Q4 2020 Daktronics Inc Earnings Call
As a reminder, this conference is being recorded today Wednesday June 10th 2020 and is available on the company's website at Www Dot Dot dot dot com. After the speakers presentation. There will be a question and answer session to ask a question at that time, you will need to press star one on your telephone.
Now I'd like to turn the conference over to Ms., Sheila Anderson, Chief Financial Officer for Daktronics for some introductory remarks. Please go ahead Sheila.
Thank you operator, good morning, everyone. Thank you for participating in our fiscal year and fourth quarter earnings Conference call I would like to review our disclosure cautioning investors and participants that in addition to statements of historical back we'll 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 maybe out of our control and may cause actual results to differ materially such risks include changes in economic conditions changes and the competitive in market landscape, including impact of global trade discussions on policies the impact of governmental laws regulations in orders, including those resulting from.
Pandemics disruptions to our business caused by geopolitical events military actions work stoppages natural disasters or international healthy margin things such as the Cobot 19 pandemic management of grow timing and magnitude of future contracts fluctuations of market margins, the introductions of new products and technologies and other important.
Factors as noted and detailed in our 10-K and 10-Q FCC filings.
With that let me highlight some of the financial starting with the fourth quarter results and the related comparison to fiscal 2019 fourth quarter.
Orders decreased by 9.4%, mostly related to the commercial and international business units as advertising spend contracted due to the cobot 19 outbreak impacting spending by our out of home company and customers sales decreased by 1.3%, resulting from fluctuations and the timing of order bookings unrelated conversions to.
Sales.
About halfway through the fourth quarter, we saw some customer delays in their shipments and we're not able to go to some project sites because of the coping 19 stay at home orders around the world.
Gross profit as a percentage of net sales was 22.7% as compared to 19.1% last year fourth quarter gross profit was positively impacted by lower warranty expense warranty expense as a percent of sales was 1.6% as compared to 2.2% in fiscal Q4 19.
Had some onetime charges that didn't recur in fiscal 20 as well.
During the quarter cost of goods sold expenses were impacted by air choice to furlough employees because of lower demand for example, or service support areas were impacted by reduced demand in serving our customers due to stay at home restrictions around the world.
Manufacturing division or Minnesota, and Ireland facilities close for two weeks during the peak quarantined time other factories worked reduce workweeks workweeks, a balanced capacity with customer demand and schedule changes.
Operating expenses for the fourth quarter fiscal 2020, or 32.1 million compared to 34.7 million decreases in operating expenses were primarily due to lower level to travel, resulting from the called bed 19 responses canceled sales conventions and decreased on site sales demonstrations.
And payroll related expenses were also lower for reduced workweeks in some areas.
For income taxes, the fiscal 224th quarter positive effective rate is primarily due to permanent tax credit for research and development over a small amount of book was.
Fiscal 2019 fourth quarter effective rate was significantly different.
Year over year, primarily due to a onetime events last year.
As a reminder, fiscal 2020 watts of 53 week here in fiscal 2019 was a 52 week here.
The extra week of fiscal 2020 fell within our first quarter last year.
Sales orders in all areas of operating expenses were impact without additional weaken comparison for the full fiscal year orders are up 2% as compared to last year and with our second highest order volume in our history, which was primarily related to our new releases a product offerings and strong demand through most of the fiscal year.
The change in orders reflects the broad range of offerings and highlights our ability to serve the diverse range of needs and our end markets could also highlights our ability to when orders in varying types and sizes.
Have you done sorters bloody increased primarily due to the timing of the demand for upgrade or new solutions are we know and for professional sports stadiums and professional sports we were awarded orders for either upgrades or replacement, it's like the Texas Rangers and the Cincinnati Reds as examples.
Transportation orders grew as demand for intelligent transportation systems increased as state transportation departments and private public partnerships continue to invest in technology to better informed travelers manage transport systems and collect revenues. They were awarded US. We were awarded a 16.5 million dollar order from a repeat customer and this intelligent.
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The High School Park in Recreation orders increased was related to variability in order timing, we continue to see an overall strong market demand and an increase in projects for larger video systems, often these customers can generate revenue from advertising or provide additional curriculum for students by designing classes for broadcast or.
And using our displays and credit control systems.
Commercial orders decreased primarily due to a decrease in large orders in our spectacular in etch and that's low market in the out of home niche at the end of the year to do that cobot 19 related impacts on our customers cash inflows.
International business unit orders were down primarily due to the tightening up order delays and delays the borders again due to cold, but 19 pandemic for both sports and out of home type customers for similar reasons.
In the domestic business units.
We work across a number of different customer types and geographies outside the U.S. in Canada, including transportation governmental sports and commercial in the international business unit.
On a year to date basis sales are up and all business units, except international for the same reasons as noted in the order changes.
On a year to date basis gross profit as a percentage of sales of 22.8% similar to last years, 22.9%.
Total warranty as a percent of sales decreased to 1.9% for fiscal 2020 as compared to 2.3% in fiscal 2019.
