Daktronics(DAKT) - 2025 Q2 - Quarterly Results

Fiscal 2025 Second Quarter Performance Overview Daktronics reported strong Q2 FY2025 financial results, marked by increased sales, record operating cash flow, and progress on strategic initiatives Q2 FY2025 Financial Highlights Daktronics reported a 4.5% increase in sales to $208.3 million and record operating cash flow of $43.3 million for the second quarter of fiscal 2025. While operating income decreased to $15.8 million from $19.4 million year-over-year, adjusted operating income was $19.1 million. The company maintained a strong gross profit margin at 26.8%, marking the seventh consecutive quarter above 24.5% Q2 FY2025 Key Financial Metrics | Metric | Q2 FY2025 | Q2 FY2024 | Change | | :--- | :--- | :--- | :--- | | Sales | $208.3M | $199.4M | +4.5% | | Gross Profit Margin | 26.8% | 27.2% | -0.4 p.p. | | Operating Income | $15.8M | $19.4M | -18.6% | | Adjusted Operating Income | $19.1M | $19.4M | -1.5% | | Net Income | $21.4M | $2.2M | +886.6% | | Adjusted Net Income | $13.9M | $12.8M | +8.6% | | Cash Flow from Operations | $43.3M | N/A | Record High | | Product Order Backlog | $236.0M | $306.9M | -23.1% | Management Commentary The CEO, Reece Kurtenbach, highlighted the strong second-quarter results, emphasizing record cash flow from operations and steady progress on strategic and digital transformation initiatives. Key achievements mentioned include the completion of innovative and high-profile installations at major sports venues, such as the L.A. Clippers' Intuit Dome and the Miami HEAT's Kaseya Center - Generated record cash flow from operations of $43.3 million for the quarter and $62.8 million for the first half of the fiscal year[3] - Completed innovative and visually striking installations at the L.A. Clippers' Intuit Dome and the Miami HEAT's Kaseya Center, which have gained significant media attention[3] Corporate Strategy and Outlook The company is executing a strategic transformation to accelerate growth and improve margins, while also providing updates on its CFO search and positive fiscal year 2025 outlook Business and Digital Transformation The company is actively executing a business transformation plan with the goal of accelerating revenue growth beyond its addressable market, expanding operating margins, and generating mid-to-high-teens returns on capital. The strategy involves five key components, including disciplined resource allocation, a tiered product offering, cost reduction, balance sheet optimization, and refining business management practices - The primary goals of the transformation are to grow revenue faster than the market, expand operating margins, and generate high returns on capital[4] - Key components of the transformation program include: * Prioritizing investments in high-growth, high-margin segments * Aligning product tiers and pricing with customer value * Reducing product costs and improving manufacturing efficiency * Maximizing balance sheet efficiencies * Refining business planning and incentive compensation[5] CFO Search Update The Board of Directors has initiated a search for a new Chief Financial Officer, as previously disclosed on October 21, 2024. The search is progressing, and the company will provide further updates when available - The search for a new Chief Financial Officer is ongoing, with the Board continuing to make progress[6] Outlook Daktronics anticipates an increase in order volume for the full fiscal year 2025, supported by a 3.3% year-over-year growth in orders during the first half. The company expects sales to follow normal seasonal patterns, with the first half typically being the highest-volume period. Management remains focused on making disciplined investments to execute its strategic transformation and enhance long-term profitability - The company expects order volume to increase for the full fiscal year, with year-to-date order growth of 3.3%[7] - Sales are expected to follow normal "seasonal" levels for the remainder of fiscal 2025, with the first half of the year typically being the highest-volume period[7] Detailed Financial Analysis This section provides a detailed analysis of Q2 FY2025 operational performance, non-operating impacts, balance sheet strength, and strategic capital structure adjustments Q2 FY2025 Operational Performance In Q2 FY2025, net sales grew 4.5% year-over-year, driven by higher volumes in the Commercial, Live Events, and Transportation business units. However, orders decreased by 