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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 26, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________.
Commission File Number: 0-23246
DAKTRONICS, INC.
(Exact name of Registrant as specified in its charter)
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SOUTH DAKOTA 46-0306862
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
331 32ND AVENUE
BROOKINGS, SD 57006
(Address of principal executive offices, Zip Code)
(605) 697-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING AS OF MARCH 6,
2002 WAS 18,203,964.
DAKTRONICS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended January 26, 2002
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS as of January 26, 2002 and
April 28, 2001 4
CONSOLIDATED STATEMENTS OF OPERATIONS for the three and nine
months ended January 26, 2002 and January 27, 2001 6
CONSOLIDATED STATEMENTS OF CASH FLOWS for the nine months ended
January 26, 2002 and January 27, 2001 7
Notes to the Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION 17
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 18
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended. These statements
appear in a number of places in this Report and include all statements that are
not historical statements of fact regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect to,
among other things: (i) the Company's financing plans; (ii) trends affecting the
Company's financial condition or results of operations; (iii) the Company's
growth strategy and operating strategy; and (iv) the declaration and payment of
dividends. The words "may," "would," "could," "will," "expect," "estimate,"
"anticipate," "believe," "intend," "plans," and similar expressions and
variations thereof are intended to identify forward-looking statements.
Investors are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and uncertainties, many of
which are beyond the Company's ability to control, and that actual results may
differ materially from those projected in the forward-looking statements as a
result of various factors discussed herein and those factors discussed in detail
in the Company's filings with the Securities and Exchange Commission.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
JANUARY 26, APRIL 28,
2002 2001
(UNAUDITED)
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 496 $ 2,896
Accounts receivable, less allowance for doubtful accounts of $775
at January 26, 2002 and $271 at April 28, 2001 15,508 21,090
Current maturities of long-term receivables 2,044 2,030
Inventories 18,754 19,719
Costs and estimated earnings in excess of billings on uncompleted
contracts 15,587 10,890
Prepaid expenses and other 365 529
Income taxes receivable 247 97
Deferred income taxes 2,103 2,103
----------- -----------
Total current assets 55,104 59,354
----------- -----------
Advertising rights 1,225 1,281
Long term receivables, less current maturities 6,408 5,269
Goodwill, net of accumulated amortization 1,156 1,469
Intangible and other assets, other than goodwill, net 1,093 970
----------- -----------
9,882 8,989
----------- -----------
PROPERTY AND EQUIPMENT, at cost
Land 654 542
Buildings 12,081 9,451
Machinery and equipment 19,849 18,404
Office furniture and equipment 9,563 7,487
Equipment held for rental 3,284 1,324
Transportation equipment 1,941 1,481
----------- -----------
47,372 38,689
Less accumulated depreciation 19,945 16,818
----------- -----------
27,427 21,871
----------- -----------
TOTAL ASSETS $ 92,413 $ 90,214
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)
JANUARY 26, APRIL 28,
2002 2001
(UNAUDITED)
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable, bank $ 8,354 $ 7,911
Accounts payable 7,668 10,199
Accrued expenses 5,480 6,981
Current maturities of long-term debt 4,337 3,883
Billings in excess of costs and estimated earnings on uncompleted
contracts 3,990 2,177
Customer deposits 760 1,236
----------- -----------
Total current liabilities 30,589 32,387
----------- -----------
Long-term debt, less current maturities 9,608 10,344
Deferred income 1,414 531
Deferred income taxes 1,039 1,050
----------- -----------
12,061 11,925
----------- -----------
TOTAL LIABILITIES 42,650 44,312
MINORITY INTEREST IN SUBSIDIARY 129 79
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, no par value, authorized 60,000,000 shares,
18,210,764 and 18,016,066 shares issued at January 26, 2002
and April 28, 2001 13,431 12,900
Additional paid-in capital 341 341
Retained earnings 35,897 32,600
Less cost of treasury stock, 19,680 shares (9) (9)
Accumulated other comprehensive loss, foreign currency translation
adjustment (26) (9)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 49,634 45,823
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 92,413 $ 90,214
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JANUARY 26, JANUARY 27, JANUARY 26, JANUARY 27,
2002 2001 2002 2001
(13 WEEKS) (13 WEEKS) (39 WEEKS) (39 WEEKS)
----------- ----------- ----------- -----------
Net sales $ 30,863 $ 33,071 $ 112,682 $ 109,721
Cost of goods sold 21,817 23,296 79,093 76,813
----------- ----------- ----------- -----------
Gross profit 9,046 9,775 33,589 32,908
----------- ----------- ----------- -----------
Operating expenses:
Selling 5,592 4,359 16,623 13,282
