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Daktronics (E): Dividend Policy in 20101

Tom Cook, University of Denver
I
n early March 2010, Bill Ritterath, Chief Financial Officer of Daktronics, Inc., was
meeting in his office with Jim Morgan, CEO, and Aelred (Al) Kurtenbach, Chair-
man of the Board, about increasing dividend payments to shareholders. Daktron-
ics was the world’s leading supplier of electronic scoreboards, large electronic display
systems, and digital messaging solutions for use in sports, transportation, and commu-
nications. The company had been going through a difficult period the past three years
with the downturn in the national economy and the sudden reversal in the company’s
operating and financial performance. Sales were projected by security analysts to fall
from a high of approximately $581 million in 2009 to an estimated value of $424
million for fiscal year 2010 ending in May.2 Stock price had also fallen from a high of
$38.66 per share on December 1, 2006 to $7.72 per share on March 3, 2010.
But with the economy showing some signs of recovering from the recession, Dr.
Kurtenbach thought it was time to review Daktronics’ current dividend policy: “We
can afford to return some additional cash to shareholders given our confidence that the
company is turning around and business is improving.”
Cash balances were growing rapidly and the outlook for future cash flows was posi-
tive. In making the decision, Dr. Kurtenbach wanted it to be based on an assessment of
the company’s current cash position and future cash flow projections: “I don’t want this
dividend to reward short-term holders at the expense of our long-term shareholders.”
Dr. Kurtenbach asked Mr. Ritterath to make a recommendation at the next Board
meeting (in four weeks) on a new dividend distribution, including both the amount
and form of the distribution.

Copyright © 2012 by the Case Research Journal and the author. The author developed this case for class
discussion rather than to illustrate either effective or ineffective handling of the situation. The case was
presented at the North American Case Research Association Annual Meeting on October 29, 2010, in
Gatlinburg, Tennessee. This project was made possible with financial support via a NACRA case research
grant and South Dakota State University.

Daktronics (E): Dividend Policy in 2010 115
This document is authorized for use only by Justin Robinson in 2018.

Daktronics Background
Company History
Daktronics was founded in a garage in 1968 by two professors of electrical engineer-
ing from South Dakota State University in Brookings, South Dakota (Dr. Aelred J.
Kurtenbach and Dr. Duane Sander). (See Appendix A for company history.) Its first
product was a voting display for the Utah legislature, delivered in 1970. The company
quickly added new products and expanded into new markets. Many new sports stadi-
ums were being built or remodeled during this time, increasing the demand for new
displays and scoreboards. The company expanded into the large sports venue market
by providing scoreboards to the 1980 Winter Olympics. During the 1980s the com-
pany also began installing displays in major-league stadiums. Daktronics also supplied
displays and digital clocks to Times Square locations. The company had a long history
of using cutting edge engineering. The blue LED, a small bulb used with green and red
LEDs to produce color on large TV-like screens, was introduced in 1996.
By 2007 the company was becoming too large to run as a single unit and split
into five different lines of business: Live Events, Commercial, Schools and Theatres,
International, and Transportation. Exhibit 1 shows sales by business segment for
2007–2009.
Exhibit 1: Daktronics Sales by Business Segment, 2001–2009
2009 2008 2007

Percentage of Percentage of Percentage of
Segment Sales Total Sales Total Sales Total
Live Events $269.6 46% $165.6 33% $177.2 41%
Commercial 155.9 27% 180.9 36% 137.2 32%
Schools & Theatres 66.4 11% 60.9 12% 50.8 12%
International 55.7 10% 51.8 10% 37.1 9%
Transportation 34.3 6% 37.4 8% 30.4 7%
Total $581.9 100% $496.6 100% $432.7 100%
Source: Daktronics, Inc. Profile, Hoovers, February 2010; Daktronics 10-K for 2008 and 2009.
Financial History
Revenues and earnings increased over time, although results varied from quarter-
to-quarter due to the timing of orders and when those orders were completed and
shipped. A significant portion of the company’s operating costs were fixed and if orders
were unexpectedly delayed or canceled there could be a significant drop in quarterly
operating results.
Large orders from professional sports teams and major colleges were seasonal, lead-
ing to large fluctuations in sales and earnings. Consequently, sales and net income in
the first and second quarters of a fiscal year were generally higher than in the third

116 Case Research Journal • Volume 32 • Issue 4 • Fall 2012

quarter. Sales were generally higher in the fourth quarter. Football related sales usually
occurred in the summer and early fall; basketball and hockey related sales followed
later in the fall and baseball related sales occurred in early to late spring. Seasonality
was aggravated by large orders from the sports markets and the effects of holidays dur-
ing the third quarter. Large orders typically had smaller margins and more margin vari-
ability than did smaller orders because large orders were won through a competitive
bidding process and more subcontracting of the work. Profits increased over 300 per-
cent during the period 2000–2008. Exhibits 2 through 4 show annual income state-
ments, balance sheets, and statements of cash flow for Daktronics from 2007–2009.
Exhibit 2: Daktronics Historical Income Statements, 2007–2009

(000s)
Year Ended
May 2, 2009 April 26, 2008 April 28, 2007
Sales $581,931.0 $499,677.0 $433,201.0
Cost of sales (excluding depreciation) 426,573.0 352,087.0 306,604.0
Gross Profit 155,358.0 147,590.0 126,597.0
SG&A expenses (excluding amortization) 88,293.0 88,226.0 75,881.0

Other operating (income)/expense, net 2,888.0 (1,049.0) 1,219.0
EBITDA 64,177.0 60,413.0 49,497.0
Depreciation 24,133.0 20,806.0 13,298.0

Amortization 315.0 315.0 503.0
EBIT 39,729.0 39,292.0 35,696.0
Interest expense 244.0 1,423.0 725.0

Interest (income) (2,068.0) (1,757.0) (1,811.0)
Pretax Income 41,553.0 39,626.0 36,782.0
Income taxes 15,125.0 13,413.0 12,355.0

Net Income $26,428.0 $26,213.0 $24,427.0
Diluted weighted average shares (in thousands) 41,152.0 41,337.0 41,311.0
Earnings Per Share $0.64 $0.63 $0.59

Additions to retained earnings
Source: Daktronics 10K Filings with SEC for 2007–2011.


Exhibit 3: Daktronics Historical Balance Sheets, 2006–2009

(000s)
Year Ended
May 2, 2009 April 26, 2008 April 28, 2007 April 29, 2006
Cash $36,501.0 $9,325.0 $2,590.0 $26,921.0
Accounts receivables, net 61,412.0 56,516.0 56,692.0 46,019.0
Inventories 51,400.0 50,525.0 45,835.0 31,045.0
Prepaid expenses 5,587.0 4,796.0 5,044.0 1,906.0
Deferred taxes 15,017.0 9,517.0 7,761.0 6,213.0
Other current assets 37,056.0 35,018.0 30,064.0 30,544.0
Total Current Assets 206,973.0 165,697.0 147,986.0 142,648.0
PP&E, net 89,427.0 97,523.0 86,126.0 40,559.0

Long term receivables, less current maturities 15,879.0 16,837.0 11,211.0 8,756.0
Goodwill 4,549.0 4,722.0 4,408.0 2,706.0
Investment in affiliates, differed taxes, 8,048.0 9,700.0 16,119.0 4,562.0
intangibles, & other
Total Assets $324,876.0 $294,479.0 265,850.0 199,231.0
Accounts payable $30,273.0 $31,540.0 $26,094.0 $19,890.0

Accrued expenses and warranty obligations 35,548.0 26,100.0 21,849.0 15,396.0
Other current liabilities 36,609.0 45,512.0 55,139.0 32,432.0
Total Current Liabilities 102,430.0 103,152.0 103,082.0 67,718.0
Revolver 0.0 0.0 0.0 0.0

Long-term debt 23.0 55.0 592.0 131.0
Long-term marketing and warranty 10,512.0 8,019.0 8,468.0 6,037.0
obligations, deferred taxes
Total Liabilities 112,965.0 111,226.0 112,142.0 73,886.0
Common stock, no par 27,872.0 25,638.0 21,954.0 19,551.0