3.3% due to declines in Live Events, Transportation, and International segments, attributed to the natural variability of large projects. Gross profit margin saw a slight decrease to 26.8% from 27.2% due to a change in sales mix. Operating expenses increased from $34.8 million to $40.1 million, reflecting investments in IT, digital transformation, and sales team expansion - Q2 orders decreased by 3.3% YoY, primarily due to declines in the Live Events, Transportation, and International business units, offset by strong bookings in the Spectacular niche[8] - Q2 net sales increased by 4.5% YoY, driven by higher volumes in the Commercial, Live Events, and Transportation business units[9] - Operating expenses rose to $40.1 million from $34.8 million YoY, reflecting investments in staffing for IT, digital transformation, and sales team expansion[11] Non-Operating Items and Taxes The company's net income was significantly impacted by a non-cash gain of $10.3 million from the change in fair value of a convertible note. Net interest income was positive due to earnings on cash balances. The effective tax rate for the quarter was 15.0%, a substantial decrease from 64.8% in the prior-year quarter, primarily due to the tax treatment of the convertible note's fair value adjustment relative to pre-tax income - Recorded a $10.3 million non-cash income for the change in fair value of a convertible note payable[14] - The effective income tax rate was 15.0%, compared to 64.8% in Q2 FY2024, influenced by the non-deductible nature of the convertible note fair value adjustment[15] Balance Sheet and Cash Flow Daktronics ended the quarter with a strong liquidity position, holding $134.4 million in cash, restricted cash, and marketable securities against $65.4 million in total debt. The company generated a record $62.8 million in cash from operations in the first six months of fiscal 2025. The working capital ratio was a healthy 2.3 to 1, and inventory levels declined by 11.9% since the end of fiscal 2024, reflecting effective working capital management Key Balance Sheet and Cash Flow Metrics (as of Oct 26, 2024) | Metric | Value | | :--- | :--- | | Cash, Restricted Cash & Marketable Securities | $134.4M | | Total Debt (Current & Long-term) | $65.4M | | Cash from Operations (First Six Months) | $62.8M | | Working Capital Ratio | 2.3 to 1 | | Inventory Change (since Apr 27, 2024) | -11.9% | Capital Structure and Shareholder Actions The company is actively optimizing its balance sheet by initiating the conversion of its $25.0 million senior second lien secured promissory note held by Alta Fox. This move is expected to save approximately $5.2 million in interest expense over the note's remaining term. To counteract the share dilution from this conversion, Daktronics intends to utilize its existing share repurchase authorization - The company initiated the conversion of its $25.0 million convertible note, which is expected to save approximately $5.2 million in interest expense[17] - To offset the share dilution from the note conversion, the company plans to execute on its existing share repurchase authorization[18] Financial Statements and Supplemental Data This section presents the comprehensive consolidated financial statements, including operations, balance sheets, cash flows, and supplemental non-GAAP reconciliations Consolidated Statements of Operations For the three months ended October 26, 2024, net sales increased to $208.3 million from $199.4 million year-over-year. Net income surged to $21.4 million, or $0.22 per diluted share, compared to $2.2 million, or $0.05 per diluted share, in the prior-year period. This significant increase in net income was largely driven by a $10.3 million non-cash gain on the change in fair value of a convertible note, contrasting with a $10.7 million loss in the same period last year Consolidated Statements of Operations (Three Months Ended) | (in thousands, except per share) | Oct 26, 2024 | Oct 28, 2023 | | :--- | :--- | :--- | | Net sales | $208,331 | $199,369 | | Gross profit | $55,863 | $54,199 | | Operating income | $15,770 | $19,436 | | Income before income taxes | $25,183 | $6,157 | | Net income | $21,406 | $2,165 | | Diluted Earnings per share | $0.22 | $0.05 | Consolidated Balance Sheets As of October 26, 2024, total assets stood at $551.9 million, an increase from $527.9 million at April 27, 2024. This growth was primarily fueled by a significant rise in cash and cash equivalents to $134.4 million from $81.3 million. Total liabilities increased to $291.0 million, while total shareholders' equity grew to $260.9 million from $238.8 million over the same period Key Balance Sheet Items (in thousands) | Account | Oct 26, 2024 | Apr 27, 2024 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $134,352 | $81,299 | | Inventories | $121,582 | $138,008 | | Total current assets | $422,792 | $401,949 | | Total Assets | $551,886 | $527,884 | | Liabilities & Equity | | | | Total current liabilities | $180,097 | $192,296 | | Long-term debt, net | $63,887 | $53,164 | | Total Liabilities | $290,956 | $289,092 | | Total Shareholders' Equity | $260,930 | $238,792 | Consolidated Statements of Cash Flows For the first six months of fiscal 2025, Daktronics generated a robust $62.8 million in net cash from operating activities, a significant improvement from $44.3 million in the prior-year period. Net cash used in investing activities was $12.4 million, primarily for property and equipment purchases. Financing activities provided a net cash inflow of $2.0 million, contributing to a total increase in cash of $52.7 million for the period Consolidated Statements of Cash Flows (Six Months Ended, in thousands) | Cash Flow Category | Oct 26, 2024 | Oct 28, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $62,820 | $44,311 | | Net cash used in investing activities | ($12,383) | ($12,073) | | Net cash provided by financing activities | $2,033 | $15,919 | | Net increase in cash | $52,674 | $48,296 | | Cash at end of period | $134,352 | $72,986 | Net Sales and Orders by Business Unit In Q2 FY2025, the Live Events segment was the primary driver of sales growth, with a 13.2% increase to $77.2 million. The Commercial segment led order growth, increasing 30.2% to $44.5 million. Conversely, the Transportation segment experienced a significant 43.2% decline in orders, and the International segment saw decreases in both sales and orders Q2 FY2025 Net Sales by Business Unit (in thousands) | Business Unit | Q2 FY25 Sales | YoY Change | | :--- | :--- | :--- | | Commercial | $43,439 | +2.3% | | Live Events | $77,207 | +13.2% | | High School Park and Recreation | $48,071 | -1.8% | | Transportation | $21,478 | +6.1% | | International | $18,136 | -7.1% | Q2 FY2025 Orders by Business Unit (in thousands) | Business Unit | Q2 FY25 Orders | YoY Change | | :--- | :--- | :--- | | Commercial | $44,548 | +30.2% | | Live Events | $70,524 | -10.7% | | High School Park and Recreation | $35,838 | +9.3% | | Transportation | $12,222 | -43.2% | | International | $14,458 | -10.6% | Non-GAAP Reconciliations The company provides reconciliations for key non-GAAP metrics to offer investors a clearer view of core operating performance. For Q2 FY2025, adjusted operating income was $19.1 million after adding back $3.3 million in business transformation expenses. Adjusted net income was $13.9 million, which excludes the non-cash fair value adjustment of the convertible note and transformation costs. Free cash flow for the first six months was strong at $52.5 million Reconciliation of Adjusted Operating Income (Q2 FY2025, in thousands) | Description | Amount | | :--- | :--- | | Operating income (GAAP) | $15,770 | | Consultant related expenses | $3,344 | | Adjusted operating income (non-GAAP) | $19,114 | Reconciliation of Adjusted Net Income (Q2 FY2025, in thousands) | Description | Amount | | :--- | :--- | | Net income (GAAP) | $21,406 | | Consultant related expenses, net of taxes | $2,842 | | Change in fair value of convertible note | ($10,304) | | Adjusted net income (non-GAAP) | $13,944 | - Free cash flow for the six months ended October 26, 2024, was $52.5 million, calculated from $62.8 million in operating cash flow less $10.5 million in property and equipment purchases[34] Long-term Debt Reconciliation As of October 26, 2024, Daktronics' gross long-term debt was $38.1 million, comprising a $13.1 million mortgage and a $25.0 million convertible note. After accounting for a $27.8 million fair value adjustment on the convertible note, net debt issuance costs, and the current portion, the net long-term debt on the balance sheet was $63.9 million Long-term Debt Composition (in thousands, as of Oct 26, 2024) | Component | Amount | | :--- | :--- | | Mortgage | $13,125 | | Convertible note | $25,000 | | Long-term debt, gross | $38,125 | | Debt issuance costs, net | ($574) | | Change in fair value of convertible note | $27,836 | | Current portion | ($1,500) | | Long-term debt, net | $63,887 |