Daktronics Income Statement ($000) Historical Projected

2007 2008 2009 2010 2011 2012 2013

Sales 433201 499677 581931 494641.4 524319.8 581995.0 651834.4
Less: Cost of Sales (excl-D) 306604 352087 426573 354163.2 375413.0 416708.4 466713.4
Gross Profit 126597 147590 155358 140478.1 148906.8 165286.6 185121.0
Less: SG&A expenses (Excl- A) 75881 88226 88293 64303.4 68161.6 75659.4 84738.5
Less: R & D expenses 19785.7 20972.8 23279.8 26073.4
Operating Exp / (income) 1219 -1049 2888 1019.3 1019.3 1019.3 1019.3
EBITDA 49497 60413 64177 56389.1 59772.5 66347.4 74309.1
Less: Depreciation & Amortisation 13801 21121 24448 16817.8 17826.9 19787.8 22162.4
EBIT 35696 39292 39729 39571.3 41945.6 46559.6 52146.8
Interest Income -1811 -1757 -2068 -442.0 -703.8 -1024.4 -1348.3
Interest Expenses 725 1423 244 1.3 1.3 1.3 1.3
EBT 36782 39626 41553 40012.0 42648.1 47582.7 53493.8
Less: Taxes 12355 13413 15125 13604.1 14500.3 16178.1 18187.9
Net Income 24427 26213 26428 26407.9 28147.7 31404.6 35305.9
Dilluted weighted average shares ('000) 41311 41337 41152 41152 41152 41152 41152
EPS 0.64 0.68 0.76 0.86
DPS 0.1 0.1 0.1 0.1
Addition to Retained Earnings 22292.73 24032.54 27289.38 31190.68

Daktronics Historical and Projected Balance Sheet

Historical Projected
2007 2008 2009 2010 2011 2012 2013
Cash 2590 9325 36501 48105.4 64807.3 80617.3 98525.5
Accounts receivables, net 56692 56516 61412 54071.8 57316.1 63620.8 71255.3
Inventories 45835 50525 51400 65319.8 69238.9 76855.2 86077.9
Other current assets 42869 49331 57660 48969.5 51907.7 57617.5 64531.6
Total Current Assets 147986 165697 206973 216466.4 243270.0 278710.9 320390.3
PP&E, net 86126 97523 89427 93004.1 96724.2 100593.2 104616.9
Long term receivales, less current maturities 11211 16837 15879 15879 15879 15879 15879
Goodwill 4408 4722 4549 4549 4549 4549 4549
Investment in affiliaites, differed taxes,
intangible & other 16119 9700 8048 5656 5656 5656 5656
Total Assets 265850 294479 324876 335554.5 365666.7 404770.8 450268.2
Accounts payable 26094 31540 30273 35099.2 37205.2 41297.7 46253.5
Accrued expenses & warranty obligations 21849 26100 35548 27978.9 29657.6 32920.0 36870.4
Other current liabilities 55139 45512 36609 38249.6 40544.6 45004.5 50405.1
Total Current Liabilities 103082 103152 102430 101327.7 107407.4 119222.2 133528.9
Revolver 0 0 0
Long term marketing & warranty obligations,
deferred taxes 592 55 23 23 23 23 23
Total Liabilities 103674 103207 102453 101350.7 107430.4 119245.2 133551.9
Common stock, no par 21954 25638 27872 27872.0 27872.0 27872.0 27872.0
Paid-in-capital 7431 10398 13898 13898.0 13898.0 13898.0 13898.0
Retained earnings 124469 147912 170705 192997.7 217030.3 244319.6 275510.3
Treasury stock, at cost -9 -9 -9 -9 -9 -9 -9
Accumulated other comprehensive loss -137 -686 -555 -555 -555 -555 -555
Total equity 153708 183253 211911 234203.7 258236.3 285525.6 316716.3
Total Liabilities and Equity 257382 286460 314364 335554.5 365666.7 404770.8 450268.2
 Daktronics Equity Free Cash Flow 2007-2013
2007 2008 2009 2010 2011 2012 2013
Sales 433201 499677 581931 494641.4 524319.8 581995.0 651834.4
Less: Cost of Sales (excl-D) 306604 352087 426573 354163.2 375413.0 416708.4 466713.4
Gross Profit 126597 147590 155358 140478.1 148906.8 165286.6 185121.0
Less: Operating expenses (Excl- A) 77100 87177 91181 85108.3 90153.7 99958.5 111831.2
EBITDA 49497 60413 64177 55369.8 58753.2 65328.1 73289.8
Less: Depreciation & Amortisation 13801 21121 24448 16817.8 17826.9 19787.8 22162.4
EBIT 35696 39292 39729 38552.0 40926.3 45540.3 51127.5
Interest Income -1811 -1757 -2068 -442.0 -703.8 -1024.4 -1348.3
Interest Expenses 725 1423 244 1.3 1.3 1.3 1.3
EBT 36782 39626 41553 38992.7 41628.8 46563.4 52474.5
Less: Taxes 12355 13413 15125 13257.5 14153.8 15831.6 17841.3
Net Income 24427 26213 26428 25735.2 27475.0 30731.8 34633.1
Plus: D & A 13801 21121 24448 16817.8 17826.9 19787.8 22162.4
Minus: Investment in NOWC -509 -5600 -13555 -3817.5 -6128.0 -11908.7 -14420.3
Minus: Capital expenditure -58743 -33916 -22888 19785.7 20972.8 23279.8 26073.4
Minus: Principal Repayment -102 -563 -546 0.0 0.0 0.0 0.0
Plus: New Borrowing (NT+LT) 24615 -24615 0 0.0 0.0 0.0 0.0
EFCF 122197 62798 87865 26584.8 30457.0 39148.5 45142.4

