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Daktronics (DAKT) Q4 2018 Earnings Conference Call Transcript

Motley Fool Staff, The Motley Fool
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Daktronics (NASDAQ:DAKT)
Q4 2018 Earnings Conference Call
May. 30, 2018 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Daktronics fiscal-year 2018 fourth-quarter earnings results conference call. As a reminder, this conference is being recorded today, Wednesday, May 30, 2018, and is available on the company's website at www.daktronics.com. I would now like to turn the conference over to Ms. Sheila Anderson, chief financial officer for Daktronics, for introductory remarks. Please go ahead, Sheila.

Sheila Anderson -- Chief Financial Officer

Thank you, operator. Good morning, everyone. Thank you for participating in our fourth quarter and year-end 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 economic conditions, changes in the competitive and market landscape, management of growth, timing and magnitude of future contracts, fluctuations of margins and 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, starting with fourth quarter comparisons. Orders for the fourth quarter of fiscal 2018 were $162 million as compared to last year's fourth quarter of $178 million. Most of the order fluctuation this quarter is attributable to the variability of timing in large projects and account-based businesses in commercial, live events, transportation and international business units. Notable orders for the fourth quarter of fiscal 2018 included projects from all applications in Dubai, a number of college stadium upgrades, transportation niche orders in the U.S.

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and Saudi Arabia, a soccer stadium in Europe, and a couple of projects exceeding $1 million in the high school markets, continuing the trends we see in high schools using larger video applications. As a reminder, we derive a significant portion of our orders and sales from large dollar size projects, primarily for college and professional sports facilities, entertainment venues, transportation market applications and from account-based business in the out-of-home niche. The timing and amount of these contracts can cause material fluctuations in our orders, sales and earnings. Awards of large contracts and their timing and amount are difficult to predict, may not be repeatable and are outside of our control.

Our business also fluctuates seasonally based on sports market and construction cycle and is dependent on various schedules based on our customers' needs. Sales for the fourth quarter of fiscal 2018 were $138 million as compared to $144 million last year. Net sales increased in international and the high school park and recreation business units, decreased in live events and commercial business units, and remained relatively flat in the transportation business unit quarter over quarter. The decline in sales is the result of lower orders and the timing of conversion to sales according to the customer delivery needs.

Other financial comparables include gross profit as a percentage of sales at 21.6% for the fourth quarter of fiscal 2018 as compared to 23.5% the year earlier. The decrease in gross profit percentage was primarily due to warranty charges. Total warranty as a percent of sales increased to 4% as compared to 1.7% last year's fourth quarter. We are working through a couple of site-specific issues and do not believe these to be pervasive through our product line. Operational expenses for the fourth quarter of 2018 were $35.2 million compared to $32 million for the fourth quarter of fiscal 2017.

The increase in total operating expenses of $3.2 million was primarily attributable to the increase in selling expenses of $1.3 million, which is due to personnel-related costs and also due to the planned increases in product development activities in both control systems and display applications, which increased $1.3 million as well. General and administrative expenses increased $0.6 million, primarily for personnel-related expenses. Operating loss as a percentage of sales was 3.9% for the fourth quarter of fiscal 2018 as compared to operating income as a percentage of sales of 1.2% for the fourth quarter of 2017. Now turning over to the full year-over-year comparisons. Orders for fiscal 2018 were $583 million as compared to $614 million in fiscal 2017. Orders increased in the international and high school park and recreation business units and decreased in commercial, live events and transportation business units.

Order changes are primarily due to the timing of usage of digital technology, but continues to be demand -- continue to have demand in the marketplace. In addition to the orders already mentioned, notable orders for the year included multi-million dollar projects for professional baseball stadiums, the national hockey arenas and increase of account-based international and out-of-home orders across multiple geographies and continued demand for sports upgrades in colleges and universities and in professional soccer, both in the U.S. and across Europe. Transportation market orders included projects for mass transit applications and over-the-roadway messaging systems.

In the commercial market, orders for on-premise applications were lower due to a national account project in FY '17 with no similar type of project recurring in FY '18, volatility in the spectacular large project order timing and increases in out-of-home orders. High school park and recreation market demand remains strong, including orders for larger sport application projects. Sales increased to $611 million as compared to $587 million last year. Net sales increased in live events, transportation, high school park and recreation and international business units and decreased in the commercial business unit. Live events' net sales increase was primarily related to the timing of production and delivery of upgraded or new solutions for arenas, professional sports, and colleges and universities.