General and administrative 1,744 1,640 5,605 4,265
Product design and development 1,890 1,344 5,312 3,835
----------- ----------- ----------- -----------
Total operating expenses 9,226 7,343 27,540 21,382
----------- ----------- ----------- -----------
Operating income (loss) (180) 2,432 6,049 11,526
Nonoperating income (expense):
Interest income 201 208 565 570
Interest expense (361) (461) (1,204) (1,040)
Other income (expense), net (111) 265 (41) 637
----------- ----------- ----------- -----------
Nonoperating income (expense): (271) 12 (680) 167
----------- ----------- ----------- -----------
Income (loss) before income taxes
and minority interest (451) 2,444 5,369 11,693
Income tax expense (benefit) (179) 916 2,023 4,616
----------- ----------- ----------- -----------
Income (loss) before minority
interest (272) 1,528 3,346 7,077
Minority interest in income of
subsidiary 21 -- 49 --
----------- ----------- ----------- -----------
Net income (loss) $ (293) $ 1,528 $ 3,297 $ 7,077
=========== =========== =========== ===========
Earnings (loss) per share(1):
Basic $ (0.02) $ 0.09 $ 0.18 $ 0.40
=========== =========== =========== ===========
Diluted $ (0.02) $ 0.08 $ 0.17 $ 0.38
=========== =========== =========== ===========
(1) Per share amounts for the three and nine months ended January 27, 2001 have
been restated to reflect a two-for-one stock split in the form of a stock
dividend.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
NINE MONTHS ENDED
-----------------
JANUARY 26, JANUARY 27,
2002 2001
(39 WEEKS) (39 WEEKS)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,297 $ 7,077
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 3,127 2,489
Amortization 385 220
Minority interest in income of subsidiary 49 --
Provision for doubtful accounts 504 123
Deferred taxes, net (11) 10
Net change in operating assets and liabilities (1,743) (5,911)
----------- -----------
Net cash provided by operating expenses 5,608 4,008
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,533) (6,715)
Purchase of business -- (1,071)
Other, net -- (6,137)
----------- -----------
Net cash used in investing activities (6,533) (13,923)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on notes payable 443 3,715
Proceeds from long-term debt -- 6,752
Principal payments on long-term debt (2,432) (1,603)
Proceeds from exercise of stock options 531 188
----------- -----------
Net cash provided by (used in) financing activities (1,458) 9,052
----------- -----------
Effect of exchange rate changes on cash (17) --
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (2,400) (863)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 2,896 1,217
----------- -----------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 496 $ 354
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash payments for:
Interest 1,120 1,078
Income taxes, net of refunds 1,537 2,872
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of building and equipment through contract for deed $ 2,150 $ --
The accompanying notes are an integral part of these Consolidated Financial
Statements.
7
DAKTRONICS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to fairly present the Company's
financial position, results of operations and cash flows for the periods
presented. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
therein. Due to the inherent uncertainty involved in making estimates, actual
results in future periods may differ from those estimates.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. These
financial statements should be read in conjunction with the Company's financial
statements and notes thereto for the year ended April 28, 2001, which are
contained in the Company's Annual Report on Form 10-K, previously filed with the
Securities and Exchange Commission. The results of operations for the interim
periods presented are not necessarily indicative of results that may be expected
for any other interim period or for the full fiscal year.
The consolidated financial statements include the accounts of the
Company and its wholly owned and greater than 50% owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB")
approved Statements of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." The
statements eliminate the pooling-of-interests method of accounting for business
combinations and require that goodwill and certain other intangible assets not
be amortized. Instead, the statements provide that these assets should be
tested, at least annually, for impairment with any related losses recognized as
incurred. SFAS No. 141 is generally effective for business combinations
completed after June 30, 2001. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001 for existing goodwill and intangible assets
and July 1, 2001 for business combinations completed after June 30, 2001. The
provisions of SFAS No. 142 will be implemented by the Company in the first
quarter of its fiscal year 2003 financial statements. However, as noted above,
the remaining unamortized goodwill and intangible asset balances will be subject
to periodic impairment analysis, which could require a write-down of these
assets upon the adoption of SFAS No. 142 or thereafter. The Company is currently
evaluating the impairment requirements, as provided by SFAS No. 142, on the
Company's financial statements.