Paid-in capital 13,898.0 10,398.0 7,431.0 3,480.0
Retained earnings 170,705.0 147,912.0 124,469.0 102,381.0
Treasury stock, at cost (9.0) (9.0) (9.0) (9.0)
Accumulated other comprehensive loss (555.0) (686.0) (137.0) (58.0)
Total equity 211,911.0 183,253.0 153,708.0 125,345.0
Total Liabilities and Equity $324,876.0 $294,479.0 $265,850.0 $199,231.0


Exhibit 4: Daktronics, Inc. Consolidated Statements of Cash Flows, 2007–2009 (in thousands)
Year Ended
May 2, 2009 April 26, 2008 April 28, 2007
Cash Flows from Operating Activities
Net income $26,428 $26,213 $24,427
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation 24,133 20,806 13,298
Amortization 315 315 503
Gain on sale of equity investments (2,878)
Gain on sale of property and equipment (862) (7) (148)
Stock-based compensation 3,154 2,628 2,095
Equity in losses of affiliates 2,404 2,402 2,027
Provision for doubtful accounts 419 145 239
Deferred income taxes, net (4,326) (785) (422)
Change in operating assets and liabilities (2,934) 10,994 (27,413)
Net cash provided by operating activities 48,731 59,833 14,606
Cash Flows from Investing Activities

Purchase of property and equipment (22,888) (33,916) (58,743)
Cash considerations paid for equity method investments (750) (13,779)
Loans to equity investees (665)
Sales of marketable securities 8,309
Proceeds from sale of equity method investments 7,000
Proceeds from sale of property and equipment 4,667 523 215
Net cash used in investing activities (18,886) (27,143) (63,998)
Cash Flows from Financing Activities

Net borrowings (payments) on notes payable – (24,615) 24,615
Proceeds from long-term debt –
Proceeds from exercise of stock options 630 2,335 1,565
Principal payments on long-term debt (546) (563) (102)
Excess tax benefits from stock-based compensation 345 339 1,411
Dividend paid (3,635) (2,770) (2,339)
Net cash provided by (used in) financing activities (3,206) (25,274) 25,150
Effect of Exchange Rate Changes on Cash and Cash Equivalents 537 (681) (89)
Increase (Decrease) in Cash and Cash Equivalents 27,176 6,735 (24,331)
Cash and Cash Equivalents
Beginning 9,325 2,590 26,921
Ending $36,501 $9,325 $2,590


Stock Price History

Daktronics’ stock price started a steady increase beginning in 1999. The company had
a reputation for high growth in earnings, and earnings surprises (higher than expecta-
tions). An online report by Zacks in 2006 noted, “Daktronics, Inc. is experiencing
increasing earnings estimates and has a history of earnings surprises, . . . [t]he company
has exceeded the consensus estimate in each of the past three quarters by an average
margin of about 14 percent. This year’s estimates have also increased by about 3 per-
cent over the past 30 days.”3
Stock price increases led to 2-for-1 stock splits in 2001 and again in 2006. In a
November 2006 stock report on Daktronics, the Value Line Investment Survey, noting
recent high-profile contracts signed with the Kansas City Royals and Auburn Univer-
sity for stadium scoreboards and displays, estimated earnings growth for fiscal 2008
in the 20–25 percent range. On November 15, 2006, shares rose $6.93 per share, or
approximately 26 percent, on the company’s announcement of a 63 percent increase
in second quarter sales and higher net income. In the same release, they reported that
order bookings in the Commercial segment were up 75 percent year-to-date; that
sports orders were up more than 45 percent and that revenues in the Transportation
unit were up over 60 percent for the quarter and the year.
But doubts about the company’s future performance started to surface in Decem-
ber 2006 when Anders Bylund of Motley Fool wrote an online article arguing that the
stock was overvalued and that recent consensus earnings growth estimates of around
29 percent at the time were not sustainable, and that the earnings multiples being
applied by investors were unrealistic.4 “Daktronics’ stock trades at 4 times revenues
and 62 times earnings, not to mention 10.7 times the company’s book value. All of
these multiples are beyond any reasonable comparison to the current or prospective
competition, and richer than at any point in the history of Daktronics,” he wrote. “I
think the current valuation is simply untenable, and the market will punish it—hard.”
On February 14, 2007 a company announcement lowering estimated sales, earn-
ings, and order backlog started a swift decline in stock price that, as of March 2010,
had yet to be reversed. Share price fell by $8 per share, or about 21 percent, by the
close on February 14. On April 4, 2007, two months into its fiscal 2007 fourth quar-
ter, Daktronics announced lower projections of revenues and earnings for the quarter,
citing insufficient order bookings to generate earlier sales estimates, and share price fell
$5.78 per share or about 20 percent.
In a February 1, 2008 report, Value Line cut its sales and earnings estimates for
Daktronics, citing problems at one of the plants in the company’s supply chain for the
Galaxy line of billboards. Although management reported that the problem had been
fixed, Value Line was concerned that the problem would affect order bookings and
future sales. Share price was down more than 30 percent from the date of the Value
Line report one year earlier, with most of the decline occurring after the company
released lower results in October, 2007.
In May 2008, the company reported that sales rose 11 percent over the previous
year, but net income fell by 24 percent due to higher than expected payroll-related
expenses. The company also reported that it was slowing its hiring rate and taking steps
to better manage employee-related costs. The company lowered its guidance for fiscal
fourth quarter sales and earnings per share.


Figure 1: Monthly Closing Price Adjusted for Dividends and Stock Splits, 1/2005 to 3/2010
Figure 1: Monthly Closing Price Adjusted for Dividends and Stock Splits, 1/2005 to 3/2010
45
40 Current long-term annual earnings growth estimates average

approximately 29%. Stock reaches historic high on December1 , 2006 of
$38.66/share.
On November 15, 2006 announced higher 2nd
Quarter sales and net income. Shares rose
35 $6.93/share (or 25.98%) to close the day
On February 14, 2007 announced lower 3rd Quarter sales, net income
30
25
Period of increasing earnings
estimates and earnings
surprises. Exceeds consensus
20
15
On April 5, 2007 announced lower 4th Quarter sales, net income

and order bookings. Shares fell $5.78/share or 20.71% to close
10
Adj Close
5
0
1/14/04 5/28/05 10/10/06 2/22/08 7/6/09 11/18/10
Source: Stock Prices from YAHOO! Finance and announcements from Lexus-Nexus.
Source: Stock Prices from YAHOO! Finance and announcements from Lexus-Nexus.
Later quarterly reports were a mix of good and bad news, continuing the “lumpy”
historical pattern of fluctuations in quarterly results. Exhibit 5 shows quarterly sales
and gross profits from Q1 FY 2004 to Q3 FY 2010. On August 25, 2009 the com-
pany announced that fiscal year 2010 first quarter net income fell 85 percent to $1.2
million (or approximately three cents per share) from the year before, and shares lost
sixty-two cents, or about 6.8 percent in early trading that day. The stock continued
trading below ten dollars per share.
Ownership
In the early days of the company, the cofounders sold all of their shares of the young
company. Later, family members paid cash to buy back shares. In early 2010, cofounder
Aelred Kurtenbach (chairman) and his brother Frank owned about 9 percent of the
company. The Kurtenbach family (Aelred, Frank, and their children), top managers,
insiders and stakeholders owned 16.3 percent of the company. Another 58 percent
of the shares were owned by 298 institutions. Daktronics had no super shares with
enhanced voting rights, although some restricted shares were held by senior managers
and directors.