On a year to date basis operating expenses increased by 2.8%, primarily due to increases in selling and product development expenses selling expenses have increased due to personnel related costs and increased marketing efforts product design and development expenses increased primarily due to increased.
Personnel costs and professional services invested in growing our portfolio of solutions for our customers.
On a year to date basis operating loss for fiscal year 2020 was just below breakeven there for annual operating loss as a percentage of sales was that their old percent as compared to operating loss as a percentage of sales of <unk>, 0.8% in fiscal 2019.
The effective income tax rate for fiscal 2020 was impacted up from the permanent tax credits reduced by a valuation allowance and proportion to that small pretax book loss at almost zero, which resulted in an abnormal looking rate.
The effective rate for fiscal 2019 was 80.6% during fiscal 2019, we had a discrete one time in fact, a $3.3 million impacting that rate.
Our effective tax rate can fluctuate depending on the changes in tax legislation and the actual geographic mix of taxable income and credit.
Our cash and marketable securities position was at $41.6 million at the end of the fiscal year, we generated $10.8 million and cash from operations, we borrowed $15 million on or notes to solidify our liquidity during the uncertainty caused by coal that.
We used $29.8 million for investments in capital and new production system capabilities information systems and equity investments.
In addition to a 10 million dollar investment than micro LNG D technology, or including that 10 million dollar investment.
We also invested $37.8 million and product development last year.
As we look into fiscal 2021, the cobot 2019 impact to the economy and changes in our near term buying habits that our customers as uncertainty in the business contraction. However, we have an active plans to reduce our extensive expenses and conservatively manage cash to react to the potential near.
Sure I'm down.
Downturn in orders and sales revenues.
We have taken proactive steps to reduce costs, including the reduced usage of outside contractors temporary reduction of benefits prediction I pay for executive and board of Directors limited our travel offered a voluntary cobot exit and retirement meant offering.
I'm conducted a reduction in force in May of 2020.
We have also reduce allocations for capital expenditures for fiscal 2021.
As noted in the April press release related to coal, but our board suspended dividends and share repurchase programs for the foreseeable future to conserve cash during this unprecedented time.
We're continuing to monitor this dynamic situation and react accordingly.
I'll now turn the call over to Reece Kurtenbach, our chairman President and CEO for more common [noise].
Thank you Sheila good morning, everyone.
As we entered into fiscal 2020, we focused on order growth market development deployment of newly designed solutions development of advanced manufacturing techniques and managing capacity in spend we achieved these goals.
Investments in technology yielded additional control system features and broadened our display lineup contributing to increased orders a shoe. The said we were able to achieve the second highest level of order value in a company's history.
As highlighted in our release, we were successful in winning projects and delivering on our commitments to customers, which is also a testament of our continued leadership in the marketplace.
Customers choose tektronix for new and leading technologies are broad range of solutions, the reliability of our products and our commitment to serve them over the lifetime of their system.
Like many other companies you uncertainty of the impacts of the coal that 19 global pandemic has impacted our business.
Over 19 has created disruption since its initial outbreak first impacting our China operations.
Our goal through all that have been to keep our people and stakeholder say, while operating our business.
To this and beginning in February we created Cobot 19 response teams to manage our global and localized response activities.
Using the guidance from the U.S. centers for disease, and control and prevention the World Health organization and other applicable regulatory agencies, we enhanced or implemented robust health safety and cleaning protocols across our organization.
Employees are working from home, where possible and we have limited or eliminated travel for the time being.
As this virus has spread across the globe. It does generated appropriate responses by governments and regulatory agencies to keep people safe.
But these responses have also disrupted our customers businesses in various ways as well as impacting how work is done.
Because of this our manufacturing and service teams have adjusted capacity, often including Furloughing employees.
For example, our China, Ireland in Minnesota production facilities, all temporarily suspended production for a few weeks this spring.
We have however continuously ship product during this crisis as timing of these closures was staggered and some facilities have not interrupted operations at all.
Currently all production facilities are our operational.
Our sales teams have continued to engage our customers, mostly virtually across our diverse markets and geographies with some customers continuing to place orders, while others are choosing to delay purchases.
Our supply chain team has remained alert to potential short supply situations and shipping disruptions.
And if necessary we are utilizing alternative sources and shipping methods to date, we have not seen a large disruption due to deliveries of components or other materials.
The covert 19 situation has created an unprecedented did and challenging time, we continue to believe the underlying fundamentals of digital displays will drive long term growth in our businesses, but the near term outlook is some contraction in different areas and greater volatility overall.
Moving into fiscal 2021, we have taken actions to position ourselves for a strong recovery when the crisis is over continuing some investments in market and product development.
But with a greater focus on reacting to the new realities of this uncertain environment.
The length and up to the global economic recovery will shape power customers will invest in digital solutions in the future.
We continue to win business in all areas and we'll monitor and adjust our capacity to these needs balancing our cost structure and timing of deliveries to our customers.
To highlight to highlight our outlook by area.
