Daktronics, Inc. (NASDAQ:DAKT) Q2 2022 Earnings Conference Call December 1, 2021 11:00 AM ET
Sheila Anderson - Chief Financial Officer
Reece Kurtenbach - Chairman, President and CEO
Conference Call Participants
Good day, ladies and gentlemen, and welcome to the Daktronics Fiscal Year 2022 Second Quarter Earnings Results Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded today, Wednesday, December 1, 2021, and is available on the Company's website at www.daktronics.com. [Operator Instructions] I would now like to turn the conference over to Ms. Sheila Anderson, Chief Financial Officer for Daktronics, for some introductory remarks. Please go ahead, Sheila.
Thank you, Latif. Good morning, everyone. Thank you for participating in our second quarter earnings conference call. I would like to review our disclosure, cautioning investors and participants that in addition to statements of historical facts, we will be discussing forward-looking statements reflecting our expectations and plans about our future financial performance and future business opportunities. All forward-looking statements involve risks and uncertainties which may be out of our control and may cause actual results to differ materially. Such risks include changes in economic conditions, changes in the competitive markets and landscape, including impacts of global trade discussions and policies, the impacts of governmental laws, regulations, and orders, including those resulting from pandemics, disruptions to our business caused by geopolitical events, military actions, work stoppages, natural disasters, or international health emergencies, such as the COVID-19 pandemic, management of growth, timing and magnitude of future contracts, fluctuations of margins, availability of raw materials, components, and shipping services, the introduction of new products and technology, and other important factors as noted and detailed in our 10-K and 10-Q SEC filings.
With that, let me highlight some of our financials. During the first half of fiscal 2022, customer activity began increasing in varying degrees across our markets as effective vaccinations became available and utilized, allowing people to move more freely and safely. COVID-19 restrictions have reduced which improved economic outlooks and provided our customers with more confidence. Customers placed a record $163.7 million of orders for the second quarter of fiscal 2022 and for the first 6 months of the year at $345.5 million. These levels equated to increases of 20.7% for the second quarter and 34% increase on a year-to-date basis.
Each business unit order volume grew through the first half of fiscal 2022. Commercial business unit orders increased due to the strong demand from customers using systems for on-premise promotion and out-of-home advertising. High School Park and Recreation, business unit growth was driven by the continued adoption of video displays used for sporting and educational use. Transportation order levels increased as project planning and approval activities resume to a more pre -pandemic level and our customers moved forward in purchasing displays using intelligent transportation systems and for mass transit venues. International business unit for the quarter were less than last year same quarter, but improved through the first half of the year.
While some countries have eased travel restrictions, we have seen some business in those locations increase, but other countries continue to have taken a more cautious approach to reducing various measures enacted during the pandemic, creating slower recovery of orders across the globe. Live Events business units were similar to last year's second quarter and increased on a year-to-date basis. Net sales increased 29.1% to $164.5 million as compared to second quarter of fiscal 2021 of $127.4 million. Year-to-date comparisons were $309.2 million to $271 million or a 4.1% increase year-over-year. The increase was a result of strong demand as noted in the order commentary, and an increase in the conversion in Q2. Yet it's been tampered by constraints in supply of components, rates, and labor availability for the first half of the year.
These materials, supply, and labor shortages are creating an increase in lead times and extending the timing of converting some orders to sales in the near term. This has created a larger than typical backlog for us. Gross profit for the quarter as a percentage of net sales was 19.6% as compared to last year's 26.2%, and gross profit year-to-date was 20.8% as compared to 25.5% for second quarter fiscal ‘21. The decrease in gross profit is primarily related to an increase of costs and inputs and higher personnel costs, compared to last year, during the pandemic. We've experienced inflation in our input costs, including raw materials, labor, and shipping through the year with varying ability to adjust our pricing. In addition, during the second quarter of fiscal 2022, we had more large project sales which generally have a lower gross profit because of the competitive nature of large projects.
Last year was also different as we were utilizing furloughs, government programs and reductions to adjust capacity and manage expenses during that phase of the pandemic. Operating expenses for the second quarter of fiscal 2022 were $27.9 million compared to $26.7 million for the second quarter of fiscal 2021, or an increase of 4.5%. On a year-to-date basis, operating expenses were $54.4 million as compared to $52.9 million or an increase of 2.8%. Our operating expenses have increased as we adjust our capacity to support the increased demand levels. These increases are mostly in personnel costs, with some increases in travel and convention activities. Effective tax rate for the 6 months ended October 30, 2021 was 27% and similar to last year's rate of 26.2%.
Our balance sheet remained strong during the quarter. Our cash position was $61.6 million at the end of the quarter. During the first half of the year, we used $8.5 million in cash from operations correlating with the focus on increasing inventory levels for backlog, increasing personnel and operating expense outflows, as we manage costs to increase demand. Capital spend was $4.5 million for production and demonstration equipment and building improvements. And we sold various properties and equipment’s to generate $800,000 of cash. We invested or loaned $6.1 million in our strategic investments and affiliates. There were no advances under our loan portion of credits -- of our line of credits, compared to last year, where we had $15 million borrowed at the end of the second quarter.