Exhibit 5: Daktronics Quarterly Sales and Gross Profits, Q1 FY 2004 to Q3 FY 2010

(amounts in 000s)
Date Qtr Yr* Quarterly Sales COGS Gross Profit COGS/Sales
8/22003 104 $48,918.0 $31,468.0 $17,450.0 64.33%
11/1/2003 204 58,307.0 36,557.0 21,750.0 62.70%
1/31/2004 304 44,745.0 29,996.0 14,749.0 67.04%
5/1/2004 404 57,937.0 39,415.0 18,522.0 68.03%
7/31/2004 105 58,710.0 38,592.0 20,118.0 65.73%
10/30/2004 205 59,472.0 39,478.0 19,994.0 66.38%
1/29/2005 305 50,818.0 35,457.0 15,361.0 69.77%
4/30/2005 405 61,346.0 43,610.0 17,736.0 71.09%
7/30/2005 106 72,345.0 50,151.0 22,194.0 69.32%
10/29/2005 206 75,802.0 53,485.0 22,317.0 70.56%
1/28/2006 306 71,050.0 49,024.0 22,026.0 69.00%
4/29/2006 406 90,173.0 62,636.0 27,537.0 69.46%
7/29/2006 107 92,153.0 65,778.0 26,375.0 71.38%
10/28/2006 207 123,530.0 88,043.0 35,487.0 71.27%
1/27/2007 307 106,731.0 74,395.0 32,336.0 69.70%
4/28/2007 407 110,787.0 78,408.0 32,379.0 70.77%
7/28/2007 108 120,923.0 84,044.0 36,879.0 69.50%
10/27/2007 208 131,436.0 92,236.0 39,200.0 70.18%
1/26/2008 308 118,201.0 83,019.0 35,182.0 70.24%
4/26/2008 408 129,117.0 92,788.0 36,329.0 71.86%
8/2/2008 109 161,229.0 115,881.0 45,348.0 71.87%
11/1/2008 209 169,697.0 121,486.0 48,211.0 71.59%
1/31/2009 309 129,182.0 95,053.0 34,129.0 73.58%
5/2/2009 409 121,823.0 94,163.0 27,660.0 77.29%
8/1/2009 110 113,453.0 83,358.0 30,095.0 73.47%
10/31/2009 210 115,362.0 81,800.0 33,562.0 70.91%
1/31/2010 310 129,182.0 95,053.0 34,129.0 73.58%
*Qtr/Yr = Number of fiscal quarter and last two digits of the fiscal year.
Source: Daktronics 10Q Filings with SEC, 2003–2010.
Daktronics, Inc. in 2010
Products
The company offered an extensive line of products, from small indoor and outdoor scoreboards
and electronic displays that cost as little as $1,000 to video display systems that sold for over $40
million, as well as the accompanying control, timing, sound, and hoist systems. The company
engaged in the design, marketing, manufacture, installation, and service of integrated systems
that displayed real-time data, graphics, animation, and video. See Appendix B for the Daktronics’
product line.


Figure 2: Daktronics Quarterly Sales (in $000),

Figure 2: Daktronics Quarterly Sales (in $000), August 2, 2003 through January 31, 2010
August 2, 2003 through January 31, 2010
$180,000.0
$160,000.0
$140,000.0
$120,000.0
$100,000.0
$80,000.0
$60,000.0
$40,000.0
$20,000.0 Quarterly Sales
$-
9/1/2002 1/14/20045/28/2005
9/1/2002 1/14/2004 5/28/2005 10/10/2006
10/10/20062/22/2008
2/22/2008 7/6/200911/18/2010
7/6/2009 11/18/2010
Source: Daktronics 10Q Filings with SEC from 2003–2010..

Source: Daktronics 10Q Filings with SEC from 2003 - 2010.
Customers and Markets

Standard scoreboards were sold to high schools as sports scoreboards and message
centers. Timing and judging equipment was sold to high schools, colleges, swim clubs,
YMCAs, and other health/sports organizations. Commercial information displays
were sold to many different types of businesses for indoor and outdoor advertising
through signage companies. Custom scoreboards and large-screen video displays were
sold to colleges, arenas, auditoriums, and professional sports facilities. Voting systems
were used by state legislatures to record votes and display information to members.
Transportation systems were sold to highway departments and airports for the display
of travel and safety information.
Marketing
One of Daktronics’ key growth strategies was to enter new geographic markets by
developing a small sales and service presence that provided after-sale support. Although
management was pleased with the results of this strategy, in FY 2009 they began clos-
ing offices in non-critical locations and allowed the local personnel to work out of their
home offices. In June 2009, they had sixty corporate offices throughout the world.
Products were sold through a combination of direct sales and resellers. A direct
sales force sold to professional sports teams, colleges and universities, convention cen-
ters, and small sports facilities. Most of the products sold by resellers were standard
catalog products. Typically, catalog products were mid-priced and easy to install. His-
torically, catalog sales accounted for less than 25 percent of annual revenues. Resellers
also sold large video systems outside of North America where the company did not
have a direct sales office.


Operations
Daktronics was a vertically integrated company that performed almost all of the sub-
assembly and final assembly of its products. Activities included marketing and sales,
engineering and design, manufacturing and servicing of its systems. Prior to 2006,
most of Daktronics’ products were produced in the main facility in Brookings, S.D.
But during fiscal year 2006 management began a large-scale expansion of their Brook-
ings facilities and began operations in Sioux Falls, SD and Redwood Falls, Minnesota.
The company also had limited manufacturing capability in China. In 2009, locations
outside of Brookings produced a significant percentage of products.
Innovation
Daktronics management traditionally invested 4 percent of revenues in product design
and development. Daktronics’ display technologies changed significantly over the
years. In the early 1990s, the primary display element was the incandescent lamp. In
2010, LED and liquid crystal display (LCD) technologies were the primary display
elements. These new technologies allowed the company to introduce full-color video
displays using LEDs as the basis for forming all of the other colors in the display. As
the cost of LCDs fell and the demand for smaller more mobile displays increased,
Daktronics added LCD displays to its product line. In March 2010, the majority of
the displays offered by the company used LED displays.
Senior Management
Most of the managers had close ties to the Kurtenbach family and/or to South Dakota
State University (SDSU). For example, many of the senior management were gradu-
ates of the electrical engineering school at SDSU, and several other managers were
children of Aelred. Exhibit 6 shows the backgrounds of the top managers in the com-
pany. Bill Ritterath joined the company as Chief Financial Officer in 2001 after work-
ing at the Dakotah Bank in Webster, South Dakota. Mr. Ritterath was regarded as a
highly respected “outsider.”
Employees
As of May 2009, Daktronics had roughly 2,500 full-time employees and about another
1,000 part-time and temporary employees. Of these, 1,200 were in manufacturing;
1,500 were in sales, marketing and customer support; 500 in engineering and 300 in
administration. The company was not unionized.
Dr. Kurtenbach once said that a key reason for starting the company in the first
place was to provide employment opportunities for the local community. This concern
for the local community continued. As the recession deepened during 2009, the com-
pany delayed cutting back on employees. Steve Dyer, an analyst with Craig-Hallum
Capital group wrote, “They have sacrificed profit for their employees and the commu-
nity. I think you’ve seen other companies that have reacted a lot sooner.”5


Exhibit 6: Brief Backgrounds on Senior Management of Daktronics

1. Co-founder Aelred Kurtenbach was the Chairman of the Board since 2008. He held BS, MS, and
PhD degrees in electrical engineering from South Dakota School of Mines and Technology, the
University of Nebraska and Purdue University, respectively.
2. Jim Morgan was President, Chief Executive Officer and Director since 2008. He had BS and
MS degrees in electrical engineering from South Dakota Sate University. He joined Daktronics
in 1970 while working on his master’s degree. Mr. Morgan led the engineering department from
1971 through 1999, when he was appointed President.
3. Mr. Frank Kurtenbach (brother of Al) was VP of Sales and Director. He had a BS degree physical
education from South Dakota State University.
4. Mr. Bradley Wiemann was VP of Commercial and Transportation Business Units. He had a BS in
electrical engineering from South Dakota State University and a master’s degree in electrical and
computer engineering from University of Iowa.
5. Mr. Reece Kurtenbach (son of Al) was VP of Live Events and International Business Units. He
had a bachelor’s degree in electrical engineering from South Dakota State University and began
working for the company in 1991.
6. Ms. Carla Gatzke (daughter of Al) was VP Human Resources. She had a BS in electrical engineer-
ing from South Dakota State University and an MBA from Drake University.
7. Mr. Dan Beirschbach was VP Schools and Theatres Business unit. He held a BS in electrical engi-
neering from South Dakota State University and joined the company in 2008.
8. Mr. William Ritterath was Chief Financial Officer and Treasurer. He held a bachelor’s degree in
business with an emphasis in accounting from the University of Minnesota in Minneapolis. He
joined the company in 2001 as Chief Financial Officer.
Daktronics Financial Policies
Dividend Policy
Daktronics was known for being a conservatively managed company and this conser-
vatism carried over into its financial policies as well. For many years Daktronics was
strictly a growth company that needed cash to fund its growth and therefore paid no
dividends. But as the business grew, management realized that there was incremental
cash flow that was not needed for future growth opportunities. Dividends were first
paid in 2004, when management felt that they had reached a sufficient cash flow level
from which to pay dividends.
As Dr. Kurtenbach stated in a 2010 briefing, dividends were paid “to attract and
reward long term investors. We think of it as a small return and a measure of some
stability. Our practice has been to hold constant or increase the amount of payment.
For our level of payout, I think it would be desirable to continue that practice.”
The initial dividend was five cents per share in 2004 and was increased by 1–1.5
cents per year since then. The dividend payout ratio increased over time from about
9 percent in 2004 to 14 percent in 2009. Historical dividends per share and dividend
payout ratios are shown in Exhibit 7.


