Q2 2023 Daktronics Inc Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to your Doctor Onyx fiscal year 2023 second quarter earnings results Conference call. As a reminder, this conference is being recorded today Monday December 12, and is available on the company's website at Www Dot dot.
<unk> Dot com.
We will have a question and answer session. After the prepared remarks into do that simply press Star then one one on your Touchtone telephone and I would now like to turn the conference over to Mr. Kevin Mcdermott doctrine inks, our lead independent director. Please go ahead Kevin.
Thank you and good morning.
My name is Kevin Mcdermott.
Our lead independent director on the <unk> Board and the Audit Committee chair.
I joined the board in June 2015.
Prior to my retirement in 2013, I was with the accounting firm of KPMG for 33 years.
I served in various capacities of K P. The.
Pretty of which involves auditing the financial statements of publicly held companies.
This morning before passing the microphone to recent Sheila I wanted to join you acknowledged the concerns reflected in the stock price reaction to announcements made last week.
And to give you some background.
<unk> announced the going concern conclusion.
The postponement of the second quarter earnings release and call.
And the delay in the filing of the company's second quarter Form 10-Q.
Dr. <unk> was unable to provide further information that at that time.
Because there were still related accounting and disclosure matters that had to be resolved.
My presence today is also meant to underlying to you that in addition to focusing on liquidity enhancement.
Our board is prioritizing engagement with shareholders.
Our goals today are to explain the substance of that going concern conclusion.
Share with you the exciting order pipeline backlog and revenue update that might otherwise be overshadowed.
And give some specific detail on the plan and activity already underway to improve our liquidity situation and the cash flow generation from operations.
It has been hampered due to the necessary inventory buildup given supply chain issues in order to serve this historic level of customer demand.
Before recent Sheila take you through the earnings release and related commentary.
I want to explain the going concern disclosure conclusion.
Generally accepted accounting principles in the U S require a reporting company to consider at each annual and interim reporting date.
Whether there are conditions and events considered in the aggregate debt raise substantial doubt about the company's ability to continue as a going concern for the 12 month period from the issuance date of the financial statements.
If such condition exists management, then must evaluate whether its planned sufficiently alleviate that substantial doubt.
Management's assessment has been considered by the Companys independent auditors.
As discussed in this morning's release and to a greater extent in the Form 10-Q, Tektronix intends to file tomorrow.
The Companys order and backlog coming out of the pandemic has been very strong.
However, tektronix had to manage through significant pandemic induced supply chain issues.
The supply line constraints led to the decision to increase inventory levels in order to improve the predictability in the production cycle.
Which is absorbed much of the companys customary levels of liquidity.
In addition, <unk>.
Global economic and geopolitical conditions have introduced increased risk to our cash flow forecasts.
And our ability to predict predict the radar backlog will convert to cash over the next 12 months.
While the Tektronix bank previously increase the company's borrowing capacity from 35% to $45 million the incremental $10 million is subject to renewal every 90 days.
Further as plans for additional financing we have not been finalized.
And are subject to market conditions that are not within tektronix control.
U S. GAAP does not allow the company to consider such plans and its going concern evaluation.
As a result, we unfortunately had to conclude that substantial doubt as defined under U S. GAAP accounting framework did exist.
I will now hand, the call over to recent Sheila but will be available during the Q&A session and we'll be happy to respond to questions at that time. Thank you now.
Now I'll turn it over the call over to Reece.
Thank you Kevin and 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.
Our 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.
Such risks include changes in economic conditions changes in the competitive and market landscape, including impacts of global trade discussions and policies.
Pact of governmental laws regulations, and orders, including those resulting from Pandemics disruptions to our business caused by Geo political events military actions work stoppages natural disasters or other international healthy emergencies, such as the COVID-19, pandemic management of growth timing and magnitude of future contracts fluctuations of margins availability.
If raw materials and components and shipping services.
Introduction of new products and technology and other important factors.
He has identified important factors could cause actual results to differ materially from those disclosed in this call and the company second quarter 2023 earnings release and its most recent annual report on Form 10-K, we refer you to these documents.
