Q1 2020 Earnings Call
As a reminder, this conference call is being recorded today Wednesday August 28, 2019 and is available on the company's website at Www Dot Daktronics.
If anyone should require operator says first hand the call. Please press star and then Sheryl and your debt shelf huh.
I would now like to turn the conference over to Ms., Sheila Anderson, Chief Financial Officer for Tektronix for some introductory remarks. Please go ahead Sheila.
Thank you Skylar good morning, everyone. Thank you for participating in our first quarter earnings conference call.
I would like to read your disclosure cautioning investors and participants.
Additionally, the statements of historical facts, we will be the clothing and 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 condition changes in the competitive and market landscape, including impact of global trade discussions and policy management of growth.
Timing and magnitude of future orders and contracts fluctuations of margins the introduction of new products and technologies and other important factors as noted and detailed in our 10-K and 10-Q FCC filing.
With that let me highlight some of the financials for the first quarter of 2020 and the related comparisons of fiscal 2000, Nineteens first quarter.
Fiscal 2020 is a 53 week year in fiscal 2019 was a 52 week year.
The extra week of fiscal 2020 fell within the first quarter, resulting in a 14 week versus a 13 week work comparison.
Sales orders at all areas of operating expenses were impacted by this additional week.
Orders are up 17.5% as compared to last year's first quarter orders increased in live events International and commercial business units decreased in high School Park and recreation business units and were relatively flat in the transportation areas.
For a comparison orders pace at $13.4 million per week in fiscal 2020 as compared to $12.3 million. During the same time last year were around a 9% increase using does comparison.
Each business unit was impacted by that additional week in fiscal 2020.
Well I think that's orders, but the increase is primarily due to the number of projects for professional sports arenas in college and University banking is available.
Professional sports we were awarded orders for either upgrades or replacement. Examples include win example wins include projects for the Cincinnati Reds and U.S. Military Academy and TD Garden I'm of the Boston Celtics influence to name a few.
We were also awarded several projects in college campus Athletics as these customers are looking to increase the fan experience and attract players and fans or thereabout.
International business unit orders were up to that due to general variations and timing of large contracts and account based business.
We worked to cross a number of different customer types and geographies outside the U.S., including transportation and governmental sports and commercial areas.
As an example, we won project this quarter in Macau Riyadh in Doha for all these customer types.
We have continued order system with local and regional out of home advertising customers as they build out their digital networks and how about continued success in projects for Molson casinos sports complexes and other transportation stations around the world.
The increase in commercial orders was due to out of home and on premise segment. These increases were caused by timing of account base orders for digital Billboards and an increase in market demand.
We did win for spectacular orders in Las Vegas during the quarter, along with other unique installed across the country.
Well transportation was relatively flat we had continued success with state departments of transportation like Colorado, and Florida for continued use of our remote sites language products.
High School Park and Recreation orders decrease was related to the variability get order timing and we had fewer larger video system project as compared to last year at this time.
As a reminder, we drive significant portions of our orders and sales for large dollar size projects in the college and professional sports facility entertainment venues transportation market applications and from spectacular nuts and account based business in or out of home match, the timing and amount of these contract awards in sports and.
Orbitz, it's amounted these contract awards sports and construction seasonality.
And the various schedules depends on our customers needs can cause material fluctuations in our orders sales and earnings across quarters.
Sales for the first quarter of fiscal 2020 increased 16.9% and were $180 million as compared to $154 million last year.
For comparison to the third to the 14 13 week quarter sales revenue pace at $12.9 million for a week in fiscal 2020 as compared to $11.9 million. During the same time last year were around a 9% increase using this comparison.
Net sales increasing commercial lives that high School Park, and recreation and transportation business unit and decrease in the international business units. The change in sales correlates to the increase in order levels as well as the timing of converting orders and backlog into sales.
Our first quarter is historically, one of the busiest quarters as they produce deliver and install for outdoor sports venues and other outdoor systems during the summer construction season.
Gross profit as a percentage of net sales was 25.2% as compared to last year's 24.8%.
And with primarily was higher due to sales volumes over a relatively fixed infrastructure costs.
Offsetting this increase was tariff related expenses of approximately $1.5 million for the quarter last year. At this time tariffs are just being introduced and U.S. imports of aluminum and steel and components from China.
Our warranty as a percentage of sales decreased to 2.1% as compared to 2.5% quarter over quarter and is slightly lower than the fiscal 2000 nineteens rate of 2.3% of sales.
Operating expenses for the first quarter of fiscal 2020 was $37.9 million compared to $34.2 million for the first quarter of fiscal 2019.