The FASB also recently issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement, which is effective for fiscal years
beginning after June 15, 2002, covers the accounting for closure or removal-type
costs that are incurred with respect to long-lived assets. The nature of the
Company's business and long-lived assets is such that adoption of this new
standard should have no significant impact on the Company's financial position
or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes FASB No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." The new statement also supersedes certain aspects of APB 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," with regard to reporting the effects of a disposal of
a segment of a business and will require expected future operating losses from
discontinued operations to be reported in discontinued operations in the period
incurred rather than as of the measurement date as presently required by APB 30.
Additionally, certain dispositions may now qualify for discontinued operations
treatment. The provisions of the statement are required to be applied for fiscal
years beginning after December 15, 2001 and interim periods within those fiscal
years. The Company has not yet determined what effect this statement will have
on its financial statements.
8
NOTE 3. REVENUE RECOGNITION
REVENUE AND COST RECOGNITION ON LONG-TERM CONTRACTS. Earnings on
long-term contracts are recognized on the percentage-of-completion method,
measured by the percentage of costs incurred to date to estimated total costs
for each contract. Operating expenses are charged to operations as incurred and
are not allocated to contract costs. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are estimable.
REVENUE RECOGNITION ON EQUIPMENT OTHER THAN LONG-TERM CONTRACTS. The
Company recognizes revenue on equipment sales, other than long-term contracts,
when title passes, which is usually upon shipment.
ADVERTISING RIGHTS. The Company occasionally sells and installs its
products at facilities in exchange for the rights to future advertising
revenues. It recognizes revenue for the amount of the present value of the
future advertising payments at such time that all such advertising is sold for
the full term of the contract for the advertising rights.
On those transactions where the Company has not sold the advertising
for the full term of the rights, it records the related cost of equipment as an
advertising rights asset and amortizes that cost over the term of the rights.
Revenue is recognized when it is earned under the provisions of applicable
advertising contracts. Advance collections of advertising revenues are recorded
as deferred income.
PRODUCT MAINTENANCE. In connection with the sale of the Company's
products, it also sells product maintenance. The revenue related to product
maintenance is deferred and recognized as net sales on a straight-line basis
over the term of the agreement.
SOFTWARE. The Company typically sells its proprietary software bundled
with its video display and certain other products. Pursuant to American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4, "Deferral
of the Effective Date of a Provision of SOP 97-2" and SOP 98-9, "Modification of
SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions".
Revenues from software license fees on sales, other than long-term contracts are
recognized when persuasive evidence of an agreement exists, delivery of the
product has occurred, the fee is fixed or determinable and collection is
probable. For sales of software, included in long-term contracts, the revenue is
recognized under the percentage-of-completion method for long-term contracts
starting when the above-mentioned criteria have been meet.
SERVICES. Revenues generated by the Company for services, event
support, control room design, on-site training, and continuing technical support
for operators of the Company's equipment are recognized as net sales as the
services are performed.
NOTE 4. EARNINGS PER SHARE
Earnings per common share have been computed on the basis of the
weighted-average number of common shares outstanding during each period
presented. A reconciliation of the income and common share amounts used in the
calculation of basic and diluted earnings per share (EPS) for the three and nine
months ended January 26, 2002 and January 27, 2001 follows:
9
NET INCOME PER SHARE
(LOSS) SHARES AMOUNT
---------------- ---------------- ----------------
For the three months ended January 26, 2002:
Basic loss per share $ (293) 18,217,183 $ (0.02)
Effect of dilutive securities:
Exercise of stock options and warrants -- 990,668 --
---------------- ---------------- ----------------
Diluted loss per share $ (293) 19,207,851 $ (0.02)
================ ================ ================
For the three months ended January 27, 2001:
Basic earnings per share $ 1,528 17,849,734 $ 0.09
Effect of dilutive securities:
Exercise of stock options and warrants -- 1,013,996 (0.01)
---------------- ---------------- ----------------
Diluted earnings per share $ 1,528 18,863,730 $ 0.08
================ ================ ================
For the nine months ended January 26, 2002:
Basic earnings per share $ 3,297 18,307,103 $ 0.18
Effect of dilutive securities:
Exercise of stock options and warrants -- 1,210,969 (0.01)
---------------- ---------------- ----------------
Diluted earnings per share $ 3,297 19,518,072 $ 0.17
================ ================ ================
For the nine months ended January 27, 2001:
Basic earnings per share $ 7,077 17,801,324 $ 0.40
Effect of dilutive securities:
Exercise of stock options and warrants -- 980,958 (0.02)
---------------- ---------------- ----------------
Diluted earnings per share $ 7,077 18,782,282 $ 0.38
================ ================ ================
On May 24, 2001, the Company declared a two-for-one stock split in the
form of a stock dividend of one share of common stock for each one share
outstanding, payable to shareholders of record on June 11, 2001. All data
related to common shares has been retroactively adjusted based upon the new
shares outstanding after the effect of the two-for-one stock split for all
periods presented.
