Q4 2023 Daktronics Inc Earnings Call
Participants
Reece A. Kurtenbach; Chairman, President & CEO; Daktronics, Inc.
Sheila Mae Anderson; CFO & Treasurer; Daktronics, Inc.
BJ Cook
Presentation
Operator
Good day, and thank you for standing by, and welcome to Daktronics Fourth Quarter and Year-End 2023 financial results. (Operator Instructions) Please be advised that today's conference is being recorded.
I would now like to introduce your host for today's call, Sheila Anderson, Chief Financial Officer. Please go ahead.
Sheila Mae Anderson
Thank you, operator. Good afternoon, 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 but 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.
These forward-looking statements reflect the company's expectations or beliefs concerning future events. All forward-looking statements involve risks and uncertainties, which could cause actual results to differ materially from our expectations. Such risks include, but are not limited to, changes in economic and market conditions, management of growth, timing and magnitude of future contracts and orders, fluctuations in margins, the introduction of new products and technologies, availability of raw material, components and shipping services and other important factors. These identified factors could cause actual results to differ materially from those disclosed in this call in the company's fourth quarter 2023 earnings release and its most recent annual report on Form 10-K.
Our fourth quarter 2023 earnings release contains certain non-GAAP financial measures and was furnished to the Securities and Exchange Commission on Form 8-K this morning. These documents are available on the Investors section at Daktronics website at www.daktronics.com.
I'll now turn the call over to our CEO, Reece Kurtenbach.
Reece A. Kurtenbach
Good afternoon. Thank you for joining us today. Daktronics has emerged from the challenges of the last 3 years, strategically renewed, operationally focused and financially sound. We faced unprecedented business and dynamic operating conditions through the pandemic times, a pullback in the business, a rapid rebound in the business and supply chain and capacity constraints.
Our teams came together to take decisive and deliberate actions to improve our customers' experience while increasing our profitability and working capital levels. We ended the year with a record sales of $754 million, $26 million in adjusted operating income and a strong balance sheet.
Fiscal 2023 was an incredibly positive transition year and our successful navigation on multiple fronts positions us for long-term success. I would like to thank you all -- to our teams who demonstrated resiliency, pragmatism and creativity and through their efforts, we were able to make long-lasting improvements throughout our organization. Our performance is also a testimony to the resiliency and strength of our diversified markets and innovation. Thank you to all our shareholders for your support through this dynamic time.
I'll now turn it over to Sheila for some more details on the financial results.
Sheila Mae Anderson
Thank you, Reece. As mentioned, fiscal 2023 was an incredibly positive transition year. As you may recall, we started the year with a record backlog and a marketplace with high demand. However, we were also facing part shortages, intermittent work stoppages, inflationary pressures and input costs and a tight labor market, all limiting our ability to operate effectively. We adapted and utilized this opportunity to be selective in addressing demand and prioritize our focus on winning only the most profitable opportunities and strategically adapting our pricing.
Our teams also managed through these dynamic supply chain conditions by redesigning and planning, manufacturing for new designs using available parts, securing and obtaining parts of support manufacturing and adding capacity in people and in machines. These actions made throughout the year, coupled with a more stable operating environment, which started late in our second quarter, led to a positive financial outcome for fiscal 2023.
We had record sales of $209.9 million for the fourth quarter of fiscal 2023 and $754.2 million for the year. This was an increase of 29.4% compared to $162.2 million for the fourth quarter of fiscal 2022, and for the year, it was an increase of 23.4% and up from -- up to -- from the $611 million of sales in fiscal 2022. Sales growth was driven by the conversion of our strong backlog, improved stabilization of supply chains and increased manufacturing capacity.
Gross profit as a percentage of net sales increased to 24.8% for the fourth quarter of fiscal 2023 as compared to 18.5% in the fourth quarter of fiscal 2022. Gross profit as a percentage of net sales increased to 20.1% for the fiscal 2023 as compared to 19.1% for the prior year. The increase in gross profit percentage for both comparative periods was primarily due to strategic pricing actions being realized through sales and due to fewer supply chain disruptions, creating a more stable and predictable operating environment, thus lowering the cost to deliver on projects. These improvements were partially offset by inflationary pressures in high material components, freight and labor costs throughout fiscal 2023.