This increase is primarily due to the additional week and we continue to invest in our development.
New or enhanced solutions, causing some increase in weekly run rates and product development.
Selling expenses increased due to the commissions to third party resellers related to sales this quarter.
Operating other person operating income as a percentage of sales was 4.2% for the first quarter as compared to 2.6% for the first quarter of 2019.
The effective tax rate for the first quarter was 12.6% as compared to an effective tax benefit of 13.1% last year.
During the first quarter of 2019, we had recorded a tax benefit which caused unexpected.
Which was caused by discrete tax credits.
Exceeding our tax expense.
We estimate our effective tax rate to be approximately 13% for fiscal 2020, but that's effective rate can fluctuate depending on changes in tax legislation actual geographic mix of taxable income.
And the level of tax credits is compared to an actual taxable income.
Our cash and marketable securities position was $33 million at the end of the quarter, we used $18.2 million of cash from operations for leading with the increase of inventory and receivables that are related to contracts in progress and which supports production of backlog.
And he was $5.9 million for investments in capital or new product production system capabilities, and information infrastructure and used $10.5 million in product development.
We used $2.2 million for dividends and $1.2 million for stock repurchases also in the quarter.
We expect capital expenditures to be between 20 and $25 million during the year and will be used primarily for new production equipments, which relate to new products and related reliability lab equipment.
Along with investments in our information technology infrastructure and systems.
One change the balance sheet to point out this quarter, we adapt to the new lease accounting standard at the beginning of the year, requiring a right of use the assets and the related liability for leases.
The asset and liability was approximately $10 million at the end of the quarter and wasn't related to our lease facilities and Sioux Falls, South Dakota in Shanghai, China, along with other leases for local offices around the world.
Our product backlog was $207 million at the end of the quarter, which we expect to convert to sales over the coming two to three quarters. We expect sales for the second quarter fiscal 2020 to be up slightly as compared to last year and of course sales could change depending on project bookings and customer schedule changes.
I'll now turn the call over to Reece Kurtenbach, our chairman President and CEO for a few comments. Thank you Sheila good morning, everyone. As Sheila highlighted we had a strong start to fiscal 2020, our teams across the company work to serve our customers, which translated into topline and bottom line performance in the first quarter.
Well historically busy at these times as a first half of our fiscal year as many of our sports customers installing facility upgrades or enhancements and this is also the construction season in the northern hemisphere and much of the World uses this time to install outdoor applications before the winter months.
As a result of our increased investments and development over the past few years, we have broadened our offerings to customers.
Solutions like our neural pixel pitch displays are being adopted by new and existing customers around the world.
Especially for these new indoor product lines, we continue to explore and develop new channels to sell through often with integrators that can incorporate our products into locations like corporate offices full centers and retail stores.
Our control offerings have also been enhanced driven demand for both control system upgrades and new system purchases.
Well that's successful around the globe, we continue to see buyers interested in making decisions to invest in our solutions you can well economic concerns longer.
Like many other companies we are in the midst of a dynamic and volatile global trade environment.
Today, we are most impacted by the China and the United States Administration measures were imposed import tariffs and the current run right on where to do business.
We continue to monitor and evaluate the situation from multiple perspectives and well continue to adjust our sourcing and production methodologies to minimize impact to our customers and to daktronics, while providing high quality high value solutions at a competitive price.
However, and our current view, we estimate the tariffs on components could impose more than 10 million in cost for us this year.
We do remain positive regarding the over all outlook of the business and the growth in the industry for fiscal 2020 and beyond we predict applications of digital solutions will continue to grow and expand in all of our business units.
Specifically in international with our establishment of localized sales and service channels and our focus on increasing market share. Our current outlook on known opportunities, we expect growth in sport auto home spectacular and transportation areas outside the U.S. in Canada.
Looking into the live events business, we expect some growth over the long term. However, we project a similar size business as previous years, driven by replacement cycles and new product uses.
One caveat that this business is lumpy primarily existing of larger contracts, which can be highly competitive which will create some variation from year to year.
We expect sustained demand for larger sized orders due to the adoption of video and supporting applications and the high School Park and Recreation Mark.
Our commercial business unit, we see growth opportunities because of expansion in the solutions for indoor applications.
Continued replacement and new investment activity on the auto home and retail segments and opportunities on the spectacular segment, which includes multimillion dollar projects that are discretionary choices by customers, which can cause ups and downs and timings and trends.
The transportation business in the Us and Canada remains strong due to continued investments in the U.S. transportation systems and stability in federal funding, an increasing advertising and on premise promotional application needs in mass transit facilities.