NOTE 5. INVENTORIES
Inventories consist of the following:
JANUARY 26, 2002 APRIL 28, 2001
---------------- ----------------
Raw Materials $ 8,924 $ 9,610
Work-in-process 2,100 2,439
Finished goods 7,730 7,670
---------------- ----------------
$ 18,754 $ 19,719
================ ================
NOTE 6. LITIGATION
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, based upon
consultation with legal counsel, the ultimate disposition of these matters will
not have a material adverse effect on the Company's consolidated financial
position.
10
NOTE 7. SEGMENT DISCLOSURE
The Company's chief operating decision maker reviews financial
information presented on a consolidated basis, accompanied by disaggregated
information about revenue and certain expenses, by market and geographic region,
for purposes of assessing financial performance and making operating decisions.
Accordingly, the Company considers itself to be operating in a single industry
segment. The Company has no individual customers which constitute a significant
concentration.
The Company does not maintain information on sales by products, and
therefore, disclosure of such information is not practical.
The following table presents information about the Company by
geographic area:
United States Other Total
------------- ----- -----
Net sales for the nine months ended:
January 26, 2002 104,357 8,325 112,682
January 27, 2001 101,789 7,932 109,721
Long-lived assets 37,050 259 37,309
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion highlights the principal factors affecting
changes in financial condition and results of operations. This discussion should
be read in conjunction with the accompanying Consolidated Financial Statements
and Notes to Consolidated Financial Statements.
OVERVIEW
Daktronics is a leading supplier of electronic scoreboards, computer
programmable display systems, and large video displays for sport, business and
transportation applications. The Company offers the most complete line of large
display products of any single manufacturer, from smaller indoor scoreboards and
displays, to multi-million dollar outdoor video display systems. The Company is
recognized worldwide as a technical leader with the capabilities to design,
manufacture, install and service complete integrated systems that display
real-time data, graphics, animation and video.
The Company has sold display systems ranging from small standard
scoreboards priced under $1,000 to large complex display systems priced in
excess of $13 million.
The Company's net sales and profitability historically have fluctuated
due to the impact of large product orders, such as display systems for
commercial applications and major league sports, as well as the seasonality of
the sports market. The Company's gross margins on large product orders tend to
fluctuate more than those for small standard orders. Large product orders that
involve competitive bidding and substantial subcontract work for product
installation generally have lower gross margins. Although the Company follows
the percentage of completion method of recognizing revenues for orders in excess
of $100,000, the Company nevertheless has experienced fluctuations in operating
results and expects that its future results of operations may be subject to
similar fluctuations.
The Company operates on a 52 - 53 week fiscal year, with fiscal years
ending on the Saturday closest to April 30 of each year. The first three
quarters end on the Saturday closest to July 31, October 31 and January 31.
For a summary of pending accounting pronouncements, see Note 2 of the
Notes to the Consolidated Financial Statements.