Operating expenses for the fourth quarter of fiscal 2023 were $33.9 million compared to $30.3 million for the fourth quarter of fiscal 2022. Operating expenses for the year were $130 million compared to $112.7 million last year. As a percentage of sales, operating expenses for the year declined to 17.2% from 18.4% of sales.
Operating income was $18.3 million or 8.7% of sales during the fourth quarter of fiscal 2023 and $21.3 million for the year and up from $4 million from a year earlier. The $8.2 million tax benefit in the fourth quarter was primarily the result of the reversal of a $13 million valuation allowance we reversed with the removal of the growing concern assessment. Fiscal 2023 effective income tax rate was 48.7%. This rate was high due primarily to valuation allowances for impairments and foreign losses, provision to return adjustments and the mix of tax rates in the location of income.
Our balance sheet reflects the change in business levels and strategies we pursued in managing our supply chain and growing our capacity to meet customer commitments while managing our liquidity. We continue to move from a period of cash investments to cash generation, improving our liquidity and better positioning us for profitable growth. Our teams are focused on lowering inventory through increased production and reduction in purchases.
We're collecting more deposits and progress payments, ensuring timely billings and collecting accounts receivable and invoice terms. We've completed many capacity adjusted additions in our factories and expect to reduce capacity spend for fiscal '24. We are now working to add efficiencies to these new capacity additions. And we're carefully analyzing our strategic pricing initiatives to improve profitability and fill capacity effectively.
During the fourth quarter of the year, we generated $24.5 million and $15 million from operations, respectively. Inventory dropped from the peak levels at the end of the third quarter of fiscal 2023 and are expected to approach more normalized levels as supply chain disruptions continue to ease and order backlog is fulfilled.
Cash, restricted cash and marketable securities totaled $25.2 million as of April 29, 2023, and $17.8 million was borrowed to fund working capital and capital asset additions. At the end of this fiscal year, our working capital ratio was 1.6:1.
We used $3.6 million and $25.4 million for purchases of property and equipment in the fourth quarter and fiscal year, respectively, and these investments were primarily focused on expanding capacity, automation and productivity in our manufacturing area.
As a result of the comprehensive review, financing alternatives led by the Board's strategy and financing review committee, we closed on a new line of credit, mortgage and convertible notes subsequent to year-end. This new structure provides us the financial resources to serve our customers and build long-term value for our shareholders. This financing paired with our financial performance resolved our growing concern disclosures.
Over the long term, we expect to grow revenues and grow profitably. We are starting FY '24 with a strong backlog of $101 million and expect sales growth next year. We plan to invest less than $19 million in capital assets, primarily in our manufacturing and technology areas, and those investments include digitization to improve customer and employee experiences.
With that, I'll turn it back over to Reece.
Reece A. Kurtenbach
Thank you, Sheila. As we look ahead, we expect growth in the global use of audiovisual communication systems in both traditional and in new applications. We are posed to capitalize on and to capture this growth by continuing to do the things we do well. These things include how we engage in a full range of activities to serve our customers by providing high-quality standard display products as well as custom-designed integrated systems, both of these with ongoing services and support.
We're manufacturing a complete line from small scoreboards and electronic displays to large multimillion-dollar video display systems and the related control and sound systems. We develop capabilities to design, manufacture, install and service complete integrated systems, and we are recognized as a technical leader in these areas. We generate new leads and serve repeat customers based on our performance, reputation and marketing efforts.
We will prioritize our focus in the growing and profitable segments in the industry, which align with these capabilities. We will focus on development of new technologies like narrow pixel pitch to harness the market's potential. Also, our existing markets are growing. To highlight, we expect our High School Park and Recreation business unit to grow through the adoption of video displays for sporting and educational use. These customers are deploying more Daktronics professional-grade technology and sophisticated content, increasing the total addressable market.
In the commercial area, we are focused on increasing sales channels with audiovisual integrators for end use in government, military, health care and corporate applications, which will create growth in this business area. In addition, customers depending on out-of-home advertising or self-promotion, use our products and services as an effective medium for both indoor and outdoor applications. We expect existing and new customers to purchase displays to install in new locations as well as replacement displays for existing locations to capitalize on the effectiveness of digital technologies.
