Daktronics - Earnings Call - Q2 2019

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Ductronics Fiscal Year twenty nineteen Second Quarter Earnings Results Conference Call. As a reminder, this conference is being recorded today, Wednesday, November 2138, and is available on the company's website at www.doctronics.com. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. I would now like to turn the conference over to Ms.

Sheila Anderson, Chief Financial Officer for Daktronics, for some introductory remarks. Please go ahead, Sheila.

Speaker 1

Thank you, Rusty. 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 economic conditions changes in the competitive and market landscape, including impacts of global trade discussions and policies management of growth, timing and magnitude of future contracts, fluctuations of margins, the introduction of new products and technologies, and other important factors as noted in detail in our 10 ks and 10 Q SEC filings. With that, let me highlight some of the financials for the quarter. Orders for the 2019 were $151,000,000 as compared to last year's second quarter of $142,000,000 Most of the order fluctuation this quarter is attributable to the variability of timing and large project and account based business. Transportation's increase in orders was due to continued Intelligent Transportation System investments by city and state's Department of Transportation. High School Park and Recreations increased due to higher demand for larger video systems.

Commercial increased for orders on the on premise and spectacular niches, with out of home orders similar in comparison to last year. Internationally, we won a multimillion dollar project in The Middle East in the Transportation segment, with the rest of the segments down as compared to last year's same quarter. Live Events orders were similar in comparison to last year. As a reminder, we derive a significant portion of our orders and sales from large dollar sized projects primarily for colleges and professional sports facilities, entertainment venues, transportation market applications, and from Spectacular Niche, an 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 the sports markets and construction cycles and is dependent on the varied schedules based on our customers' needs. Sales for the 2019 were $173,000,000 as compared to $169,000,000 last year. Net sales increased in Commercial, High School Park and Recreation, Transportation and International business units and decreased in Live business units quarter over quarter. We expected sales in Live Events business units for the second quarter and for the first half of the year to be lower as compared to 2018, as we completed a number of arenas, professional sports and colleges and university venues in 2018, with no similar site to projects this year during the same timeframe.

Commercial, especially spectacular and on premise, transportation and international sales increased, mostly related to the variability of timing in large projects. High School Park and Recreation sales increased as a result of more activity in larger sized orders and the timing of customer demand. Other financial comparables include: gross profit as a percentage of net sales at 24.8% for the second quarter as compared to 25.2% last year during the same quarter warranty expenses declined year over year Unfortunately, this improvement was offset by higher commodity costs due to the current global trade environment, which made our overall profitability to decline year over year. Total warranty as a percent of sales decreased to 2.5% as compared to 3.9 quarter over quarter. Operating expenses for the 2019 was $33,700,000 compared to $33,200,000 for the 2018.

The increase in total operating expenses of $05,000,000 was primarily attributable to the increase in selling expenses, which is mostly due to personnel related costs. General and administrative expenses and product design and development expenses in total remained relatively flat quarter over quarter. Operating income as a percentage of sales was 5.2% for the 2019 as compared to 5.6% for the 2018. For the quarter, our overall effective tax expense was 5.8% compared to an expense of 24.6% last year. This decrease in effective tax rate is due to tax credits proportionate to pre tax book as income as compared to the same prior year period, and a decrease in the federal statutory rate from 35% to 21% pursuant to The U.

S. Cuts and Jobs Act. In the 2019, we recorded a benefit and in the second quarter we recorded a tax expense, which resulted in a zero tax expense for a year to date basis, as our estimated effective tax rate is based on our estimate of the permanent research and development tax credits we receive, offsetting the estimated tax expense for the year. As we have previously discussed, our effective tax rate can fluctuate depending on changes in tax legislation and the actual geographic mix of taxable income. Our cash and marketable securities position was $67,300,000 at the end of the quarter.

We reported a positive free cash flow of $12,900,000 for the 2019 as compared to $3,600,000 for the same period last year. The fluctuation in free cash flow is the result of timing differences in operating assets and liabilities, corresponding with the seasonality of our business, offset by a decrease in net income this quarter as compared and with the $12,100,000 used for investments and capital acquisitions and acquisitions as well. We expect capital expenditures to be less than $20,000,000 for fiscal twenty nineteen. Our product backlog is $150,000,000 going into the third quarter. Much of this backlog is projected to be realized over the coming few quarters.

We expect sales for the 2019 to be slightly lower as compared to last year's third quarter. Of course, sales could change pending project bookings and customer schedule changes. I'll now turn the call over to Rice Gurtinbach, our Chairman, President and CEO, for a few comments.