Our second quarter 2023 earnings release contains certain non-GAAP financial measures and was furnished to the SEC on the Form 10-Q or excuse me 8-K. This morning and is available on the investors section at Tektronix website at Www Dot that Tronox Dot Com I will now turn the call over to reach back for additional comments.
Thank you Sheila Thank you Kevin for your remarks in the first half of fiscal 2023, we achieved sales increases even when our capacity was constrained due to significant unusual part shortages challenging labor environment operating disruptions from COVID-19 related absences in the first.
Quarter, COVID-19 mandated shutdown of our Shanghai production facilities.
I am proud of our team's ability to increase our sales output during the second quarter and through the first half of the year under these conditions.
The unprecedented persistent supply chain conditions caused lower gross profits through fulfillment as well as higher cost for materials labor and freight that we're not all able to be passed on to our customers. We made the strategic decision to keep delivery windows for our customers as close as possible.
To the originally committed date.
Fly chain in manufacturing constraints would allow.
Even though there is sometimes added additional cost to fulfill a project.
To address supply chain volatility, we aggressively secured inventory to fulfill orders for our customers consuming cash while increasing predictability of our operations.
We did all of this because tektronix has distinguished itself for 54 years for meeting our customer commitments on delivery dates product quality and customer support.
Our people displayed enormous strength adaptability and resiliency over the past year and a half to maintain that reputation securing supplies of critical components and respond to customers when demand came rushing back.
So through the first six months of fiscal 2023 cash was used for strategic growth and inventory stocking at to add stability in our production.
Growth in accounts receivable due to continued growth in orders and sales and capital investments to increase manufacturing capacity.
Today, our production and fulfillment operations continue to adapt and recover from the enduring implications of the pandemic.
Supply chain disruptions have started to ease and we expect our infant Tory levels to peak in the current quarter Q3 of 'twenty, three and continue to decline to more normalized levels through production usage and reductions in purchases.
Most important is how we are managing the cash implications of these supply strategic supply chain and production decisions. So I'd like to share more about that now.
54 year history, we have not been faced with the perfect storm that days last two years represent beginning with the immediate implications of the economy shutting down in the spring of 2020, followed by the sudden rebound in activity, while supply chain remain delayed snarled and often just plain closed.
These times of stress our liquidity beyond levels that we've ever seen in our financial resources has not been sufficiently flexible our priority for today is to restore our balance sheet to appropriate levels of liquidity.
Our entire organization is focused on four critical drivers of our liquidity enhancement plan.
First is cash generation focus through proactively completing in fulfilling orders and our $463 million backlog.
We will do this through productivity improvements from previous investments in factory capacity in capital equipment, and hiring only critical production and service personnel to increase output.
We will focus on merger operating margin improvement through pricing actions product mix adjustments and prudent management of operating expenses, we will reengineer designs for supply chain resiliency, and we will normalize inventory levels supply chain challenge.
<unk> continue to ease.
A second driver will be the aggressive management of working capital.
Our third will be concentrated in capital investments on maximizing asset returns.
In the fourth will be to obtain additional sources of liquidity with the consent of our lead banking partner.
To summarize where we are under the plan, we have already taken steps to move from a period of cash investment to cash generation to improve our liquidity and better position us for profitable growth.
We are pursuing avenues to strengthen our financing financing flexibility by adding liquidity and diversifying our funding sources.
Additionally, since last year at this time, we have successfully increased prices and have focused on selling and fulfillment resources on the most profitable opportunities and have turned away price driven business.
We have taken steps with a specific goal of improving profitability and cash flow over the coming quarters and beyond as our backlog increasingly contains work booked using current pricing methodologies.
We are aware of the stress that the liquidity implications of the rapid re expansion of our order book and backlog have placed on our employees customers communities and of course, our investors.
In the last few days, we have had employee town hall meetings and talked with hundreds of customers to reassure them and address any questions or concerns.
Importantly, we have not seen order cancellations or retractions and are still booking new orders.
I look forward to the opportunity this morning to engage with all of our investors who have taken the time to attend this call I will now hand, the call to Sheila to recap the financial results for the second quarter and first half.
Thanks, Ruth with that I'll move on to our financial comments orders for the second quarter of fiscal 2023 increased 11, 7% as compared to the second quarter of fiscal 2022 and increased by two 2% on a year to date basis order increases for the year were driven by live events bookings for replacement.
