Daktronics(DAKT) - 2025 Q4 - Annual Report

Part I Business Overview Daktronics is a leading global designer and manufacturer of electronic display systems for sports, commercial, and transportation markets, operating through five segments and focusing on growth and efficiency via a new Business Transformation Office - Daktronics is a global leader in designing and manufacturing electronic display systems, serving sports, commercial, and transportation applications through a full range of activities from design to customer support[13][21] - The company operates through five reportable segments: Commercial, Live Events, High School Park and Recreation, Transportation (all covering the U.S. and Canada), and the International business unit[18] - In fiscal 2025, a Business Transformation Office (BTO) was formed to review business strategy and develop initiatives for market penetration, growth, and efficiency[14] Product Order Backlog Trend | Date | Backlog (in millions) | Change (YoY) | | :--- | :--- | :--- | | April 26, 2025 | $341.6 | +7.8% | | April 27, 2024 | $316.9 | | - The company expects to fulfill the $341.6 million backlog within the next 24 months, though timing may be impacted by external factors like customer site conditions[60] - As of April 26, 2025, Daktronics employed 2,702 people globally, with 2,422 full-time and 280 part-time/temporary employees, none represented by a collective bargaining agreement[15][76] Products and Technologies Daktronics' product portfolio includes advanced LED video displays, scoreboards, message displays, and intelligent transportation systems, complemented by integrated sound systems and comprehensive software control suites - The company's systems consist of two main components: the display and the control system, with products customized based on customer specifications and environmental conditions[27] - Key product families include Video displays/walls, Scoreboards/timing systems, LED Message displays, ITS dynamic message signs, Mass Transit displays, Sound systems, Digital billboards, and various software controllers like Venus® Control Suite (VCS) and Show Control Suite[28][39] - The Venus® Control Suite (VCS) is a key software platform for scheduled content control, available in on-premise or cloud-based configurations, and can be combined with the Show Control Suite for live event applications[47] Raw Materials and Competition The company sources critical raw materials globally, facing supply chain risks from single-source suppliers and intense competition based on product quality, technical expertise, and cost-effectiveness - Key raw materials include LEDs, integrated circuits, printed circuit boards, and power supplies, sourced globally, with some materials from single-source or limited suppliers, creating supply chain risk[49] - The company competes with a variety of domestic and foreign companies, as well as other advertising forms like television and print media, with competitive factors including product quality, features, technical expertise, service, and cost[68][69][70] Risk Factors The company faces significant macroeconomic, geopolitical, business, industry, information systems, legal, and regulatory risks, alongside investment-related challenges Macroeconomic and Geopolitical Risks Daktronics is exposed to global trade restrictions, tariffs, economic downturns, and unexpected events that can disrupt its complex supply chain and manufacturing operations - The company's complex manufacturing relies on components from over 40 countries, with China being a major source for semiconductors, and U.S. tariffs on Chinese imports ranging from 10% to potentially 170%, increasing costs[81] - Global economic downturns, inflation, and interest rate fluctuations can adversely affect customer spending and demand for the company's products[82][85] - Unexpected events like natural disasters or wars could damage or close manufacturing facilities in the U.S., Ireland, or China, disrupting operations and supply chains[87][88] Business and Industry Risks The company faces risks from single-source supplier dependence, intense market competition, intellectual property infringement, logistics failures, cost inflation, and challenges in managing global operations and fixed-price contracts - Dependence on single-source or limited suppliers, especially for semiconductor components from Taiwan and China, creates significant risk of supply chain disruption due to geopolitical tensions[89][91] - The company operates in a highly competitive market and faces pricing pressure from foreign and domestic competitors, requiring continuous product innovation[94][95] - A provision for expected credit losses of $15.5 million was recorded as of April 26, 2025, for loans to an affiliate deemed uncollectible[118][129] - The company recorded a goodwill impairment charge of $4.6 million in fiscal 2023 for the Live Events and International reporting units, but no impairment was recorded in fiscal 2025 or 2024[132] - The company is