Exhibit 7: Daktronics Historical Dividends Per Share and Dividends Payout

Ratio, 2005–2009
Date Dividend Per Share Dividend Payout Ratio
5-Jun-09 $0.095 79%
6-Jun-08 0.09 14%
4-Jun-07 0.07 11%
25-Jun-06 2:1 Stock Split
5-Jun-06 0.06 10%
10-Jun-05 0.05* 10%
*First dividend for the company
Source: ValueLine Investment Survey for Daktronics, October 20, 2009.
Despite the fact that Daktronics projected a loss on the fiscal 2010 income state-
ment, the company generated a significant amount of excess cash. The difference
between the two was due to depreciation and freeing up of cash tied up in working
capital. Although there was not a mandate to pay dividends every year going forward
just because they had paid dividends in prior years, the Board of Directors felt that
given the projected cash position and outlook at the end of Fiscal 2010 that paying a
dividend was appropriate. The current dividend policy was to pay a regular dividend
of ten cents a share, and this would cost the company approximately $4 million. The
question before Mr. Ritterath was whether to increase the regular dividend above the
current level or whether to utilize a stock repurchase. Stock repurchases had tax advan-
tages over cash dividends (capital gains versus ordinary income taxes), but timing the
repurchase was difficult to determine. Having been with the company for nine years,
Mr. Ritterath appreciated the impact of the founders’ values and company culture on
decisions such as this one, so he would listen closely to Dr. Kurtenbach’s inclination to
increase the dividend. However, he also saw his role as somewhat of an outsider who
provided objective recommendations to ensure that financial decisions were in the best
interests of the company in the long-term.
Capital Structure Policy

With the high fixed operating costs and the variability of operating income, Dr. Kur-
tenbach had always maintained a conservative capital structure. Growth had been
financed primarily by a combination of retained earnings and new common stock
issues. Long-term debt had never been higher than $11 million over the last ten years,
and over the past three years it averaged less than $1 million. In 2009, the company
had a present value of operating lease payments of roughly $9.3 million. Comparative
dividends and capital structure for select competitors are shown in Exhibit 8.


Exhibit
Exhibit 88: Comparative
: Comparative D/E
D/E Ratios,
Ratios, Net Income,
Net Income and Dividends
and Dividends for
for Select Select Competitors
Competitors
Debt to Equity Ratio Dividends paid and Net Income Available to Common Shareholders
2009 (Mkt Value Terms) (In Millions of Dollars)
Company Ticker SIC Sales $mil.) 2009 2008 2007 2009 2008 2007 2009 2008 2007
Advanced Display Technologeis ADTI 3651 $ - 0.014 0.003 0.001 0 0 0 (5.61) (5.42) (2.18)
Avid Technology AVID 3861 629.0 - - - 0 0 0 (68.36) (198.18) (7.98)
DivX Inc DIVX 7373 70.6 - - 0.000 0 0 0 0.13 10.01 9.21
Dolby Labs DLB 6794 719.5 0.002 0.002 0.003 0 0 0 242.99 199.46 142.83
DRI Corporation TBUS 3663 70.6 0.429 0.011 0 0 0 1.19 0.60
DTS Inc. DTSI 6794 77.7 - - - 0 0 0 10.69 9.51 9.60
Electronic Arts ERTS 7372 4,212.0 - - - 0 0 0 (1,088.00) (454.00) 76.00
LSI Industries LYTS 3640 233.8 - - - 6.54 13.7 11.1 (13.41) (13.05) 20.79
OmniVision Techn. OVTI 3674 507.3 0.077 0.041 0.038 0 0 0 (37.32) 65.08 23.97
Panasonic Corporation of NA PC 3600 78,321.0 0.308 0.068 0.055 488.6 687.2 550.1 (3,822.10) 2,823.01 1,840.55
Rovi Corp ROVI 7373 453.9 0.130 0.697 0.245 0 0 0 (18.71) 20.93 44.13
SeaChange Int'l SEAC 7372 201.7 - - - 0 0 0 1.32 9.97 2.90
Sigma Designs SIGM 3674 206.1 - - - 0 0 0 2.46 26.42 70.21
Silicon Image SIMG 3674 150.6 - - - 0 0 0 (129.11) 10.06 19.00
Synchronoss Tech SNCR 7370 128.8 0.019 0.020 - 0 0 0 12.30 11.88 23.76
Take-Two Interactive TTWO 7372 968.5 0.154 0.076 0.013 0 0 0 (137.93) 97.10 (138.41)
THQ Inc. THQI 7372 830.0 - - - 0 0 0 (433.15) (36.85) 64.96
Trans Lux Corporation TLX 3990 36.7 12.717 3.129 0 0 0 (4.62) (5.10)
Universal Electronics UEIC 3651 317.6 - - - 0 0 0 14.68 15.81 20.23
Zoran Corp ZRAN 3674 380.1 - - - 0 0 0 (32.96) (215.73) 66.19
Average $ 4,658.7 0.04 0.740 0.184
Source:
Source: Individual
Individual Company
Company 10K Filings
10K Filings with
with SEC SEC
from from 2007-2009.
2007–2009.

127

U.S. Digital Signage Industry

Competition. The industry was highly fragmented and marked by intense compe-
tition. Entry was relatively easy because the technology was often readily available
to entrants and making the displays did not require any specialized manufacturing
techniques. However, Daktronics’ competitive advantage was selling complete sys-
tems solutions to customers, including hardware, customized software, and customer
support. None of the competitors offered such a complete solution to its customers.
Price competition was intense, especially in the short-run, as some foreign competitors
offered competing products at what appeared to be unsustainably low prices. There
were a number of established competitors. Daktronics’ top competitors were LSI
Industries, Mitsubishi Electric, Panasonic Corporation of North America, LG Elec-
tronics, DRI Corporation, Trans-Industries, and Trans-Lux Corporation. (See Appen-
dix C for profiles of major competitors.)
Mitsubishi competed in the Live Events segment for business from professional
sports teams and Division I colleges. In 2007, Daktronics held a 70–80 percent market
share in the professional sports market and a 60–70 percent share in the Division I
market. LSI competed with Daktronics in digital advertising where Daktronics held
a 40–60 percent market share. Two privately-held companies (Skyline and Ledstar)
competed in the Transportation market. Daktronics had a 40–50 percent market share
in this segment in 2007.
Competitors were not aligned by business unit, but rather by product line. Product
categories with less complex display systems, such as high school scoreboards, usually
had more competitors, but as the complexity of the system increased the number of
competitors fell and the degree of competition decreased. In the standard product
business, management did not consider any of the competitors to be dominant. Com-
petition was very dynamic, with major competitors from one year changing the fol-
lowing year. Large video systems were very complex and highly visible to the public,
demanding a high level of systems integration that was difficult for competitors to
match. Instead of worrying about who the competitors were, Daktronics sales manage-
ment tried to convince customers that they should buy from them since the company
was large, stable, and could service customers after the sale. Daktronics competed on
the basis of a broad depth of service and large variety of product offerings.
Although Daktronics competed on the basis of advanced technology and a high
level of customer support, some competitors competed on a price basis, offering lower
quality products at a lower price. Whenever a customer focused primarily on the price
of a system, Daktronics was less likely to win the contract. Industry average financial
ratios for the industry, SIC 3393, are shown in Exhibit 9.
Industry Outlook
Russell Grantham [Atlanta Constitution] reported that during the current recession
outdoor advertising had suffered the largest drop in decades, affecting billboard opera-
tors of all sizes.6 Outdoor advertisers were not only affected by the recession but they
were also hit by advertisers’ continued migration toward online media. Looking out
further (2012–2014), Value Line felt that prospects would be more favorable as spend-
ing on scoreboards and video displays improved the performance of the Live Events
business. Further, demand for outdoor advertising should improve as well, indicating
that industry sales could return to 2008 levels by 2012–2014.