Speaker 2

Thank you, Sheila. Good morning, everyone. We had a good second quarter. As Sheila highlighted, our orders and sales for the quarter were up as compared to last year during the same time, and our pipeline of projects remained strong in our various business segments. Overall, our outlook for the 2019 remains similar to our past discussions.

We predict ongoing global market growth and continue to provide a competitive and diverse solution offering to meet customers' needs. Both factors support our goal of long term profitable growth. Some specific highlights of our outlook by business units include: We expect sustained demand and growth for larger sized orders due to the adoption of video and sporting applications in the high school, park and recreation market. During the second quarter, we continued to quote and win higher dollar video projects. In our International business unit, we believe the market's increased adoption of digital systems, as well as our focus on increasing market share in our segments of Sport, Out of Home, Spectacular, and Transportation, will continue our growth outside of The US and Canada.

The transportation business in The US and Canada has growth opportunities due to continued investment in The US transportation systems, the stability in federal funding, and increasing advertising and on premise 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 our account based businesses, expansion of solutions for indoor applications, and continued replacement and new investment activity in the out of home segment. We expect Live Events sales in the short term to be down as this business is primarily lumpy and can be highly competitive in the larger contract space. Over the long term, replacement cycles and new product uses support a similar sized business. In all our markets, have a natural replacement cycle and strive to serve our customers with their needs today as well as in the future.

Our range of solutions and global capabilities makes us the industry's most experienced digital display provider to support them over the long term. We are focused on developing and bringing innovative solutions to our customers in all segments. For example, the expected use of narrow pixel pitch technology by customers in our markets is predicted to grow, and we continue to release newer generations of this product line to serve this demand. We also have differentiated our product offering, allowing customers to have choices for their particular situation. We invest in new technologies to enhance our service and control system offerings, and regularly release new offerings.

While we are optimistic about our long term growth in the digital display industry, various geopolitical, economic, and competitive factors influence order growth. Tektronix competes on the world stage, and we are impacted by the uncertainties in today's trade and business environments, both in the sourcing of components to produce our products and in shipping these finished products globally. As we know, today's global trade environment is very dynamic. We continue to monitor the situation and evaluate ways to minimize these impacts through vendor negotiations, alternative sources, and potential price adjustments. Our teams are focused on the continued development of industry leading solutions and global sales channels to support long term profitable growth.

With that, I would ask the operator to please open the line for questions.

Speaker 0

Our first question comes from the line of Greg Pendy from Sidoti. Your line is open.

Speaker 3

Hey guys, thanks for taking my questions. I guess just a couple. First, can you just kind of share with us on the higher commodity costs? I mean were a lot of these just raw input costs or was it also a mix of I guess higher costs related to sourcing components?

Speaker 1

There were input costs related to aluminum and some of the electronic components. There's been a high demand in the world for both of those and some of the tariff impacts have caused some of the supply and demand factors to be at force right now. So that's the areas we've seen some higher costs.

Speaker 3

And can you just share with us, I guess, what are you seeing in terms of right now maybe on a go forward basis on the electronic component side? Is that starting to ease up, do you think? Or is it going to stay sort of a headwind for some time now?

Speaker 2

It's difficult to predict. The next clear milestone is after the first of the year when this List three could potentially be increased. And we think there's a lot of decisions being made right now trying to anticipate what that could be. It will be easier as we get into 2019 and maybe not as much dynamic change and we can understand what the steady state may be.

Speaker 3

Got it. Got it. And then just switching gears maybe just to one other thing. You mentioned earlier on the call the investments. We've seen you guys ramp up in narrow pixel pitch technology now that we're in sort of further generations.

Is that something that will sort of cycle year over year that will kind of stay at these levels? Or is that something you think those investments will continue to ramp higher?

Speaker 2

We've increased our product development expense or investment considerably in 2018 and held that flat with 2019. And I would expect that we wouldn't see an increase in 2020, but I would find it unlikely we would significantly decrease it either.

Speaker 3

Okay, great. Well, that's helpful. And congratulations on the results.

Speaker 2

Thank you very much.

Speaker 0

There are no further questions at this time. You may continue now, Reese.

Speaker 2

Well, thank you. I appreciate everybody joining the call today. For those of you in The U. S, I hope you have a great Thanksgiving holiday. And for everybody, I hope your holiday season and New Year go well.

And we will talk to you in a quarter. Thank you.

Speaker 0

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.