Our Board suspended dividends and share repurchase programs at the start of the pandemic and can reinstate them at their discretion. Therefore, no cash was used during the first half of the year for these programs. As we look into the second half of fiscal 2022, we expect some cash usage for inventory, accounts receivable, and contract assets, as our business activities continue to grow. We estimate total capital expenditures to be roughly $25 million for the total fiscal year, which will be used primarily for increasing capacity and production equipment and for demonstration assets. Some of the spends may move into next year, depending on the availability and timely delivery of the equipment. We may choose to invest additional funds in our strategic investments and affiliates, or conduct other acquisitions to advanced technologies to market requirements and [trends at] (ph) on other capabilities.
And we continue to invest our -- in product development initiatives at an increased level from FY '21 to continue to create value for our customers. Our product backlog is at an all-time high of $282 million, resulting from the increased order activity in the first half of fiscal 2022. We expect sales for the third quarter of fiscal 2022 to increase over last year's third quarter due to that record product backlog. But of course, sales could change pending project bookings, customer schedule changes, and the availability of plants and material capacity. COVID-19 variants and certain geography restrictions could also impact order levels and conversions to sales. We continue to work to adjust our expense levels during -- from the pandemic level a year with uncertainty and now we're focused on prudently controlling costs to this time of growth. I'll now turn it over the call to Reece Kurtenbach, our Chairman, President and CEO for a couple of comments.
Thank you, Sheila. Good morning to everyone. As activities in our markets increase, we have and are increasing our capacity to maximize production and service capacity while prudently controlling costs through this time of growth. We will be strategically making investments in capital assets for our factories, for product developments to meet the needs of our customers, and for technology developments to be a market leader on into the future. We will also continue to invest in improving the strength and expertise of our internal operations and business systems to enhance our customer and employee experiences. During the first half of the year, we have experienced headwinds in the availability of materials, labor, and transport, creating inflationary pressures in our cost structure.
These headwinds in supply chain disruptions began to emerge as a result of the pandemic and the changes in global demand. Specifically, we are impacted by the global shortage of semiconductors and related electronic components, other materials needed for production, shipping container shortages, and Freight availability. We expect these factors will cause volatility in our revenue cycles and production costs through the remaining fiscal year and into our fiscal 2023. We continue to focus on the supply chain to reduce our lead time in the short-term and improve our ability to deliver over the long-term.
As we look out to the longer-term, we believe the audio-visual industry fundamentals remain strong and are poised for growth. Our strategies to provide long-term profitable value propositions for all of our stakeholders include offering comprehensive products and services that match our customer needs and expectations, expanding to new markets, often unlocked by the development of advanced technologies, such as narrow pixel pitch, micro LED, and control systems, growing and fostering our direct and indirect sales channels globally, providing world-leading solutions and services to our customers today, as well as into the future to make us the obvious choice for new systems and replacement or upgrade of their existing audio visual systems, and improving the experiences of both our customers and our employees continually developing our internal processes and systems.
Specific strategies in our business units include: continuing to develop and release innovative solutions and services tailored for different applications for existing and new markets, including investment and development in micro LEDs. Investments in increased use of digital technologies to enhance our interactions with our customers, growing international by using our established localized sales and service channels to focus on growing our market share in sport, out-of-home, spectaculars, and transportation areas, servicing our Live Events business with solutions for traditional applications and marketing new technologies for these venues. We expect some growth in this area, but know this business is lumpy, primarily consisting of large contracts, and can be highly competitive, creating some variation from year-to-year.
Continuing to serve our high school and parks and recreation market, we see opportunity for larger-sized orders due to the adoption of video in sporting applications and growth in new applications across these campuses. In our Commercial business unit, we are focused on strategies to support the expansion of solutions for indoor applications, continued replacement and new investment activity in the out-of-home and retail segments, and the increasing success in the spectacular segment. This segment includes multi-million-dollar projects that are discretionary choices by customers, which can cause ups and downs in timing and trends.
Demand in the transportation business for the U.S. and Canada, we believe will be strong due to continued investment in transportation systems. The stability and potential for increases in federal infrastructure spending and increasing advertising and on-premise promotional application needs in mass transit facilities. Our strategies are to continue to build relationships with industry influencers as we tailor products for the different applications in this segment. Our strong portfolio of products and services, support the market needs today and are well-positioned to grow with customers ' willingness to purchase AV systems on into the future.
We are optimistic about the world's ability to overcome this pandemic and the continued growth in our business. Our focus for fiscal 22 and beyond is to grow profitably and improve our operating margins by the development of new solutions, new customers and continually improving operations. We look forward to serving our new and existing customers as the most experienced provider in the industry with the broadest range of solutions.
With that, I would like to thank everyone for attending today's conference. Our next conference call will be in late May, after our fourth-quarter completion. I hope you have a wonderful winter season and you stay safe and stay healthy.
This concludes today's conference call. Thank you for participating. You may now disconnect.