Exhibit 9: Interquartile Range for Select Financials Ratios for the Sign and Advertising Specialists, SIC 3393, 2006–2009
Exhi bi t 9: I nterqua rti l e R a nge for S el ect F i na nci a l R a ti os for the S i gn a nd Adverti s i ng S peci a l i s ts , S IC 3393, 2006-‐2009
As s et R a nge: Al l As s et R a nges w i thi n S IC G roup

2009 2008 2007 2006
Statement Sampling: 77 Sta tement S a mpl i ng: 83 Sta tement S a mpl i ng: 97 Sta tement S a mpl i ng: 126
Indus try Qua rti l es
Sol vency Upper Medi a n Lower Upper Medi a n Lower Upper Medi a n Lower Upper Medi a n Lower
Qui ck R a ti o ( ti mes ) 2.2 1.4 0.7 2.2 1.2 0.8 2.0 1.2 0.7 1.9 1.1 0.7
Current R a ti o ( ti mes ) 4.0 2.1 1.4 3.3 2.0 1.2 3.3 1.9 1.2 2.9 1.9 1.2
Current Li a bi l i ti es / Net Worth ( %) 22.4 55.6 117.8 26.9 62.1 140.4 29.4 66.8 163.5 34.9 72.0 159.2
Current Li a bi l i ti es / I nventory ( %) 101.7 191.3 371.8 113.3 231.0 621.9 136.6 244.8 595.0 113.4 216.7 501.8
Tota l Li a bi l i ti es / Net Worth ( %) 30.0 76.5 198.9 36.4 81.3 181.1 37.9 96.7 209.1 50.1 106.6 243.0
Fi xed As s ets / Net Worth ( %) 14.7 32.5 57.0 18.6 35.6 67.1 16.8 37.3 68.9 21.5 45.6 82.0
Effi ci ency Upper Medi a n Lower Upper Medi a n Lower Upper Medi a n Lower Upper Medi a n Lower
Col l ecti on Peri od ( da ys ) 25.2 40.6 54.4 27.6 38.0 56.6 28.8 44.2 54.8 30.3 46.0 62.3
Sa l es / I nventory ( ti mes ) 23.9 14.1 7.8 42.5 18.2 8.9 39.8 15.2 9.6 35.5 14.8 8.3
As s ets / S a l es ( %) 32.7 45.1 65.0 26.7 38.6 57.3 31.0 40.2 56.6 29.7 39.8 54.0
Sa l es / Net Worki ng Ca pi ta l ( ti mes ) 7.6 5.2 3.7 18.8 7.7 4.2 12.6 7.1 4.2 14.4 6.6 4.5
Accounts Pa ya bl e / S a l es ( %) 1.8 3.5 6.6 2.1 4.3 7.0 2.3 4.3 6.4 2.7 4.5 7.6
Profi ta bi l i ty Upper Medi a n Lower Upper Medi a n Lower Upper Medi a n Lower Upper Medi a n Lower
Return o n S a l es ( %) 4.5 1.8 -‐1.3 6.6 3.1 0.7 7.6 3.4 1.4 7.2 3.4 1.2
Return o n As s ets ( %) 11.8 3.5 -‐2.0 20.1 7.1 2.1 16.9 7.1 3.0 18.4 8.7 3.2
Return o n Net Worth ( %) 27.2 7.1 -‐2.4 40.5 14.6 5.6 39.4 14.9 6.4 40.1 20.0 8.1
Source: D un & B ra ds treet Onl i ne.
Source: Dun & Bradstreet Online.

129

Standard and Poor’s, in a February 20, 2010 report,7 estimated that revenues for the
entire sector would improve going forward. In early 2010, companies were beginning to
increase their inventory levels in anticipation of the economy recovering from the reces-
sion. Capacity utilization rates were increasing and the restructuring and cost control
measures adopted by firms in the sector should lead to greater earnings going forward.
Looking Ahead
Managing the company during the recession was a challenge. In response to declining
sales, Daktronics instituted programs to reduce costs and improve product quality by
adopting lean manufacturing techniques. Payroll was reduced through a combination
of attrition, firings for poor performance, and other measures. Management expected
the cost reductions to be an ongoing process that would continue to reduce operating
costs. Managers planned on only maintenance levels of capital expenditures during
fiscal year 2010. Order backlogs would be lower than in recent years due to the down-
turn in the national economy. It was also apparent that there would not be any large
(greater than $5 million) baseball projects in fiscal year 2010. Revenues from national
accounts as well as large commercial projects would also be lower in FY 2010. Aggres-
sive pricing practices from new competitors trying to enter the market would also
lower margins. Competition from Chinese companies was becoming more important.
In the company’s third quarter FY 2010 earnings call with analysts on February 23,
2010, Jim Morgan, CEO, said:
There were no large baseball projects happening this year. In the past years, we have
had anywhere from $10 million to $30 million worth of large baseball projects at this
time of year. And this is the most notable gap . . . In our Commercial market, we had a
multimillion dollar Times Square contract get pushed out. . . .We don’t see this level as
indicative of the future, but we do see greater uncertainty and greater time line involved
in closing orders. [T]he biggest downturn in the past two quarters has been in our Live
Events business.
Our Commercial business has been relatively flat for the first half of the year, and for
the third quarter was down . . . It’s hard to say when national accounts business will
pick up the pace again. . . . Our International business is always the lumpiest of all.
International today has much stronger activity than we had a year ago, but especially in
Asia, the price competition is extremely tight.
Bill Retterath, the Chief Financial Officer, said during the same conference call:
In the short-term, our manufacturing costs are generally fixed, and when sales come
in so much less than expected, we see a significant impact on gross profit percent.
This accounted for somewhere between four and five margin points. Margins were
also negatively impacted by higher than expected inventory write-downs and higher
customer maintenance costs. Inventory was about a point and maintenance contracts
added another point to the margin decline.
Daktronics had new products coming to market in FY 2010. The new DVX out-
door video display was scheduled to start shipping during the fourth quarter and ana-
lysts expected it to improve the company’s competitiveness in the Live Events segment
with its lower cost and excellent viewing qualities. The new Show Control software for
video systems was also scheduled to roll out during the fourth quarter. Selected secu-
rity analyst revenue estimates for 2010 and 2011 are shown in Exhibit 10.