Great.
Increases were offset by order volume declines in other areas, primarily as the market demand levels are normalizing after a record number of orders in fiscal 2022, driven up from pent up demand after the COVID-19 pandemic.
In particular orders have softened in international due to the weakened weakening economic outlook related to geopolitical events in currency headwinds net.
Net sales for the second quarter of fiscal 2023 increased by 14% as compared to the second quarter of fiscal 2022, and by 16, 2% on a year to date basis sales growth was driven by fulfilling orders in backlog, even while we experienced multiple materials supply chain disruptions and labor shortages.
As Reece conveyed supply chain disruptions created an increase in lead times by extending the timing of converting orders to sales. This coupled with strong demand contributed to a larger than typical backlog and inventory levels. As a result of this relationship between the past order bookings and realization of sales product order backlog remains at a history.
High level of $463 1 million at the end of the quarter and was approximately $441 million at the end of November .
Gross profit as a percentage of net sales was 16, 9% for the second quarter of fiscal 2023 as compared to 19, 6% a year earlier and 16% for the six months ended October 29, 2022, as compared to 28% for the same fiscal six months of your earlier this comparative decline in gross profit.
Tonnage was caused by inflation in materials freight and personnel related costs that were not able to be passed on fully to our customers. In addition, extraordinary supply chain disruptions created instruments at work stoppages and factory inefficiencies, adding additional costs to meet our customer commitments.
However to reflect the reality that these inflationary cost prices were increased in late calendar 2021 and throughout 2022. These price changes are just beginning to be realized through sales and gross profit margins as we work through the prior backlog, we expect sales price increases to be realized and reflected through the remaining 2023 fiscal year.
We are carefully managing our operating expenses well.
Operating expenses grew 13% to $61 $5 million for the first half of 2023 as compared to $54 4 million for fiscal 2020 to a slower rate than the rate of sales, enabling some operating leverage.
The $14 million of tax expense for the second quarter of fiscal 2023 was primarily a result of the valuation allowance against our net deferred tax assets and the reversal of fiscal 2023 tax benefits previously recognized to comply with the accounting regulations related to our going concern assessment.
Of course, our balance sheet likewise reflected the change in business levels on strategies, we pursued in managing supply chain and growing our capacity to meet customer commitments.
For the first half of the year, we used $21 $9 million in cash primarily to grow working capital, especially in inventory.
<unk> change disruptions have started to ease and we expect our inventory levels to peak now in the third quarter, and then to decline to more normalized levels through increased production.
And reductions in purchases.
We have invested $16 $2 million in capital expenditures during the first six months of fiscal 2023, primarily focused on expanding manufacturing capacity automation and productivity.
To fund working capital and capital asset additions, we have borrowed $26 $4 million on our credit facility as.
As of October .
31, 2022, we amended our credit facility to temporarily increased the commitments by $10 million to $45 million until January 31 2023.
As part of the liquidity enhancement program risks detailed the finance team is focused on accounts receivable collections cash generation and accessing additional sources of liquidity.
I'll turn it back over to Ruth Thank you Sheila to our investors and stakeholders I would say that management understands the concern and uncertainty generated by last week's required announcement.
As both Sheila and I described earlier as a key component of our liquidity enhancement program. We are pursuing other additional sources of liquidity and are focusing on reducing inventory levels.
Our goal is to be able to remove this qualifying language as soon as is practical.
The World has seen a lot of change over the past two years and Tektronix has navigated this as the ongoing industry leader in quality technology and reliability.
Customers continue to choose tektronix as demonstrated by our historically strong order volume and backlog.
We appreciate our customers' belief then the tektronix brand and we thank all of you for your commitment to what our products represent.
Even with our recent going concern challenges, we believe our strategy to emerge from this time of the pandemic healthy and profitable by stabilizing our fulfillment performance through increased purchasing of critical components and increasing production levels through selected equipment investments in.
<unk> staffing.
Has reinforced the reasons why customers choose tektronix we.
We have delivered many of the orders quoted with previous pricing structures and our backlog now mainly consists of orders booked under new pricing methodologies.
