Daktronics

Financial Management-II

DAKTRONICS

Introduction

The story is of March 2010 when the chairman, the CEO, and the CFO of the board were confused whether they should increase the dividend or not. The company had suffered financial and operational downsides in the past three years due to the economic slowdown. However, the U-turn in the economy the company was showing signs of improvement and thus the chairman, Dr Kurtenback asked the CFO of the company to present a case on new dividend distribution while taking care of the current and the future cash flows of the company. The focus should be on rewarding the long term investors.

Background

Founded in the year 1968, by Dr Kurtenback and Dr Sanders, the company began with the production of voting displays and started moving on to scoreboards for renewed stadiums. By 2007, it was already operating in five lines of businesses, namely – Live Events, Commercial, Schools and Theatres, International and Transportation.

Financial Situation

Although the revenues and earnings of Daktronics continuously increased over time, there were fluctuations in every quarter because of the timing of placing an order and when they were completed. Big orders from bigger clients lead to fluctuations in revenue and earnings. Therefore this had become a trend wherein sales and earnings were generally higher in the first 2 quarters than in the third quarter. Also the sales were usually high in the fourth quarter.

History of the stock price

• Showed an increasing trend in 1999 due to an image of high growth in earnings of the company
• The prices rose so much that a 2:1 split was done in 2001 and 2006
• Rose due to positive news of new contracts and good earnings which were displayed
• An overvaluation of the stock was found in a report in 2006 and the share price fell
• Due to a fall in net income the price further fell in 2008 in spite of 11% increase in sales

Dividend Policy

Historically a conservative company, it was growth oriented and utilised all of its earnings for its growth. In 2004 however, the business grew and management felt that the extra cash flows were not required and therefore it paid its first dividend in 2004. Ever since, it has been growing by 1 to 1.5% every year.

Conclusion

As per the calculations, projected cash flow from operation in May 2010 will be INR -33624 (in thousands). This shows that the operating activities will be a tough task for the company.

Free Cash Flow = -33624 – 16960 (4% of projected sales), which is INR -50,584. So the company is having negative cash flow after it has paid all its revenue and capital expenses.

But the projected Net Income of the company is positive, though there is a sharp fall of 26% over the previous period. Hence, the company should pay its dividend just as last year so that the faith is maintained in the market.

Stock repurchase will not be suggested. Since the company has a tradition of regularly paying dividend, so conservative people invest in the company who buy the company’s stock for the dividend. So it