Exhibit 10: Analyst’s Revenue Estimates for 2010 and 2011 (in millions $)
Revenue Estimates
Analyst 2010 2011
Morningstar $424.0 N/A
Reuters $401.2 $395.3
ValueLine $520.0 N/A
YAHOO! Finance $396.3 $386.0
Sources: http://finance.yahoo.com Accessed March 23, 2010.

http://)-valueline.com.bianca.penlib.du.edu/secure/vlispdf/stk1700/profile.aspx. Accessed 12/4/2009.
Reuters Company Research Report for Daktronics, 24 February 2010.
Standard & Poor’s Quantitatives Stock Report on Daktronics, February 20, 2010.
Morningstar Equity Research Report on Daktronics, 22 March 2010.
According to Mr. Morgan, the company’s financial strategy was to preserve cash.
Expected investment projects arising over the period 2010–2014 did not appear to
require large amounts of money:
• Capital expenditures were likely to be small until the large excess capacity was
utilized.
• Funds for new acquisitions were also likely to be small. The company’s focus
was on growing internally, supplemented by an occasional small acquisition.
CEO Morgan felt it was unlikely that the company would acquire any com-
pany costing more than $5 million. Mr. Morgan said, “We can generate better
shareholder returns through organic growth.” Key competitors were also not
aggressively pursuing acquisitions.
• Investments in international markets would also be small. Although there
were many opportunities abroad, international markets were very competi-
tive, especially in China, according to Mr. Morgan. Doing business abroad
was also expensive, with higher expatriate employee costs, legal expenses, con-
sulting fees, shipping and duties.
Mr. Morgan said, “Our overall strategy is to optimize our revenue and profits in
the markets we are already working in, and continue to look for opportunities bring-
ing new products to existing markets, or finding new markets for existing products.”
Building the Pro Forma Model

Mr. Ritterath knew there was a lot of work to do in the next few weeks. His staff
would first need to construct a pro forma planning model to estimate future cash
balances and free cash flows for the firm. With this information Mr. Ritterath could
begin thinking about whether the new dividend should be an increase in the regular
dividend or a stock repurchase. Finally, there was the issue of whether it should be a
regular or special dividend. What signals would be sent to investors by these different
methods he wondered? He knew that the new dividend should be in sync with the
message that the firm was trying to get out to investors. He also thought that he should
use his free cash flow model to make his own estimate of the current value of the stock.
Dr. Kurtenbach often complained about the negative impact of the “renters” (his term


for short-term, momentum investors) and how their trades pushed market value below the true value of the
firm. Were shareholder returns low because share price was below its intrinsic value?
But first things first, the pro forma would have to be constructed before Mr. Ritterath could do anything
else. The staff set about gathering the information needed for the pro forma model. Exhibit 11 contains
the various planning assumptions that the staff decided to use.
Exhibit 11: Selected Assumptions for the Pro Forma Statements, and Miscellaneous
Financial Data
Exhibit 11: Selected Assumptions for the Pro Forma Statements, and Miscellaneous Financial Data
(000’s)
(Dollar amounts in 000's)
Final Inputs Forecasting basis
Income Statement Assumptions
Gross margin analysis of quarterly data
SG&A expenses (as a % of sales, excl Amort & R&D) 13.00%
R&D as % of Sales 4.00%
Other operating (income) / expense (amount) $ 1,019
Effective tax rate 34.00%
Dividends per share $ 0.10
Balance Sheet Assumptions
Cash/Sales % ave % sales 2007-2009
Accounts receivables, net (collection period in days) ave % sales 2007-2009
Inventories (days outstanding) ave % sales 2007-2009
Other current assets (as % of sales) ave % sales 2007-2009
Accounts payable (days outstanding) ave % sales 2007-2009
Accrued expenses and warranty obligations (as % of cost of sales) ave % sales 2007-2009
Other current liabilities (as % of cost of sales) ave % sales 2007-2009
Capital expenditures as % of sales, constant every year 4.00%
Depreciation expense as % of CAPX 85.00%
Goodwill $ 4,549
Investment in affiliates $ 5,656
Long-term debt $ 23
Revolver "Plug" figure
Other Assumptions
Beta 1.60
30-Year Treasury Rate 3.82%
Equity Risk Premium 5.00%
Assumed current year P/E Multiple 14.20
Shares repurchased - thousands -
Assumed EV/EBITDA exit multiple in 2013. 9.0x
Revolver interest rate 0.28%
Long-term debt interest rate 5.60%
Cash Balances: interest rate 1.00%
Minimum Cash Balance $ 20,000
Source:Case
Source: Case Author's
Author’s Assumptions
Assumptions and Analysis
and Analysis of Daktronics.
of Daktronics.


Appendix A: Daktronics Company History

Daktronics, Inc. had come a long way from its start in Brookings, South Dakota in
1968 by two electrical engineering professors from South Dakota State University
(SDSU), Dr. Aelred (Al) Kurtenbach and Dr. Duane Sander.
Al Kurtenbach received his first training in electronics from the military. He
explained, “I served time in the Air Force before I went to college and worked as a
radar technician . . . I came to like electronics; learned a little bit about the engineer-
ing profession; and decided that that would be a good avenue for life.” Kurtenbach
went on to complete his undergraduate, master’s, and doctoral programs in electrical
engineering. He joined the electrical engineering faculty at SDSU in 1971 where he
became close friends with Dr. Duane Sander who was already on the faculty. The
two dreamed of a company;—however, there were obstacles. As Kurtenbach put it,
the two would-be entrepreneurs “ . . . were rich in children but poor in dollars,” and,
consequently, started “ . . . with very minimal startup capital and . . . bootstrapped
our way up.” The two friends set up their new company in a converted garage, funded
operations for the company’s first four years through a private placement of stock, and
took their salaries in stock for those first four years. The company name combined the
words “Dakota” and “electronics.”
Kurtenbach and Sander wanted a company that would employ SDSU students
and graduates and provide opportunities to retain the university’s talent in the area.
The two looked for a niche product. Kurtenbach said the original philosophy was, “If
GE (General Electric) is interested, we’re not.” Initial ideas focused on bio-medical
instrumentation, a reflection of Sander’s research interests in the field of electrical engi-
neering. However, the firm’s first product line was electronic voting systems, a line that
enjoyed some success.
Daktronics’ first electronic scoreboard came about because of Al Kurtenbach’s
friendship with SDSU’s wrestling coach who identified the need for scoreboards. Dr.
Kurtenbach called the portable scoreboard introduced in 1971 the “Matside®.” Dem-
onstration of the new product at regional and national wrestling meets developed
name recognition for the company and Daktronics’ leaders quickly realized the impor-
tance of working directly with sports customer groups to identify needs and design
products to meet those needs. The Matside® was the first of the company’s growing
standard or “catalog” scoreboards. The company subsequently developed a scoreboard
for swimming competitions and continued to develop its product line for a broader
array of sports applications.
Al Kurtenbach left SDSU in 1973 to devote full-time to Daktronics. Sander
remained on the faculty at SDSU, while continuing to serve on the board of direc-
tors for Daktronics. By the following year the company reached one million dollars in
sales and an employment body of 100. The company had a growing line of products
that included time and temperature displays, electronic message centers, custom and
standard athletic scoreboards, and electronic voting systems.
In 1983 the company constructed a new manufacturing plant in Brookings, bring-
ing its total manufacturing space to 64,000 square feet. Within three years, sales
exceeded $10 million dollars. The company continued to focus on small markets, but
planned to enter larger commercial markets. The following year Daktronics made its
first acquisition by purchasing circuit board manufacturer Star Circuits, and opened