currently recruiting for a new Chief Executive Officer and Chief Financial Officer, and the outcome of these searches is critical for future leadership and strategic direction[133] Information Systems, Legal, and Regulatory Risks The company is exposed to cybersecurity breaches, complex global regulatory compliance (anti-corruption, trade, data privacy, ESG), and the potential for significant fines and reputational damage from non-compliance - The business heavily relies on complex IT systems, and any failure or cybersecurity breach could result in disruption, data loss, and significant financial and reputational damage, with early-stage generative AI use also posing data-related risks[138][139] - Global operations require compliance with numerous laws, including anti-corruption regulations like the FCPA and UK Bribery Act, as well as U.S. trade controls and economic sanctions, violations of which can lead to severe penalties[142][143][144] - Increasingly stringent privacy and data protection laws worldwide, along with a growing focus on ESG matters, could increase compliance costs and expose the company to regulatory action and reputational harm[148][151] Cybersecurity Daktronics manages cybersecurity risks through a NIST-based program with Board oversight, a dedicated team, external testing, and an incident response plan, having experienced no material incidents to date - The company's cybersecurity program is based on the NIST framework and includes prevention, detection, and remediation measures such as a dedicated security team, third-party assessments, an incident response plan, and employee training[172][176] - The Board's Strategy and Risk Committee provides oversight for cybersecurity risks and strategy, receiving periodic reports from management, with the program led by the VP of Information Technology who has over 25 years of experience[174][175] - The company has not identified any cybersecurity threats or incidents that have materially affected its business strategy, results of operations, or financial condition[173] Properties Daktronics' principal properties, including owned and leased manufacturing, sales, service, and corporate facilities, are considered adequate for foreseeable needs and secure its senior credit facility Principal Properties | Location | Owned/Leased | Square Footage | Activities | | :--- | :--- | :--- | :--- | | Brookings, SD, USA | Owned | 771,000 | Corporate HQ, Manufacturing, Sales, Service | | Redwood Falls, MN, USA | Owned | 151,000 | Manufacturing, Sales, Service, Office | | Ennistymon, Ireland | Owned | 62,000 | Manufacturing, Sales, Service, Office | | Sioux Falls, SD, USA | Leased | 296,000 | Manufacturing, Sales, Service, Office | | Shanghai, China | Leased | 157,000 | Manufacturing, Sales, Service, Office | - The company's obligations under its credit facility are secured by substantially all of its owned real property[178] Part II Stockholder Matters and Equity Purchases Daktronics' common stock trades on Nasdaq, and the company repurchased 2.1 million shares for $29.5 million in fiscal 2025 under its $50.0 million share repurchase program - The company's common stock is listed on The Nasdaq Global Select Market under the ticker DAKT, with 802 stockholders of record as of June 9, 2025[182] - During fiscal 2025, the company repurchased 2.1 million shares of its common stock for a total cost of $29.5 million, with no shares repurchased in fiscal 2024 or 2023[185] - As of April 26, 2025, the company had $9.9 million of remaining capacity under its share repurchase program[185] Management's Discussion and Analysis (MD&A) In fiscal 2025, Daktronics experienced a decline in net sales and profitability, reporting a $10.1 million net loss, driven by lower Live Events volumes and increased operating expenses, while pursuing a Business Transformation Plan - The company is focused on a Business Transformation Plan to grow revenue, expand operating margins to 10-12%, and achieve 17-20% returns on capital, having spent approximately $6.8 million on these efforts in fiscal 2025[201] - Market uncertainties, including potential U.S. import tariffs and changes in federal funding priorities, are creating challenges in predicting order timing and volume[193][194] Consolidated Performance Summary For fiscal 2025, net sales decreased by 7.5% to $756.5 million, resulting in a $10.1 million net loss, primarily due to lower Live Events volumes and a significant increase in G&A expenses from transformation and transition costs Fiscal Year 2025 vs. 2024 Performance | Metric | FY 2025 | FY 2024 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $756.5M | $818.1M | ($61.6M) | (7.5)% | | Gross Profit | $195.5M | $222.4M | ($27.0M) | (12.1)% | | Operating Income | $33.1M | $87.1M | ($54.0M) | (62.0)% | | Net (Loss) Income | ($10.1M) | $34.6M | ($44.7M) | (129.2)% | | Diluted EPS | ($0.21) | $0.74 | ($0.95) | (128.4)% | | Orders | $781.3M | $740.2M | $41.2M | 5.6% | - The decrease in net sales was mainly due to lower volumes