Transportation demand is strong as project planning and approval activities resume to more pre-pandemic levels and our customers move forward in purchasing displays used for intelligent transformation -- transportation systems and for mass transit (inaudible). Infrastructure spending should continue to benefit this segment as digital signage is often used in these projects, and we are qualified to do business in all the U.S. states.
In the International business unit, we continue to experience...
(technical difficulty)
Sheila Mae Anderson
I'm sorry, we're having some technical difficulties, I think.
Reece A. Kurtenbach
I'm sorry. In the international business unit, we continue to experience a softer market due to macroeconomic and geopolitical factors. We expect to see these factors to continue to impact sales in the coming year. We're watching developments closely and have and can adjust resources and commitments accordingly. Over the longer term, we expect similar growth trends in the commercial and transportation areas outside the U.S. We also expect sports venue projects to be a focus in our marketing efforts.
The Live Events segment outlook remains strong due to large stadium renovations, continued replacement cycles and expansion of sales efforts beyond traditional sport areas. We are the acknowledged market leader in this segment, which allows us to be strategic in our pricing and contract terms while being very mindful about the profitability of this segment. We continue to closely monitor the ever-evolving geopolitical and global economic environment to ensure we are able to quickly adjust our resources and market approaches to maintain profitability through various cycles.
In FY '24, we will make investments in high-return projects and technologies to support long-term profitability. Our experience in engineering, process design, service design and product development capabilities and investments made in affiliated companies are very important factors in continuing to develop, produce and offer the most up-to-date digital displays and control system solutions desired by the market. We will continue to invest in our development efforts and our affiliated companies to release differentiated product platforms, software offerings and services.
We'll also advance critical architecture and design in new competitive technologies, such as narrow pixel pitch and micro LED, sustainable technology, software architecture and other related areas. We also plan to grow our operational efficiency by focusing on retention of our highest performing team members and capitalizing on automation capabilities added over the last year. We will invest in digital transformation projects and other automation that will support improved customer and employee experiences and lower our cost to operate.
I again want to thank our Daktronics team for the results delivered during FY 2023. We appreciate our suppliers and vendors for also helping and supporting us in the past and on into the future. And thank you to our investors for your patience and support as we work through and emerge from these unprecedented times, stronger and better positioned to meet the future. We believe the stage is set for strong fiscal 2024, and we look forward to continued growth of sales and expansion of operating income.
With that, I would ask the operator to please open the line for any questions.
Question and Answer Session
Operator
(Operator Instructions)
One moment for our first question. And our first question comes from BJ Cook from Singular Research.
BJ Cook
Great quarter. Just a couple of questions for you. You guys have been working pretty diligently over the last year or so to adjust prices. You guys are in a good spot now in pricing in the backlog? Is there some work left to be done there?
Reece A. Kurtenbach
No, I believe we're in a good place there, BJ. I believe that the backlog consists mainly of projects using our new pricing methodologies.
BJ Cook
Okay. Great. But I understand there's an inflationary element to your price increases, but part of it also is demand for your product. I guess going through this whole process, how do you feel about pricing power? Is there maybe a little bit more than you had saw?
Reece A. Kurtenbach
Maybe to answer that. I think that as we are in a more stable operating environment as we've seen the supply chain more predictable than it was a year ago, that we have a better understanding of what the cost elements would be and can be very strategic in how we price new projects or products.
BJ Cook
Okay. That makes sense. Appreciate it. One more last one. You mentioned some newer opportunities, the infrastructure bill has been in place for a while now. Do you expect or have you seen any benefit to the transportation segment with regard to the Bill?
Reece A. Kurtenbach
Yes. We believe that the -- since the bill is in place and is continuing to invest in projects, but that's not an immediate 1 quarter sort of event for Daktronics. Those projects go on for months and years. And in the end, we'll continue to provide benefit to Daktronics in that market segment.
Operator
And I am showing no further questions. I would now like to turn the call back over to Reece Kurtenbach for closing remarks.
Reece A. Kurtenbach
I would just like to thank everybody for attending today's conference. We appreciate your attendance and your questions. And we'll look forward to speaking again at our next conference call, which will be after our first quarter results are released. Thank you, everyone.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
Reece A. Kurtenbach
Thank you.