the first company- owned scoreboard sales and service office in Seattle, Washington. In
addition, Daktronics began to build a nationwide dealer network.
As President, Al Kurtenbach led the company to striking achievements. CEO
James (“Jim”) Morgan pointed out, “We did the 1980 Winter Olympics and that
was our first opportunity to work on an international stage.” According to Morgan,
the 1980 Lake Placid event made him realize how big the company that Kurtenbach
and Sander had founded was really becoming. Daktronics went on to provide systems
for multiple Olympic games including Calgary (Winter 1988), Barcelona (1992),
Lillehammer (1994), Atlanta (1996), Salt Lake City (2002), Athens (2004), Beijing
(2008), and Vancouver (2010). In the 1980s, the company began installing displays
in major-league stadiums, leading to its being chosen for high profile sporting events
including the 2005 Super Bowl.
In 1994, Daktronics’ stock was first publicly traded on the NASDAQ with the
market symbol DAKT. By then, the company had over 500 employees. Daktronics’
most significant commercial applications included the 1997 conversion of the famous
Times Square “Zipper” sign to LED display technology. In the 1990s, Daktronics
acquired Keyframe®, Inc., and Sportslink®, Inc., and introduced LED technology for
use in scoreboards, which resulted in company sales exceeding $100 million in 2000.
Daktronics cited as one of the keys to its emergence as the dominant company
in large electronic displays its creative applications of light emitting diodes (LEDs),
which had become available in red, blue and green colors with outdoor brightness
in the mid-1990s. Daktronics pioneered the development of full-color LED video
displays capable of replicating trillions of colors. This enabled the company to pro-
duce long-lasting, energy-efficient large-format video systems with excellent color and
brightness.
In November 2001, Al Kurtenbach resigned as president of Daktronics but
remained on the board of directors. Jim Morgan took over as President and CEO.
Morgan had originally joined the company part-time as Daktronics’ first student
employee while he was still an SDSU graduate student. Morgan finished his MSEE in
1970 and went to work for Daktronics as the company’s first full-time employee. As he
put it, he had just “… happened to graduate from SDSU with my electrical engineer-
ing degree at about the time they founded Daktronics.” Morgan headed the company’s
engineering department from the time he joined the company full-time in 1971 until
he moved into the position as President and CEO.
The mid-2000s was a period of continued expansion and growth. Daktronics
expanded its manufacturing facilities and administrative facilities in Brookings; then
opened a manufacturing facility in Sioux Falls, South Dakota, and another in Red-
wood Falls, Minnesota. The additions brought total manufacturing space to 728,000
sq. ft. in the U.S. The geographic dispersion reflected Daktronics’ difficulties in find-
ing employees in Brookings, population about 20,000.
The company’s sales exceeded $300 million in 2006 when it began to implement
lean manufacturing to increase production efficiencies and reduce waste. By 2007 the
company was becoming too large to run as a single unit; thus it was split into five
different lines of business. Four of the units were domestic and included U.S. and
Canada—Commercial, Live Events, Schools and Theatres, and Transportation—with
a fifth business unit for International Operations.
In 2008, the company reached over $500 million in sales with over 3,000 employ-
ees. CEO Jim Morgan said, “If we hadn’t gone into lean manufacturing, we couldn’t


have had $581 million this last fiscal year without chaos.” That same year, the firm
leased 90,000 sq. ft. in a new building in Shanghai, China. That facility was used
primarily for assembly. Daktronics purchased some of the needed commodity parts in
China but flew sub-assemblies in from the U.S.
In 2009, after more than 41 years in business, Daktronics’ products were found in
nearly 100 countries on six continents around the world. However, the severe recession
that began in the United States in 2008 affected Daktronics as well. In fiscal 2009, the
company began to see the economy negatively impact its Commercial business unit
and, to a lesser degree, its International business unit. The stock price took a hit, fall-
ing from a high of $29.82 in October 2007 to a low of $6.55 in March 2009. As fiscal
2010 began, the adverse economic conditions also began to affect the sports business
in the company’s Live Events and Schools and Theatres business units. The company
began to see costs and selling prices of products being affected by the growth of com-
petition across all of its business units. In FY 2010 its challenge was how to weather
the recession and emerge well-positioned to resume pursuit of its stated goal to be a
billion dollar company.
President and CEO Jim Morgan remained optimistic. He believed that,
The interest of our customers in providing more entertainment value at sports venues
using our display technology is still there. We have a list of potential projects in our
sales pipeline for summer and fall delivery in calendar 2010, but there remains uncer-
tainty on how the economy will impact these projects. We will know more about this
as we move through the fourth quarter of fiscal 2010 and into the first quarter of 2011.


Appendix B: Daktronics Products

In 2010 Daktronics produced and sold the following major product lines.
Scoreboards and timing systems included scoreboards for baseball and basketball
(four- and single-sided) and scoreboards and timing displays for football as well as
stadium “enhancements” that could include video and message displays and sponsor
panels. In addition, Daktronics provided automated rigging and hoist products to
install and support its center-hung arena scoreboard/display systems for both small
and large sporting facilities.
Video displays used Daktronics-developed imaging and manufacturing technol-
ogy in permanent LED displays, mobile and modular LED displays for concert tours,
corporate functions and award and auto shows. Daktronics’ freeform LED technology
provided architects with flexible modules for designing and controlling displays on
buildings, and flat-panel displays for creating indoor display networks at businesses,
stadium concourses and event centers.
Audio systems coordinated high-quality sound systems for sports venues with the
scoring and video displays for indoor and outdoor venues. Daktronics’ audio system
offerings included both standard and custom options.
Digital billboards included a full line of LED architectural lighting and display
products for billboard displays as well as billboard management software and services.
Transportation products encompassed a wide range of LED-based displays for
road management, parking (including space availability displays to inform drivers
about parking- space status), mass transit and aviation applications including lane use,
travel time/toll rate, and variable speed signs.
Software and controllers allowed efficient and easy operation of Daktronics dis-
play technology. Some products were designed for simple display management (for
example changing information on the displays) and others were designed for creating
content for LED message signs. The sport software and controllers served to control
not just scores, but game and player stats, while the video software and controllers
helped process and control digital content for video displays.
Digital and price displays included product lines marketed primarily to com-
mercial customers. Products included outdoor time and temperature displays as well
as digital displays specifically designed for the petroleum industry. These offered high
visibility and quick fuel price updates using Daktronics’ Fuelink™ control software.
In addition, the company serviced the products it sold and, where necessary, pro-
vided training in programming and the use of the equipment.
Source: Daktronics Annual Report.


Appendix C: Profile of Major Digital Signage Industry

Competitors
The following brief profiles represent the breadth of firms that competed in the digital
signage industry in 2010.
Adaptive Micro Systems, LLC, was founded in 1978 and manufactured stan-
dard LED text and video displays primarily applicable to indoor/outdoor commercial
advertising and transportation markets. The company had manufacturing and sales
sites in the U.S., Malaysia, and Europe and used an authorized dealer network to sell
its products.
ANC Sports specialized in manufacturing and selling LED video displays directly
to large sports venues. It had worked with many collegiate and professional sports
teams on custom LED video display designs. It had also worked with other LED
display manufacturing companies, like Mitsubishi Electric, to complete projects using
ANC’s software and controllers that were used to power large, high-definition LED
video displays.
Barco was a leading global technology company that designed and sold visualiza-
tion solutions for a variety of markets including the digital-out-of-home (DOOH)
industry. Its manufacturing sites in Europe, North America, and Asia-Pacific built
standard and custom LED video displays as well as LCD and rear- or front-projection
displays. Barco had sales offices around the globe and also sold to customers through
resellers and system integrators.
Capturion was a privately owned multi-format LED video display company based
in Laurel, Mississippi with manufacturing facilities owned and operated in Asia. It was
striving to advance its indoor and outdoor products towards a better, “greener” LED
system.
Daktronics was considered by many to be the industry leader in manufacturing
LED displays. In business since 1968, the company had products installed in nearly
100 countries. Daktronics manufactured a wide variety of custom and standard LED
text and video displays as well as LCD screens. Daktronics used a vast dealer network
as well as selling its custom products directly and through system integrators.
Hibino Corp., in business since 1964, manufactured LED video displays primar-
ily for use in mobile and modular applications. The company reported it could custom
design and construct completely mobile audio visual systems for nearly any event.
Hibino sold directly to its customers.
Hi-Tech LED Displays had been manufacturing electronic displays since 1984.
It mostly manufactured standard LED text and video displays for a variety of applica-
tions, but also manufactured some custom displays. Hi-Tech sold primarily to U.S.
sign installation companies, but also sold directly to customers, and had completed
projects world-wide.
Imago (Odeco Electronica in Europe and ADDCO in U.S.) had offices and part-
ners around the world. Its assembly plants in Europe, North America, South America,
and India manufactured a variety of standard LED text and video displays. Imago was
best known for its intelligent transportation systems, but also did some low-end cus-
tom LED displays. The company sold through integrators and resellers to customers.