Our live events business, which is lumpy primarily consist of larger contracts can be highly competitive or customers. In this area have been impacted by lack of revenue due to even cancellations. However planning is in process to bring back both professional and college sports activities.
Some projects are being planned, but we also know constrained budgets and potential for fall sports will impact this business unit.
In addition to sports we continue to focus on college campus sales outside of the sports areas for other networks digital solutions.
We're still seeing demand in our high School Park and recreation market due to the continued adoption of video in sporting applications. However, there are questions as to the sustainability as we anticipate some constraints in school budgets and uncertainty woven when events will begin.
We have launched the streaming application to help schools broadcast and monetize school events in this time of coated.
And beyond.
And our commercial business unit, we expect order volumes to be impacted by both new and replacement systems for account base businesses.
Expansion of solutions for indoor applications for retail and growth in military applications, a new market niche for us.
Continue to replacement and new investment activity in the out of home segment. However, however, we expect this activity will be lower until late calendar year 2020.
The spectacular segment will be difficult to predict as it includes multimillion dollar projects that are discretionary choices by customers, which can cause ups and downs and timing and trends.
In international with our establishment of localized sales and surface channels outside the U.S and Canada, our focus is on increasing market share and growing new business areas.
Our current outlook based on known opportunities, we expect some contraction in the beginning part of this fiscal year with continued improvement overtime.
The transportation business in the U.S and Canada remains strong due to continued investment in the us transportation systems and the stability in federal funding.
However, the impact to tax funds and other revenues because of responses to coated 19 credit crisis caused uncertainty on the magnitude and timing of these projects.
For example, we had been seen increasing demand in advertising and Onpro premise promotional applications for mass transit facilities like airports, but because of drastic reduction of travelers there'll be some pullback in these investments.
In all our markets, we have a natural replacement cycle and strive to serve our customers with their needs today as well as in the future.
We continue to enhance our indoor neural pixel pitch offerings and see a receptive market for these products across our business units.
We continue to foster and build out indirect sales channels for existing and new markets.
A range of solutions and global capabilities make us the industry's most experienced digital display provider.
And to support our customers over the long term, we are focused on developing and releasing innovative solutions and services tailored to different applications in each segment.
We enter fiscal 2021 with a strong product backlog of $212 million, we're focused on reacting to the current economic environment and prioritizing key initiatives that will make a stronger better able to compete as this crisis dissipate.
The markets increasing to bought adoption and use of digital solutions, along with our new technology release us caused us to remain positive on the long term growth in the industry and the overall future of our business.
With that I would ask the operator, please open the line for questions.
Certainly once again, ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to move yourself from the Q. Please press the pound key our first question comes on line of Greg Pendy from Sidoti Your question. Please.
Hey, guys. Thanks for taking my questions first of all congratulations on getting the the warranty expenses down for the year I know theres a lot of out of your control, but you guys definitely on what you can control delivered on that I just wanted to get a sense I guess on a go forward basis I know there was an uptick in some failures a few.
Two years back, but where are we in that and are we in sort of your are you comfortable that we can start thinking that the warranty expenses will be in sort of that 1.5% to 2% range on a go forward basis.
We are we believe we're through that other issue and we have not seen a significant issue like that raised its head and so yes, I believe that's a fair estimate.
Great. That's helpful. Thanks, and then second question. Thanks for the color on the supply chain can you just maybe talk to us a little bit about what you're seeing on the costs.
Components, and maybe things like aluminum and stops and how we should be thinking about the costs outside of just the disruptions and the availability of product.
Yeah, that's a great question.
The volatility in so many of these markets isn't isn't and then continue to increase price pressure and isn't.
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Position, where things are lowering cost, but it can fluctuate greatly based on.
All in brief periods of time, we do on many of our commodities, we do negotiate longer term contracts, which gives our stability there and we have very deep vendor relations. So I believe we have a stability in our our supply chain.
But predicting some of that.
Volatility in pricing is pretty difficult Greg.
Okay, Great and then just one final one just in light of turning back on the dividends and share repurchases, but then going for the the investment on Michael.
On the micro Alley de side can you kind of.
Elaborate maybe on why that's a significant from an investment standpoint, perhaps maybe from a strategic standpoint, as we kind of look out to the future.
Yeah, I believe as we've said in our continued communication that this narrow pixel pitch, which is roughly seen those products at a two and a half millimeter pitch and less so at a distance from one pixel to another as we get to one millimeter and below we believe microwave.
He is a good technology for that and this investment sets us up for that ongoing into the future and we believe it's critical for our ongoing viability.
Great all right well congratulations on the quarter I appreciate it.
Follow up on the questions. Thanks.
I appreciate it thanks.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Reece Kurtenbach for any further remarks.
Thank you we appreciate everybodys.
Attendance in today's call that we know this is a challenging time and we're committed to the long term viability of Daktronics and working through this in a way that makes us stronger.
As we as we come out so we hope you have a great summer and we'll talk to you again in the fall. Thank you.
Thank you, ladies and gentlemen for your participation in todays conference. This does conclude the program you may now disconnect good day.
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