11
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales represented
by items included in the Company's Consolidated Statements of Operations for the
periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
JANUARY 26, JANUARY 27, JANUARY 26, JANUARY 27,
2002 2001 2002 2001
(13 WEEKS) (13 WEEKS) (39 WEEKS) (39 WEEKS)
----------- ----------- ----------- -----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 70.7% 70.4% 70.2% 70.0%
----------- ----------- ----------- -----------
Gross profit 29.3% 29.6% 29.8% 30.0%
Operating expenses 29.9% 22.2% 24.4% 19.5%
----------- ----------- ----------- -----------
Operating income (loss) (0.6%) 7.4% 5.4% 10.5%
Interest income 0.7% 0.6% 0.5% 0.5%
Interest expense (1.2%) (1.4%) (1.1%) (1.0%)
Other income (expense), net (0.4%) 0.8% 0.0% 0.6%
----------- ----------- ----------- -----------
Income (loss) before income taxes and
minority interest (1.5%) 7.4% 4.8% 10.6%
Income tax expense (benefit) (0.6%) 2.8% 1.9% 4.2%
----------- ----------- ----------- -----------
Income (loss) before minority interest (0.9%) 4.6% 2.9% 6.4%
Minority interest in income of
subsidiary (0.0%) -- (0.0%) --
----------- ----------- ----------- -----------
Net income (loss) (0.9%) 4.6% 2.9% 6.4%
=========== =========== =========== ===========
NET SALES
Net sales increased 2.7% to $112.7 million for the nine months ending
January 26, 2002 compared to $109.7 million for the same period in fiscal year
2001. Net sales decreased 6.7% to $30.9 million for the three months ending
January 26, 2002 from $33.1 million for the same period in fiscal year 2001. The
decline in net sales for the quarter ending January 26, 2002 as compared to the
same period of fiscal year 2001 was due to a decline in sales in the commercial
market, partially offset by an increase in sales in the sports market. The
increase in net sales for the nine months ending January 26, 2002 as compared to
the same period of fiscal year 2001 was due to an increase in sales in the
sports and transportation markets, offset by a decline in sales for the
commercial markets. Included in sales and orders for the quarter and nine months
ending January 27, 2001 were portions of an unusually large order for the
commercial market that is a significant factor in the decline in sales for the
quarter and nine months ending January 26, 2002. Within the commercial market
the decline resulted from the worsening economic conditions as compared to the
prior fiscal year and a decline in sales to destination type markets such as
casinos and New York City as a result of the events of September 11, 2001. The
increase in the sports market included increases in both large and small venues
due to further market penetration resulting from regionalization, increasing
sales of new products developed by the Company and lowering product costs.
The order backlog decreased approximately 28% to $30.1 million as of
January 26, 2002 as compared to approximately $43.0 million as of January 27,
2001. Historically, the Company's backlog varies significantly due to timing of
large orders during the year. The backlog as of January 27, 2001 included a
significant commercial market order booked in fiscal year 2001. The decline in
backlog was across all three of the Company's markets, however the most
significant decline was in the commercial market.
Year to date order bookings for the Company are down for the nine
months ending January 26, 2002 as compared to the nine months ending January 27,
2001, primarily due to the decline in order bookings in the commercial markets,
although orders in the transportation market were also slightly down. The
Company expects
12
that orders in the sports and transportation markets will be up over the fiscal
year 2001, while orders in the commercial market will be down from fiscal year
2001 and that order booking and net sales will begin to grow as economic
conditions improve.
GROSS PROFIT
Gross profit increased 2.1% to $33.6 million for the nine months ending
January 26, 2002 compared to $32.9 million for the same period in fiscal year
2001. Gross profit decreased 7.5% to $9.0 million for the three months ending
January 26, 2002 from $9.8 million for the same period in fiscal year 2001. The
change for both the quarter and nine months ending January 26, 2002 as compared
to the same periods of fiscal year 2001 was primarily due to the changes in net
sales. The gross profit percentage was relatively consistent for both the
quarter and nine months ending January 26, 2002 as compared to the same periods
of fiscal year 2001. In general, gross profit percentages were positively
affected by cost improvements in manufacturing, slightly better margins on large
contracts, and a transfer of certain indirect personnel from manufacturing to
sales and were negatively affected by a slight decline in the gross profit
margins on standard product sales.
OPERATING EXPENSES
SELLING EXPENSES. Selling expenses consist primarily of salaries, other
employee related costs, travel and entertainment, facilities-related costs for
sales and service offices, and expenditures for marketing efforts including such
things as collateral materials, conventions and trade shows, product demos and
supplies. Selling expenses increased 25.2% to $16.6 million for the nine months
ending January 26, 2002 compared to $13.3 million for the same period in fiscal
year 2001. Selling expenses increased 28.3% to $5.6 million for the three months
ending January 26, 2002 from $4.4 million for the same period in fiscal year
2001. Selling expenses were 14.8% and 12.1% of net sales for the nine months
ending January 26, 2002 and January 27, 2001, respectively. Selling expenses
were 18.1% and 13.2% of net sales for the three months ending January 26, 2002
and January 27, 2001, respectively. The change in dollars for both the quarter
and nine months ending January 26, 2002 as compared to the same periods of
fiscal year 2001 was primarily due to increased costs of personnel as the
Company continued to develop its markets through an increased number of offices
in North America as part of its regionalization efforts, increased spending to
develop its video content and animation business, and an increase in advertising
and marketing. The increased number of offices resulted in higher facility,
depreciation, supplies and other costs typically associated with a remote
office, and was slightly offset through lower costs of travel. Finally, the
Company continued to experience higher levels of bad debt expense in the second
and third quarters of fiscal year 2002 as compared to the same periods of last
fiscal year primarily due to losses in the transportation and international
markets. As a percentage of net sales, selling expenses were higher in both the
quarter and nine months ending January 26, 2002 than the prior fiscal year
periods, primarily as a result of a lower level of net sales than the Company
had expected to achieve.