Ledstar, Inc., specialized in manufacturing LED text variable message signs (VMS)
for transportation applications since 1988. The VMS used on highways across North
America provided information to motorists. Ledstar’s products could be purchased
directly from the company.
LG Electronics, located in Korea, was established in 1958. Globally, it had 9.4
percent of the LCD TV market and 13.5 percent of the flat panel TV market in 2010.
It had leveraged its TV capabilities—including high definition (HD) TV—into com-
mercial products for the public venue market as well as many other market segments,
including healthcare, transportation, education, financial, retail, hospitality, quick ser-
vice restaurants (QSR), food services, government, and small business.
Lighthouse Technologies offered a line of LED text and video displays for almost
any application. The company had sales offices around the world and was recognized
for its custom mobile and modular units, as well as some of its displays in large sports
venues. Lighthouse was known as one of the industry’s leading companies for new
products and technologies. The company sold direct and through systems integrators
to customers.
LSI Industries entered the DOOH industry with its 2006 purchase of SACO
Technologies, Inc., of Montreal, which gave it the ability to produce large-format LED
displays. The company manufactured LED text and video displays and LCD displays
for nearly every application. LSI also had the ability to design and manufacture custom
displays and sold them direct and through integrators and resellers.
Mitsubishi Electric rated in 2009 as the world’s 215th largest company by Fortune
Global 500, manufactured standard and custom LED text and video displays, and a
variety of other products. It had sales locations around the globe and was capable of
manufacturing some of the largest custom LED video displays through its subsidiary
Mitsubishi Diamond Vision. The company sold its products through several distribu-
tion channels including direct and through partners, resellers, and system integrators.
Nevco, Inc., manufactured its first scoreboard in 1934, and had been considered
the largest private scoreboard manufacturer for some time until Daktronics displaced
it. Most recognized for its LED scoreboards. The first also manufactured LED text and
video displays. Nevco was capable of small custom scoreboard designs and sold directly
to end users and integrators mainly in North America, but also around the world.
Optec Display, Inc., in business since the late 1980s, primarily manufactured
standard outdoor LED text and video commercial advertising displays. It used manu-
facturing sites in the U.S., China, and Taiwan and had a 300+ dealer network that sold
its displays primarily in the U.S., with some global sales.
Optotech Corporation, established in 1983, manufactured both standard and
custom LED text and video displays for a variety of applications, its best known being
digital billboards. It also made LCD screens and other products. It had locations in
Taiwan and China, as well as sales locations throughout the world. To sell its products
Optotech used resellers and integrators, but also sold directly to the customer.
Panasonic Corporation, headquartered in Japan, was one of the largest electronic
product manufacturers in the world, comprised of over 634 companies. The com-
pany offered a wide range of digital signage solutions, from all-inclusive bundled solu-
tions, to custom-designed enterprise networks. Panasonic provided hardware, software
installation and support for its customers.


SignCoEDS manufactured signage for sports and commercial applications. It

manufactured LED text and video signs as well as LCD video walls and DLP (digital
light processing) displays. SignCoEDS primarily used a dealer network to sell to cus-
tomers, but also sold through integrators when doing custom projects.
Skyline Products, Inc., manufactured LED text displays primarily for the trans-
portation industry. Skyline’s VMS provided information to travelers on highways and
as a part of intelligent transportation systems. Skyline also manufactured renewable
energy sources and did aluminum fabrication. Skyline products could be purchased
directly from the company.
Sony was a Japanese multinational conglomerate corporation headquartered in
Tokyo, Japan. Convergent Media systems, a Sony company, developed Prodokol, a
fully managed, end-to-end, digital signage platform. Prodokol supported applications
such as interactive touchscreen, digital menu boards, and single display or multi-
display signage. Its leading managed solutions were banking, retail and quick service
restaurants (QSR).
Telegra was a leading manufacturer of advanced traffic management systems for
roadways, tunnels, and other transportation applications. It had manufacturing sites
in Croatia and the U.S., as well as sales sites around the world. The company reported
the ability to custom design transportation systems for nearly any application and sold
directly through integrators and resellers to customers.
Toshiba, rated in 2009 as the world’s 97th largest company by Fortune Global,
manufactured a variety of standard and custom LED text and video displays, LCD and
plasma screens, rear- and front-projection screens, as well as a number of other com-
munications and electronics products. Toshiba sales locations around the globe sold
products for use in a variety of applications. Toshiba sold direct, and through system
integrators and resellers around the world.
Trans-Lux Corporation manufactured standard and custom LED text and video
displays as well as LCD and plasma screens for a variety of applications. Trans-Lux had
locations across North America and the globe to sell its products. Trans-Lux worked
with resellers, partners, and integrators to sell its products to customers.
Watchfire manufactured standard LED text and video displays for the commer-
cial indoor/outdoor advertising market. The company’s products were manufactured
completely in the U.S. and were sold through a dealer network to customers across
North America.
Young Electric Sign Company (YESCO) started building custom signs and dis-
plays in 1920. The company manufactured LED text and video displays as well as
other different styles of signs, and was often featured on the Las Vegas strip. YESCO
had several manufacturing and sales locations in the U.S. capable of custom building
many styles of signs. It sold directly, and through resellers and integrators.


Notes
1. An earlier version of this case was presented at the October 28–30, 2010
NACRA Conference held in Gatlinburg, TN.
2. Morningstar Equity Research Report on Daktronics, 22 March 2010.
3. http://www.thefreelibrary.com
4. zacks.com. Accessed 3/23/2010.
5. http://www.fool.com/investing/general/2006/12/21/the-worst-stock-for-
200-daktronics.aspx. “The worst Stock for 2007: Daktronics,” Accessed
3/23/2010.
6. http://www.argusleader.com. Accessed March 10, 2010.
7. Grantham, Russell, “Sign of the Times: Vacant Billboards, Outdoor Advertising
Firms See Big Drop-off During Recession”, Atlanta Constitution, September 9,
2009.


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Daktronics (E): Dividend Policy in 20101

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Exhibit 1: Daktronics Sales by Business Segment, 2001–2009

2009 2008 2007

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Exhibit 2: Daktronics Historical Income Statements, 2007–2009

SG&A expenses (excluding amortization) 88,293.0 88,226.0 75,881.0

Depreciation 24,133.0 20,806.0 13,298.0

Interest expense 244.0 1,423.0 725.0

Income taxes 15,125.0 13,413.0 12,355.0

Diluted weighted average shares (in thousands) 41,152.0 41,337.0 41,311.0

Earnings Per Share $0.64 $0.63 $0.59

Source: Daktronics 10K Filings with SEC for 2007–2011.

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Exhibit 3: Daktronics Historical Balance Sheets, 2006–2009

PP&E, net 89,427.0 97,523.0 86,126.0 40,559.0

Accounts payable $30,273.0 $31,540.0 $26,094.0 $19,890.0

Revolver 0.0 0.0 0.0 0.0

Common stock, no par 27,872.0 25,638.0 21,954.0 19,551.0

Total Liabilities and Equity $324,876.0 $294,479.0 $265,850.0 $199,231.0

Source: Daktronics 10K Filings with SEC for 2006–2009.

This document is authorized for use only by Justin Robinson in 2018.

Cash Flows from Investing Activities

Cash Flows from Financing Activities

Source: Daktronics 10K Filings with SEC for 2007–2009.

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Stock Price History

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40 Current long-term annual earnings growth estimates average

On April 5, 2007 announced lower 4th Quarter sales, net income

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Exhibit 5: Daktronics Quarterly Sales and Gross Profits, Q1 FY 2004 to Q3 FY 2010

Source: Daktronics 10Q Filings with SEC, 2003–2010.

Daktronics, Inc. in 2010

This document is authorized for use only by Justin Robinson in 2018.

Figure 2: Daktronics Quarterly Sales (in $000),

$20,000.0 Quarterly Sales

Source: Daktronics 10Q Filings with SEC from 2003–2010..

Customers and Markets

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Exhibit 6: Brief Backgrounds on Senior Management of Daktronics

Daktronics Financial Policies

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Exhibit 7: Daktronics Historical Dividends Per Share and Dividends Payout

*First dividend for the company

Source: ValueLine Investment Survey for Daktronics, October 20, 2009.

Capital Structure Policy

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U.S. Digital Signage Industry

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As s et R a nge: Al l As s et R a nges w i thi n S IC G roup

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Sources: http://finance.yahoo.com Accessed March 23, 2010.

Building the Pro Forma Model

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Appendix A: Daktronics Company History

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This document is authorized for use only by Justin Robinson in 2018.