 2000. The
increase in gross profit dollars was due to increased sales. Gross profit as a
percentage of net sales for the three months ended July 28, 2001 decreased
slightly to 29.7% from 29.9% for the three months ended July 29, 2000.
OPERATING EXPENSES
Selling expenses were $5.5 million for the three months ended July 28,
2001 and $4.5 million for the three months ended July 29, 2000. As a percent of
sales, selling expenses increased .8%. The increase was primarily attributable
to the expansion of sales staff as the Company continues to expand its marketing
efforts to increase sales.
General and administrative expenses were $2.1 million for the three
months ended July 28, 2001 compared to $1.2 million for the three months ended
July 29, 2000. The increase was due to increased administrative support to
sustain future Company sales growth, including increased depreciation on
computer equipment, office furniture, and buildings.
Product design and development expenses increased to $1.7 million for
the three months ended July 28, 2001 from $1.3 million for the three months
ended July 29, 2000. The increase was due to the continued development and
improvement of the family of ProStar(R) Video displays, and ProAd(TM) digital
advertising and information systems, and adapting other products to LED
technology.
INTEREST INCOME
The Company occasionally sells products on an installment basis or in
exchange for advertising revenues from the scoreboard or display, both of which
result in long-term receivables. Interest income decreased to $174,000 for the
three months ended July 28, 2001 from $196,000 for the three months ended July
29, 2000.
10
INTEREST EXPENSE
Interest expense increased to $401,000 for the three months ended July
28, 2001 from $286,000 for the three months ended July 29, 2000. The increase
was the result of an increase in average loan balances as the Company utilized
its line of credit and long-term debt.
INCOME TAX EXPENSE
Income tax expense as a percentage of income before income taxes and
minority interest was 38% for the three months ended July 28, 2001 and was 39%
for the three months ended July 29, 2000.
NET INCOME
Net income decreased to $1.6 million from $2.1 million for the three
months ended July 28, 2001 and July 29, 2000, respectively. The decrease in net
income was due to the increase in operating expenses as a percentage of sales.
Management believes that one of the principal factors that will
continue to affect the Company's rate of growth is the Company's ability to
increase the marketing of its current and future products in existing markets
and expand the marketing of its products to new markets.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $27.0 million at July 28, 2001 and $27.0 million at
April 28, 2001. Working capital provided by net income, depreciation and
amortization was offset by purchases of property and equipment and repayment of
long-term debt. The Company has historically financed working capital needs
through a combination of cash flow from operations and borrowings under bank
credit agreements.
Cash provided by operations for the three months ended July 28, 2001
was $314,000. Net income of $1.6 million plus depreciation and amortization of
$1.1 million were offset by an increase in accounts receivable, an increase in
inventories, including costs and estimated earnings in excess of billings on
uncompleted contracts, net an increase in accounts payable and an increase in
customer deposits. Cash used by investing activities consisted of $4.8 million
of purchases of building and equipment, of which $2.1 million was purchased
through a contract for deed. Cash provided by financing activities included
$802,000 net borrowings under the Company's line of credit. Cash used for
financing activities consisted of $851,000 of repayment of long-term debt.
The Company has used and expects to continue to use cash reserves and
bank borrowings to meet its short-term working capital requirements. On large
product orders, the time between order acceptance and project completion may
extend up to 12 months depending on the amount of custom work and the customer's
delivery needs. The Company often receives a down payment or progress payments
on these product orders. To the extent that these payments are not sufficient to
fund the costs and other expenses associated with these orders, the Company uses
working capital and bank borrowings to finance these cash requirements.
The Company's product development activities include the enhancement of
existing products and the development of new products from existing
technologies. Product development expenses were $1.7 million for the three
months ended July 28, 2001 and $1.3 million for the three months ended July 29,
2000. The Company intends to continue to incur these expenditures to develop new
display products using various display technologies to offer higher resolution
and more cost effective and energy efficient displays. The Company also intends
to continue developing software applications for its display controllers to
enable these products to continue to meet the needs and expectations of the
marketplace.
The Company has a credit agreement with a bank. The credit agreement
provides for a $20.0 million line of credit. The line of credit is at the LIBOR
rate plus 1.55% (5.325% at July 28, 2001) and is due on October 1, 2003. As of
July 28, 2001, $8.7 million had been drawn on the line of credit. The credit
agreement is unsecured and requires the Company to meet certain covenants.
Financial covenants include the maintenance of tangible net worth of at least
$23 million, a minimum liquidity ratio, a limit on dividends and distributions,
and a minimum adjusted fixed charge coverage ratio.
11
The Company is sometimes required to obtain performance bonds for
display installations. The Company currently has a bonding line available
through an insurance company that provides for an aggregate of $100 million in
bonded work outstanding. At July 28, 2001, the Company had $7.9 million of
bonded work outstanding against this line.
The Company believes that if its growth continues, it may need to
increase the amount of its credit needs. The Company anticipates that it will be
able to obtain any needed funds under commercially reasonable terms from its
current lender or other sources. The Company believes that its working capital
available from all sources will be adequate to meet the cash requirements of its
operations in the foreseeable future.
BUSINESS RISKS AND UNCERTAINTIES
A number of risks and uncertainties exist which could impact the
Company's future operating results. These uncertainties include, but are not
limited to, general economic conditions, competition, the Company's success in
developing new products and technologies, market acceptance of new products, and
other factors, including those set forth in the Company's SEC filings, including
its current report on Form 10-K for the year ended April 28, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In July, 2001, the FASB issued two statements - Statement 141, BUSINESS
COMBINATIONS, and Statement 142, GOODWILL AND OTHER INTANGIBLE ASSETS, which
will impact the Company's accounting for its reported goodwill. The provisions
of FASB Statement 141 apply to all business combinations initiated after June
30, 2001 and all business combinations accounted for by the purchase method for
which the date of acquisition is July 1, 2001, or later. The provisions of FASB
Statement 142 will be implemented by the Company in the first quarter of its
fiscal year 2003 financial statements. The Company has not yet completed its
full assessment of the effects of these new pronouncements on its Financial
statements and is uncertain as to the impact. See Note D in the Notes to
Consolidated Financial Statements for further information.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe its operations are exposed to significant
market risk relating to interest rates or foreign exchange risk.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8K
Refer to Form 8K filed on June 7, 2001
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Aelred J. Kurtenbach, Chairman and Acting CFO
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Daktronics, Inc.
(Dr. Aelred J. Kurtenbach)
(Chairman)
(Acting Chief Financial Officer)
Date September 10, 2001
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13