Invest NOWC = Change in TCA, except cash minus Change in TCL, except notes payable.
EFCF = EBIT(1-T) - INT(1-T)+DA-CAPX-Invest NOWC-Princ Repay+ New borrowing

2006 2007 2008 2009 2010 2011 2012 2013

Total Current Assets 142648 147986 165697 206973 216466.4 243270.0 278710.9 320390.3
Less: Cash 26921 2590 9325 36501 48105.364 64807.3 80617.3 98525.5
Total CA-Cash 115727 145396 156372 170472 168361.01 178462.67 198093.56 221864.79
Change in CA / Inc in CA 29669 10976 14100 -2110.99 10101.66 19630.89 23771.23

Total Current Liabilities 67718 103082 103152 102430 101327.73 107407.39 119222.2 133528.9
Less: Accounts payable 19890 26094 31540 30273 35099.208 37205.161 41297.728 46253.456
Total CL - Notes Payable 47828 76988 71612 72157 66228.52 70202.231 77924.476 87275.413
Change in CL / Inc in CL 29160 -5376 545 -5928.4804 3973.7112 7722.2454 9350.94
Invest in NOWC 509 5600 13555 3817.49 6127.95 11908.65 14420.29

Daktronics Funds Available for Distribution, 2010 - 2013

Projected
2010 2011 2012 2013
A. How much more could Daktronics pay as dividends?
FCFE 26,584.8 30,457.0 39,148.5 45,142.4
After tax interest income 291.72 464.508 676.104 889.878
Projected Beginning Cash Balance 36501 48105.4 64807.3 80617.3
Less: Minimum Cash Balance 20000 20000 20000 20000
Excess Cash1 16501 28105.4 44807.3 60617.3
Available for paying dividends 36501.0 28105.4 44807.3 60617.3
Less: Dividends currently paying 4115.2 4115.2 4115.2 4115.2
Available for increasing dividends 43,085.8 58,562.4 83,955.8 105,759.7
(Divs/FCFE)*100 15.48 13.51 10.51 9.12
(Divs/Availale for incr dividends)*100 9.55 7.03 4.90 3.89
B. Is Daktronics making good capital investment deivisons?
ROE 11.3 10.9 11.0 11.1
Cost of Equity Capital 11.8 11.8 11.8 11.8

Rate of Return on Assets 7.9 7.7 7.8 7.8

WACC / Ke 11.8 11.8 11.8 11.8
Daktronics: Looking Forward
Daktronics while being in an economic recession wanted to position itself to resume the pursuit
of becoming a billion-dollar company. The company is introducing new products to the market
in 2010 which will be released during the fourth quarter of the year. Over the 2010-2014
period, Jim Morgan, CEO, stated the company’s financial strategy will be to preserve cash.
Capital expenditures and funds for new acquisitions were likely to be small, as well as
investments in international markets. The company’s focus is to grow internally, and focus on
generating better shareholder returns through organic growth. 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 bringing new products to existing markets, or finding new
markets for existing products.”