It is true and all of our markets and we have a natural replacement cycle and strive to serve our customers with her needs today as well as in the future. So where there are obvious choice for replacement.
We have recently introduced indoor neural pixel pitch offerings, and we see a receptive market for these products across our business units.
And so we continue to foster and build dog indirect sales channels.
Our major solutions and global capabilities make us the industrys, most experienced digital loosely provider and to support our customers over the long term, we are focused on developing and releasing innovative solutions and services tailored to different application in each of our segments.
During fiscal 2020, we were continuing to invest at higher levels than our development and are making investments and the technologies and techniques of using microwave ladies.
These technologies will open up new markets and create competitive advantages to us while serving the needs of customers desiring to improve the way they conduct and interact with our customers and audiences.
We enter the second quarter of fiscal 2020, with a strong backlog and a positive outlook.
During fiscal 2020, we are focused on increasing orders as we serve a growing global customer base and commercial sports and government markets.
We plan to continue to invest in product development activities for new technologies and advancing our manufacturing techniques.
Finally, we are focused on carefully managing capacity and spend on our path to long term profitable growth.
With that I would ask the operator, please open the line for any questions.
Ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your touch and telephone.
If your question has been answered or you wish or maybe yourself in the queue. Please press the pound key again that is star and then one to ask a question.
And our first question comes from Greg Pendy with Sidoti. Your line is now open.
I just wanted to I think in the quarter, you said that the tariffs were 1.8 million dollar impact and you're expecting a 10 million impact throughout this year. So just can you help us understand the timing of where there might be some step ups throughout the year, maybe more tariffs coming through and how we should be thinking about that because it seems like.
Given a 10 million impact you're expecting.
If you it to increase a little bit throughout the year.
Oh, there was just a recent announcement that there would be a bit of an increase there was that creates some of that increase to the $10 million and then it also goes along with when we utilize the inventory. So there's some tariff pop up in our inventory at this moment that well use in future quarters.
Got it thanks, and then just moving on just wondering you know.
I think in the guidance for next quarter, you kind of mentioned you're expecting revenue to be up slightly just trying to understand the live events because it looked very strong in this quarter you were thinking it kind of balances out throughout the year I take it and can you just kind of give us a little bit of color was helpful. That you pointed out the Cincinnati Reds, the Celtics, but just trying to understand a little bit maybe of what you're seeing environment wise and maybe the NFL given the attendance problems, maybe a few years back and whether people are more comfortable and <unk> and some of the professional sports attendance trends.
We continue to see an investment Oh, I sports teams across the board and improving the in venue experience.
Not just in the ball, but in all different spaces associated with today's modern sports venues.
We believe that investment will continue to happen in the NFL than the other pro teams.
And that without a big stadium construction that investment tends to be upgrades or enhancements, which are more difficult to predict in time, because a customer can choose to do with this season or next season ended on their personal schedules and other priorities.
Great. That's helpful. Thanks, a lot.
And worse.
Right.
Again, if you have a question. Please press star and then one our next question comes from Lisa Springer with singular research. Your line is now open.
Thank you and congratulations on a good quarter by the way.
Thank you.
I wanted to could you give us a little bit more color around the surge in orders for the international segment and how.
Soon do you think you're going to recognize the revenue from those orders.
Well I think the international business or.
Oh, it has its ups and downs, but we continue to grow overall and our presence is.
That's been continuing to build over the years as far as the timing of when the business will turn to the sales I think in the next two to three quarters. It mostly projects that will finish out in the relatively near term here.
Okay, and just in general a in a given quarter what percentage of your sales are from replacement sales and what percentage would be new customers and new installations.
It's I don't know if we have that number at our finger tips and it would it would vary a lot from year to year, depending on construction cycles.
We don't we don't keep figures like that I will say that.
In North America, especially almost every major team from a a college a minor league has some type of video system and so when they choose to upgrade that they're really you could consider that a replacement and so then some parts of our business. The whole thing is almost some type of upgrade or replacement outside of new.
And what would be the typical a replacement cycle for a a college or professional sports or sports.
A nominal 10 year replacement cycle for most of what we do is is a as a rule of thumb dot on everything tracks in that.
HM Okay. Thank you.
No worries.
And at this time Im showing no further questions I would like to turn the call back over to raise for any closing remarks.
Well I'd like to thank everybody for attending the call today for those of you in the U.S. I wish you a great read a ando summer holiday I look forward to talking to all of you in a few months.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program you may now disconnect everyone have a great day.