The Company had expected to achieve a decline in selling expenses from
the second quarter of fiscal year 2002 to the third quarter of fiscal year 2002.
This decline was not achieved due to a number of factors, including the higher
bad debt reserves mentioned above, the timing of certain cost reductions which
were late in the third quarter, and finally higher marketing expenses related to
the opening of the American Airlines center in Dallas, Texas, a significant
project completed by the Company earlier in the current fiscal year. The Company
expects selling expenses to decline in the fourth quarter of fiscal year 2002
and into fiscal year 2003 as compared to the third quarter of fiscal year 2002
as a result of recent reductions.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, other employee-related costs, professional fees,
facilities and equipment related costs for administration departments,
amortization of intangibles, and supplies. General and administrative expenses
increased 31.4% to $5.6 million for the nine months ending January 26, 2002
compared to $4.3 million for the same period in fiscal year 2001. General and
administrative expenses increased 6.3% to $1.7 million for the three months
ending January 26, 2002 from $1.6 million for the same period in fiscal year
2001. The change for both the quarter and nine months ending January 26, 2002 as
compared to the same periods of fiscal year 2001 was primarily due to increased
costs of personnel as the Company positioned itself for higher levels of net
sales, the building of infrastructure to support the regionalization
13
efforts of sales, higher professional fees and higher employee benefit costs. As
a percentage of net sales, the increase for both the quarter and nine months
ending January 26, 2002 over the previous periods of fiscal year 2001 was due to
the items mentioned above as well as a lower level of net sales than expected.
PRODUCT DESIGN AND DEVELOPMENT. Product design and development expenses
consist primarily of salaries, other employee-related costs, facilities and
equipment related costs, and supplies. Product design and development expenses
increased 38.5% to $5.3 million for the nine months ending January 26, 2002
compared to $3.8 million for the same period in fiscal year 2001. Product design
and development expenses increased 40.6% to $1.9 million for the three months
ending January 26, 2002 from $1.3 million for the same period in fiscal year
2001. The change for both the quarter and nine months ending January 26, 2002 as
compared to the same periods of fiscal year 2001 was primarily due to increased
costs of personnel associated with design and development efforts. As a
percentage of net sales the increase for both the quarter and nine months ending
January 26, 2002 over the previous periods of fiscal year 2001 was due to the
items mentioned above as well as a lower level of net sales than the Company had
expected to achieve and a planned increase by the Company resulting from its
intentions to invest at least 4% of net sales on an annual basis back into
product design, development and research. The Company expects these costs to
decline as a percentage of net sales in the fourth quarter and into fiscal year
2003.
INTEREST INCOME
The Company occasionally sells products on an installment basis or in
exchange for advertising revenues from the scoreboard or display, both of which
result in long-term receivables. Interest income resulting primarily from these
long-term receivables, remained level at $0.6 million for the nine months ending
January 26, 2002 and for the same period in fiscal year 2001. Interest income
for the three months ending January 26, 2002 and the same period in fiscal year
2001 was also level at $0.2 million.
INTEREST EXPENSE
Interest expense is comprised primarily of interest costs on the
Company's notes payable and long-term debt. Interest expense increased 15.8% to
$1.2 million for the nine months ending January 26, 2002 as compared to $1.0
million for the nine months ended January 27, 2001. Interest expense decreased
21.7% to $0.4 million for the three months ending January 26, 2002 from $0.5
million for the same period in fiscal year 2001. The change for both periods was
related to higher average levels of debt, notes payable, and long-term debt,
offset by a decline in average interest rates during the periods noted.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $24.5 million at January 26, 2002 and $27.0 million
at April 28, 2001. Working capital provided by net income, depreciation and
amortization was offset by purchases of property and equipment and repayment of
long-term debt. The Company has historically financed working capital needs
through a combination of cash flow from operations and borrowings under bank
credit agreements.