High school park and recreation's increase of net sales follow the increase in orders and the related conversion to sales during the year. Transportation's increase in net sales is related to the variability of large order production timing caused by customer project schedules. International net sales increase was mainly attributable to the market demand in the out-of-home niche. Commercial net sales decreased as a result of lower order volumes in our on-premise and spectacular niches, offset by an increase in our out-of-home niche sales. Gross profit was 23.9% on a year-to-date basis for both fiscal 2018 and fiscal 2017.

Gross margins in fiscal 2018 were impacted by an increase in warranty as a percentage of sales, changing from 3.5% for fiscal 2018 as compared to 2.5% in fiscal 2017. During the year, we incurred costs for specific site issues and choosing to provide additional coverage on a historical product defect to preserve our customers' relationships. Operating expenses increased $8.2 million or 6.6% for the year due to the product development increase of $6.4 million for additional resources focused on velocity of development and deployment of display and control solutions to the market. Selling expenses increased $1.1 million or 1.7%, primarily for personnel-related costs, offset by recoveries of receivable previously written off. And general and administrative expenses increased by $0.7 million or around 2%. Our overall effective tax rate for the year was 55.2% due to the change during the year to revalue our deferred tax assets due to the enactment of the U.S.

Tax Cuts and Jobs Act of 2017. This act changes the U.S. tax rate from 35% to 21%, along with other changes. The impact of the tax change accounted for approximately $0.06 per share of our loss during fiscal 2018. Looking ahead to future years, we expect an effective tax rate of approximately 21%, taking into account the new U.S.

tax rate, benefits of the research and development tax credit and estimations for states and other geographic tax rates. As we have previously noted, our effective tax rate can fluctuate depending on changes in the tax legislation and the geographic mix of taxable income. Our cash and marketable securities position was $64.3 million at the end of the quarter. We reported a positive free cash flow of $14.4 million for fiscal 2018 as compared to a positive free cash flow of $31.1 million for fiscal 2017. The fluctuation in free cash flow is the result of timing differences in operating assets and liabilities, primarily for reduced accounts payable and increase in inventory and income tax payment and the $9.6 million increase in capital spending this year as compared to last year.

Primary uses of capital included manufacturing equipment, research and development testing equipment and facilities, demonstration equipment for new products and information technology infrastructure. We expect capital expenditures to be less than $20 million for fiscal 2019, and we made no repurchases of stock during fiscal 2018. Our backlog is $171 million going into the first quarter. Much of this backlog is projected to be realized over the coming few quarters. We expect sales for the first quarter fiscal '19 to be somewhat less than 2018 as we completed a number of NFL stadiums in 2018 with no similar-sized projects expected in the first quarter of 2019.

Of course, sales could change pending project bookings and customer schedule changes. I'll now turn over the call to Reece Kurtenbach, our chairman, president and CEO for commentary on the year and outlook.

Reece Kurtenbach -- Chairman, President and Chief Executive Officer

Thank you, Sheila. Good morning, everyone. While the overall results for fiscal 2018 were below expectations, we remain optimistic for the future. We proactively increased product development activities during fiscal 2018 and introduced additional narrow pixel pitch solutions and control features to our broad array of offerings.

The marketplace is using these types of solutions in many applications from sport, to retail, to commercial buildings, and transportation hubs. Warranty claims challenged our bottom line, however, we have maintained strong relationships with customers through our demonstrated commitment to serve them over the long term. We made facilities improvements and invested in new testing machinery and processes to further the robustness of our product lines. And we continue to grow our global accounts business and have continued success in European, Middle Eastern and Asia Pacific geographies. We are focused on winning more orders, and we'll continue our velocity of product development to match the industry's growth and solution demands.

Specifically, we see these opportunities and trends in the marketplace. Sport, commercial and governmental entities continue to choose digital applications to support their needs. This demand is driving long-term growth globally in the LED video display industry, as well as other digital applications. Digital systems have a known end-of-life that will drive continued replacement or refurbishment of the installed base.

Our range of solutions and global capabilities makes us the industry's most experienced digital display provider, and we continue to release new or enhanced product lines and comprehensive solutions targeted toward our broad market base as well as specific customer needs. This allows for success in markets during natural ups and downs of each segments. In each business area, we are expecting the following. Our international business unit will continue to be poised for growth through increased adoption of digital systems as well as our focus on increasing market share in our segments of sports, out-of-home, spectacular and transportation. We expect continued demand and growth for larger-sized orders due to the adoption of video and sporting applications in the high school park and recreation market.