We see signs of supply chain, stabilizing which will allow reduced inventory levels in the coming months as our production levels continue to increase.
We do not believe that the geopolitical situation is back to normal or however, this would be defined but we do believe that the levels of uncertainty and volatility will not be as great in the coming months and we will continue to stabilize in the coming calendar year.
While macroeconomic factors continue to make it difficult to forecast the future over the coming years, we currently see signs of the following.
Our high School Park and Recreation business unit will continue to grow through adoption of video displays for sporting and educational use this.
This trend towards deploying what used to be professional grade technology in new markets grows. The total addressable market. In addition video displays also have a higher average selling price than the messaging and scoring equipment traditionally purchased in this segment.
Commercial business unit out of home advertising customers continuing to buy.
After the pandemic related economic contraction.
This is somewhat of an effect of their natural replacement cycle.
Our on premise business also remained strong as customers continue their purchase and use of digital messaging systems. We are also focused on increasing sales channels with audio visual integrators for end use in government military health care and corporate applications.
Transportation order levels continued to be strong worldwide as project planning and approval activities resumed to more pre pandemic levels and our customers move forward and purchasing displays used for intelligent transportation systems and for mass transit venues.
Infrastructure spending should continue to benefit this segment as digital signage is often used in these projects.
Importantly, selling costs are lower in this sector as procurements over multiyear periods are often handled through master agreements.
In the international business unit, we naturally are seeing some softening in the European market due to macroeconomic factors as well as the impact of the current strengthening of the dollar.
We will watch developments closely and adjust resources and commitments accordingly.
Our flagship business.
Complex live events segment outlook remains strong due to large stadium renovations continued replacement cycles and expansion of sales efforts beyond sports areas.
Recent installations include college football displays at Clemson and Tennessee, and we previously announced recent wins of our new Super system for the La Clippers New arena.
Having said that as part of the gross profit improvement pillar of our liquidity enhancement plan, we're being very mindful about the profitability of this segment through pricing and contract terms.
Thank you to our electronics team for increasing our capacity adjusting to the uncertain and volatile supply chain conditions and continuing to serve our customers we.
We appreciate our suppliers and vendors for also helping us through these challenging times and thank you to our investors for your patience and support these are unprecedented precedented time, so we're working through and our management teams and employees are focused on long term profitable growth and cash generation that we believe will create.
Value for our shareholders now and into the future.
With that I would ask the operator to please open the line for any questions.
Thank you and as a reminder to ask a question simply press Star one one on your telephone that is star 112, getting the queue one moment, while we compile the Q&A roster.
Okay.
One moment for our first question please.
Ladies from BJ Cook with singular research. Please go ahead.
Got it.
Can you guys hear me thanks for taking my questions.
Yes, no worries.
<unk>.
Excellent.
You had mentioned.
Investing in manufacturing capacity upgrades.
A lot of those projects finished and you guys expect to execute on your order back order book.
Faster going forward.
How much how much quicker to you guys.
Good morning to execute.
We have.
<unk> invested a lot in.
Automation in our different factories and many of those projects have been completed and are being used.
Equipment manufacturers are having their own supply chain challenges. So some of the equipment that we've ordered has not arrived yet and will be implemented in the coming months.
And may be even early next fiscal year.
Okay. Thanks for that just one more quick one.
Given the short term nature and the bump in the line of credit.
Guys expecting to realize cash stream.
Accounts receivable or over the next month, and a half or so or even since the end of the quarter.
Yes, maybe I'd say two things our banking facility has been.
Very open and flexible with us.
But of course, it's only guarantee to the end of the quarter and we believe as our business is continuing to be.
Increasing our production levels are increasing we will convert more of our backlog more quickly into.
Invoiced orders.
Okay. Thanks, Thats all I had appreciate it.
Thank you again this of star one one to get in the queue.
Ladies and gentlemen, I will turn it back to Mr. <unk> for final remarks.
Okay. Thank everybody for joining us on this morning's call.
We are taking the going concern situation very seriously and we're working hard to remove that qualifying language as soon as possible and to update the group on those activities. We are planning to have our next conference call at the end of our Q3.
Thank you everyone.
And have a good day bye bye.
And with that we thank you ladies and gentlemen, today's we concluded with that Anne. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.