Cash provided by operations for the nine months ended January 26, 2002
was $5.6 million. Net income of $3.3 million plus depreciation and amortization
of $3.5 million, a decrease in accounts receivable and inventories and an
increase in billings in excess of costs on uncompleted contracts was offset by
an increase in costs and estimated earnings in excess of billings on uncompleted
projects and a decrease in accounts payable and accrued expenses. Cash used by
investing activities consisted of $6.5 million of purchases of property and
equipment as described below. Cash provided from financing activities included
$0.4 million of net borrowings under the Company's line of credit, and $0.5
million in proceeds from the exercise of stock options. Cash used for financing
activities consisted of $2.4 million of repayment of long-term debt.
The decline in accounts receivable resulted from enhanced collection
efforts and dedication of personnel to achieve targeted reductions. In addition,
the impact of one large long-term contract with revenues included in costs and
estimated earnings in excess of billings on uncompleted projects as opposed to
accounts receivable, in accordance with the payment terms of the contract,
contributed to the decline in accounts receivable and the increase
14
in costs and estimated earnings in excess of billings on uncompleted projects.
The decline in inventories was the result of lower levels of sales as compared
to prior periods and focused efforts by the Company to reduce levels of
inventory. Finally, accounts payable and accrued expenses declined as a result
of lower levels of sales and related costs of sales and reductions in operating
expenses implemented by the Company during the quarter. Included in accounts
receivable as of January 26, 2002, was approximately $1,300,000 of retainage on
long-term contracts, all of which is expected to be collected in one year.
During the nine months ended January 26, 2002, the Company invested
approximately $2.0 million in equipment for its SportsLink, Inc. subsidiary to
increase its fleet of video boards available for rental. In addition, the
Company purchased additional facilities within close proximity to its existing
manufacturing facilities in order to increase manufacturing capacity. The total
cost of the new facilities which was approximately $2.2 million, was financed
through a contract for deed with the seller of the property. Finally, during the
first nine months of the current fiscal year, the Company invested approximately
$2.8 million in manufacturing equipment and approximately $2.0 million in office
equipment and furniture as it expanded its general office space to accommodate
its planned growth in personnel to support higher sales.
The Company has used and expects to continue to use cash reserves and
bank borrowings to meet its short-term working capital requirements. On large
product orders, the time between acceptance and completion may extend up to 18
months depending on the amount of custom work and the customer's delivery needs.
The Company often receives a down payment or progress payments on these product
orders. To the extent that these payments are not sufficient to fund the costs
and other expenses associated with these orders, the Company uses working
capital and bank borrowings to finance these cash requirements.
The Company's product development activities include the enhancement of
existing products and the development of new products from existing
technologies. Product design and development expenses were $5.3 million for the
nine months ended January 26, 2002 and $3.8 million for the nine months ended
January 27, 2001, respectively. The Company intends to continue to incur these
expenditures to develop new display products using various display technologies
to offer higher resolution, and more cost effective and energy efficient
displays. The Company also intends to continue developing software applications
for its display controllers to enable these products to continue to meet the
needs and expectations of the marketplace.
The Company has a credit agreement with a bank providing for a $20.0
million line of credit, which includes up to $2.0 million for standby letters of
credit. The line of credit is at LIBOR rate plus 1.55% (3.37% at January 26,
2002) and is due on October 1, 2002. As of January 26, 2002, $8.4 million had
been drawn on the line of credit and no standby letters of credit had been
issued by the bank. The credit agreement is unsecured and requires the Company
to meet certain covenants. Financial covenants include the maintenance of
tangible net worth of at least $23 million, a minimum liquidity ratio, a limit
on dividends and distributions, and a minimum adjusted fixed charge coverage
ratio.
The Company's Sports Link, Inc. subsidiary has various lines of credit
for operating needs and equipment purchases totaling approximately $2.0 million.
These lines carry interest rates varying from prime (4.75% at January 26, 2002),
to prime + 1/2% (with minimum and maximum rates between 6.5% and 9.5%), (6.5% at
January 26, 2002). These lines are secured by a guarantee by the Company as well
as substantially all the assets of the subsidiary. These lines of credit
terminate over the next 12 months. The Company expects to be able to renew these
lines as they expire.