Regular Dividend vs Stock Repurchase

By paying the regular dividend Daktronics would not being doing anything different than what
they had been doing since 2004. While there was no mandate to pay dividends every year, the
Board of Directors felt that given the projected cash position at the end of each year, paying a
dividend was appropriate. There would be no change in the dividend policy. If Daktronics
decided not to issue a dividend and buyback shares through a repurchase, the company would
raise share price as the number of outstanding shares would decrease. A stock repurchase is a
sensible way to use extra cash, which in Daktronics case is available. While this would not
provide investors with any immediate monetary benefits that a dividend could, the value of
investors stocks would rise. Buybacks should only be pursued when management is confident
share are undervalued. When shares are overvalued and repurchased the company is
destroying the shareholder value, and dividends would be a place to spend excess cash. In this
case if Daktronics were to pursue a repurchase of stocks they would need to make sure their
shares were undervalued, otherwise a dividend would a better means of rewarding investors.

Recommendation:
Based off my analysis of Daktronics and its financial position in early 2010 I think the dividend
policy should be reviewed and modified. I would propose that the company should pay
increased dividends in 2010 in the form of a special dividend. A special dividend is a non-
recurring distribution of company assets, usually in the form of cash, to shareholders. It is larger
compared to normal dividends paid out by the company. Generally special dividends are
declared after exceptionally strong earnings to distribute profits directly to shareholders. It can
also change the financial structure of a company, restructuring toward a more debt-base
financing mix. (investopedia.com) Daktronics has a huge cash flow and current asset base, the
company has no intention for acquisitions, and no plan for any large capital expenditures. As
Dr. Kurtenbach stated in a 2010 briefing, dividends were paid “to attract and reward long term
investors,” and by issuing a special dividend it would do just that.
Advantages and Disadvantages of Increasing Dividends

Advantages:
To help make any decision on increasing dividend distribution, I think it is important to
understand the advantages and disadvantages. An advantage of increasing dividends is that it
can be used as a tool to convey the company’s earnings and cash flow outlook is positive. This
can attract investors, by assuring them a reliable source of earnings, even if the market price of
the share drops. Another advantage of increasing dividends is that it can reflect the stability of
a company. If a company has a record of increasing dividends it indicates predictable earnings
for investors which can make it attractable. Investing in a dividend paying stock also means that
a shareholder can reap monetary benefits without having to sell with an increased dividend
there are increased earnings for shareholders. By increasing dividends a company may find that
current shareholders want to reinvest back into the company, which is a good sign.

Disadvantages:
A disadvantage of increasing dividend prices is that when a dividend is issued the share price
will generally drop by the dividend amount since it is an effective payout. The larger the
increase, the larger the drop-in share price. Paying dividends also result in the reduction of
usable cash which may limit a company’s growth. By increasing the dividend Daktronics will
have much less usable cash which may be needed as the company is coming out of hard
economic times. Also given the capital structure Daktronics throughout the years, the company
does not have much history or experience in debt handling. If the company increases dividends
more this year, investors may come to expect increases like this each year, which could put
pressure on the company in the future. Another disadvantage of increasing dividends is that the
company will have to pay taxes on the distribution of profit which would not be the case if the
company invests its excess cash back into the business.

7) Capital Structure:

The capital structure of Daktronics leans more towards equity financing as opposed to debt financing.
Their growth is primarily financed by retained earnings and new common stock issued. This is beneficial
because it decreases the risk of default on liabilities since debt isn’t the primary source of financing.
Capital structure theory refers to a systematic approach to financing business activities through a
combination of debt and equity. These theories are the M&M theory, the net income to capital
structure approach and the pecking order theory. The M&M theory is a capital structure approach
named after Franco Modigliani and Merton Miller in the 1950s. It has two propositions, under the first
proposition the value of the firm is not affected by changes in the capital structure. It is affected by
earning power and asset risk. The cash flows of the firm do not change; therefore, value doesn’t change.
This mean that even though Daktronics is being finance safer than other firms it won’t make the
company any more valuable. The second proposition however says that the financial leverage boosts
the value of a firm and reduces WACC. The implication from this theory is because the company uses
majority equity financing the value of the firm would increase in value under this proposition. The net
income to capital structure approach say that the more debt a company uses to finance its growth the
more it will add to the value of the firm. Debt is cheaper than equity because you can deduct the
interest on the company taxes. Therefore, using more debt makes the cost of capital less and in theory
increasing the firms’ value. The implications this theory would have on Daktronics is that it would reduce
the value of the firm since they use majority equity financing to finance growth. Lastly the pecking order
theory assumes that companies prioritize their financing strategy based on the path of least resistance.
Internal financing is the first preferred method, followed by debt and external equity financing as a last
resort. This is the pattern that Daktronics seems to be following. Which is why they are primarily
financed by equity then debt comes into the picture. If Daktronics was to increase debt financing an
advantage of this would be an increase in control over the company. This is because lenders of debt
don’t have any say in how the business is ran. The relationship ends when the debt is repaid but on the
other side individuals with shares in a company may have the ability to influence the company through
voting rights. Another advantage would be the tax deductible effects that debt allows. The
disadvantages on the other hand are the increased fixed payments that the business would need to
make in terms of principle and interest. Also there is the fact that with increase debt the company will
need to provide more collateral for if they cannot repay on the debt.

Analysis: From the results of the pro-forma equity cash flows there isn’t any pattern to follow the results
fluctuate yearly. The years 2010 and 2012 had the highest operating cash flows and highest equity cash
flows respectively. One of the major reasons for the low equity cash flows in 2011 and 2013 is because
of the big increase in net working capital for those years. Also the company is expected to maintain a 20
million dollar balance on its cash balance. Therefore with this restriction this does not leave any extra
cash available to pay cash dividends. There isn’t any excess cash to pay cash dividends because in each
year the equity cash flow falls below the required balance. Therefore if the company was to pay
dividends they would have to pay them via other methods such as stock dividends.

5) Dividend policy:

Daktronics didn’t always pay out dividends they only began to pay dividends in 2004 when they felt they
reached a sufficient cash flow level. The initial dividend payout was five cents per share in 2004 and was
then increased by 1 – 1.5 cents per share since that period. Over time the dividend payout increased
from around 9% in 2004 up to about 14% in 2009. They follow the practice of either holding the
dividend payout constant or increase the level of payout. In evaluating this dividend policy, it would be
justified once the company is striving and doing well. However based on the situation of the company
and other external factors this policy will not be the best for the company going forward. Factors such as
the recession and the current decreases in profits wouldn’t allow the company to maintain this policy in
the long run. Therefore the dividends should not be increased because the business is not in a position
to increase dividends. Currently they need to retain as much profits as possible which could be used
more effectively in the business as opposed to paying them out in dividends. Over time when the
business regains stability then they can consider an increase. However an advantage of increasing
dividends is that it will make the company more attractive to investors which means more individuals
will want to invest in the company and others will stay invested in the company because they feel as
though they are being rewarded for their investments. Also increasing dividends will give the impression
that the company is stable since they are able to increase dividends. On the other hand increasing
dividends will decrease retained earnings which is a disadvantage because the company will need the
extra retained earnings to put back into the company itself. In other words increasing retained earnings
could restrict growth in the company. If dividends were to increase it should be distributed in the form
of Stock dividends. Each equity shareholder would receive a certain number of additional shares
depending on the number of shares originally owned by the shareholder. This is a good way to keep
investors happy while not troubling operating cash flows. The firm could give one bonus stock for every
ten shares an investor has. Shareholders should be happy with the increase since they are still benefiting
from their investments. However some shareholder groups may prefer cash dividends as opposed to
stock dividends. Different shareholder groups will react different based on their expectations and wants.

6) Based on the shares outstanding of 41,152 (In thousands) and the firm value of 1,539.22 (In
thousands) the share price is estimated at 0.04 which is low compared to the prices given in the case.
Although in the case the share prices made dramatic drops of for example 21% or 8 dollars a share, it
was no expected to fall to almost next to nothing for a share. The terminal value of EBITDA time 9 and
the constant growth model are below.