Transportation has growth opportunities due to a continued investment in U.S. transportation systems, the stability of federal funding and increasing advertising and in-store promotional application needs in mass transit facilities. In our commercial business unit, we see opportunities for growth, mainly driven by digital opportunities in the spectacular segment, both new and replacement systems for a national account-based business, expansion of solutions for indoor applications and continued activity in the billboard segment. We expect live events sales to maintain order levels to prior years. While optimistic about our long-term future, various geopolitical, economic and competitive factors may impact order growth.

For example, current trade discussions could have an impact in our competitiveness globally. For fiscal 2019, we expect to continue to invest at similar levels in our development area. Over the coming months, we continue to release our latest generation of technology, featuring narrow pixel pitches, new features in our control systems and interactive contact features. We will also continue development for modules using chip-on-board technology. While these efforts will increase development expenses as a percent of sales in the near term, we believe this investment is appropriate 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 profitably over the long term. While our path will not always be smooth, our business will continue to be lumpy. We believe the growing market and our industry-leading solutions position us to generate long-term profitable growth.

We provide proactive support from initial project planning throughout the intended use of the system, leading to satisfied customers and repeat business aligned with natural replacement cycles. And we continually innovate to meet our customers' needs today and over the long term. With that, I would ask the operator to please open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Greg Pendy with Sidoti. Your line is now open.

Greg Pendy -- Sidoti & Company -- Analyst

Hey, guys. Thanks for taking my call. Just, I guess, two questions, one on the warranty expense. Are you guys still comfortable, I guess, long term? I think, in the past, you've stated a goal of more like 1.5% to 2% of sales.

And can you just kind of give us any color on how we should think about that, if that is still sort of the longer-term target?

Reece Kurtenbach -- Chairman, President and Chief Executive Officer

Greg, this is Reece. That is still our target to have our warranty spend less than 2%.

Greg Pendy -- Sidoti & Company -- Analyst

OK. And then, I guess, just second question, just on live events. You mentioned that you're going to be cycling some -- I know it's a lumpy business and you're going to be cycling some NFL business. But just what -- can you give us any color on what the environment is like this year heading into some of the key sports, just given the challenging attendance? And how kind of operators are looking and thinking about that? Thanks.

Reece Kurtenbach -- Chairman, President and Chief Executive Officer

Yes. In our live events business, we still see strong interest in digital, both in the competition bowl and outside the competition bowl. But the business itself will change based on the projects available in the current year, and there's not as many new facilities opening up this fiscal year as some of our previous fiscal years.

Greg Pendy -- Sidoti & Company -- Analyst

OK. Thanks. That's helpful.

Reece Kurtenbach -- Chairman, President and Chief Executive Officer

Thank you, Greg.

Operator

Thank you [Operator instructions] Our next question comes from Lisa Springer with Singular Research. Your line is now open

Lisa Springer -- Singular Research -- Analyst

Thank you, and good morning. My question concerns product development spending. As a percent of sales, it rose to 5.8% for the year. How should we think about the percentage next year? Do you think the percentage is going to actually increase as well as the spending?

Reece Kurtenbach -- Chairman, President and Chief Executive Officer

We believe we'll continue to invest in product development at the similar levels of last year. So we don't -- we do not intend for the dollar value in product development to grow. But we believe the products that we're releasing will give us room on the top line to grow, and so we believe the percent spend in product development will start to become more in line with what our expectations are internally.

Lisa Springer -- Singular Research -- Analyst

OK. Thank you. And the products you introduced during the quarter, which was Fuel Price Data Kit and the digital traffic display. Are those products for sale now? And are they available worldwide or in the U.S.? Or ...

Reece Kurtenbach -- Chairman, President and Chief Executive Officer

They are available now and they are mainly targeted at the U.S. transportation and fuel market. Not that they couldn't be sold elsewhere, but that's where the -- they were tailored for that customer base.

Lisa Springer -- Singular Research -- Analyst

OK. Thank you.

Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Reece Kurtenbach for any further remarks.

Reece Kurtenbach -- Chairman, President and Chief Executive Officer

Thanks, everybody, for attending the call today. We appreciate your attention. And we hope that you have a great summer, and look forward to talking to you again at our Q1 call in September.

Operator

[Operator signoff]

Duration: 20 minutes

Call Participants:

Sheila Anderson -- Chief Financial Officer

Reece Kurtenbach -- Chairman, President and Chief Executive Officer

Greg Pendy -- Sidoti & Company -- Analyst

Lisa Springer -- Singular Research -- Analyst

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