The Company is sometimes required to obtain performance bonds for
display installations. The Company currently has a bonding line available
through a surety company that provides for an aggregate of $100.0 million in
bonded work outstanding. At January 26, 2002, the Company had approximately
$10.1 million of bonded work outstanding against this line.
The Company believes that if its growth continues, it may need to
increase the amount of its credit facility. The Company anticipates that it will
be able to obtain any needed funds under commercially reasonable terms from its
current lender. The Company believes that cash from operations, from its
existing or increased credit facility, and its current working capital will be
adequate to meet the cash requirements of its operations in the foreseeable
future.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RATES
Through January 26, 2002 substantially all of the Company's net sales
were denominated in United States dollars, and its exposure to foreign currency
exchange rate changes has been immaterial. Through January 26, 2002, net sales
originating outside the United States, substantially all of which were
denominated in United States dollars were 7% of total net sales. It is expected
that net sales in the future to international markets may increase as a
percentage of net sales; however, the Company does not expect that such increase
in such sales will be denominated in foreign currencies. As a result, operating
results are not expected to become subject to significant fluctuations based
upon changes in the exchange rates of certain currencies in relation to the
United States dollar. However, to the extent that the Company engages in
international sales denominated in United States dollars, an increase in the
value of the United States dollar relative to foreign currencies could make the
Company's products less competitive in international markets. Although the
Company will continue to monitor and minimize it's exposure to currency
fluctuations, and, when appropriate, may use financial hedging techniques in the
future to minimize the effect of these fluctuations, exchange rate fluctuations
as well as differing economic conditions, changes in political climates,
differing tax structures and other rules and regulations could adversely affect
the Company's financial results in the future.
INTEREST RATE RISKS
The Company's exposure to market rate risk for changes in interest
rates relates primarily to the Company's debt and long-term accounts receivable.
The Company maintains a blend of both fixed and floating rate debt instruments.
As of January 26, 2002, the Company's outstanding debt approximated $22.3
million, with approximately $14.5 million in fixed rate obligations. Each 100
basis point increase or decrease in interest rates would have an approximate
$78,000 annual effect on variable rate debt interest based on the balances of
such debt as of as of January 26, 2002. For fixed rate debt, interest rate
changes affects its fair market value, but do not impact earnings or cash flows.
In connection with the sale of certain scoreboards and message display
centers, the Company has entered into long-term sales contracts and sales type
leases. The aggregate amounts due from customers include an imputed interest
element. The majority of these financings carry fixed rates of interest. As of
January 26, 2002, the Company's outstanding long-term receivables were
approximately $8.5 million. Each 25 basis point increase in interest rates would
have an associated annual opportunity cost of approximately $21,000.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates, including debt
obligations for the quarter ending April 26, 2002, and the fiscal years
following fiscal year 2002. Weighted average variable interest rates are based
on implied forward rates in the yield curve at the reporting date.
16
INTEREST RATE SENSITIVITY
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
(Dollars in thousands)
FOURTH
QUARTER FISCAL YEAR ENDING
------- ------------------------------------------------- THERE
2002 2003 2004 2005 2006 2007 AFTER
- ------------------------------------------------------------------------------------------------------
Assets:
Long-term receivables,
including: 192 1,591 1,773 1,229 1,076 754 1,610
current portion
Fixed rate
Average interest rate 6.2% 7.1% 7.6% 9.8% 9.9% 9.6% 9.0%
Liabilities:
Long and short term debt
Fixed rate 2,825 3,484 3,113 1,469 3,368 253 36
Average interest rate 8.0% 7.5% 7.6% 8.5% 6.3% 9.1% 12.0%
Variable rate 7,741
Average interest rate 3.37%
The carrying amounts reported on the balance sheet for long-term
receivables and long and short-term debt approximates its fair value.
Substantially all of the Companys cash balances are denominated in
United States dollars. Cash balances in foreign currencies are operating
balances maintained in accounts of the Company's Canadian subsidiary. These
balances are immaterial to the Company as a whole.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ James B. Morgan, Chief Executive Officer
-------------------------------------------------
Daktronics, Inc.
(James B. Morgan, Chief Executive Officer)
(Chief Executive Officer)
Date March 11, 2002
--------------
/s/ William R. Retterath, Chief Financial Officer
-------------------------------------------------
Daktronics, Inc.
(William R. Retterath, Chief Financial Officer)
(Principal Financial Officer)
18