in the Live Events business unit because of order timing and buildable backlog[208] - General and administrative expenses rose by 48.9%, primarily due to $13.9 million in professional fees for business transformation and corporate governance, and $2.6 million in management transition costs[215] - Other expense increased significantly due to a $15.5 million provision for losses on loans to equity method affiliates[219] Reportable Segment Performance Summary In fiscal 2025, Live Events sales and contribution margin significantly declined, while Commercial and High School segments saw order growth and improved margins, and International continued to operate at a loss - Live Events sales decreased by $47.0 million (13.9%) and contribution margin fell by $33.3 million (39.2%) due to lower buildable backlog and sales mix differences[222][226] - Commercial orders increased by $41.3 million (30.6%) due to market adoption of digital displays, with contribution margin improving by $4.8 million (28.6%) due to a favorable product mix[222][225] - High School Park and Recreation orders grew by $27.6 million (18.6%) as schools increasingly adopt larger video solutions[222][227] - International orders increased by $17.5 million (31.7%), but the segment operated at a negative contribution margin of ($3.5 million)[222][229] Liquidity and Capital Resources Daktronics maintained strong liquidity with $127.5 million in cash, driven by $97.7 million in operating cash flow, and expects $22 million in capital expenditures for fiscal 2026 Cash Flow Summary (FY 2025) | Activity | Cash Flow (in millions) | | :--- | :--- | | Operating Activities | $97.7 | | Investing Activities | ($23.8) | | Financing Activities | ($27.4) | - Cash and cash equivalents stood at $127.5 million as of April 26, 2025[234] - The company has a $75.0 million credit facility, with no borrowings against the $60.0 million ABL and an outstanding principal of $12.4 million on its mortgage loan as of April 26, 2025[233] - Projected capital expenditures for fiscal 2026 are approximately $22 million, focusing on manufacturing equipment, automation, and IT infrastructure[240] Critical Accounting Estimates The company's critical accounting estimates involve significant judgment in revenue recognition for custom contracts using the cost-to-cost method and estimating the $35.8 million warranty liability based on historical experience - Revenue for uniquely configured (custom) systems is recognized over time using the cost-to-cost input method, which requires significant management judgment in estimating total contract costs[244] - The accrued liability for warranty obligations was $35.8 million as of April 26, 2025, with this estimate based on historical experience and subject to change based on actual defect rates and repair costs[247][248] Market Risk Disclosures Daktronics is exposed to foreign currency fluctuations, commodity price volatility, and tariffs, with a 10% change in foreign exchange rates impacting pre-tax income by approximately $0.4 million - In fiscal 2025, 10.6% of net sales were derived in currencies other than the U.S. dollar, and the company estimates a 10% change in all foreign exchange rates would impact income before taxes by approximately $0.4 million[250] - The company faces significant commodity risk from its dependence on raw materials and components sourced globally, which are subject to price volatility, supply availability, and tariffs[255] - As of April 26, 2025, of the $127.5 million in cash, $112.8 million was denominated in USD and $14.7 million was in foreign currencies[253] Financial Statements and Supplementary Data This section presents Daktronics' audited consolidated financial statements for fiscal 2025, including an unqualified auditor's opinion, detailed notes, and disclosures on critical accounting matters Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on Daktronics' financial statements and internal controls, identifying revenue recognition for uniquely configured contracts as a critical audit matter due to significant cost estimation judgments - The auditor, Deloitte & Touche LLP, issued an unqualified opinion, stating the financial statements are presented fairly and internal controls were effective[257][258] - A Critical Audit Matter was identified related to revenue recognition for uniquely configured contracts, due to the significant judgments management must make to estimate total costs to complete these projects[262][263] Consolidated Financial Statements The consolidated financial statements show total assets of $502.9 million, a net loss of $10.1 million for fiscal 2025, and strong operating cash flow of $97.7 million, reflecting changes from share repurchases and affiliate loan losses Consolidated Balance Sheet Highlights (in thousands) | Account | April 26, 2025 | April 27, 2024 | | :--- | :--- | :--- | | Total Current Assets | $381,451 | $401,949 | | Total Assets | $502,892 | $527,884 | | Total Current Liabilities | $172,005 | $192,296 | | Total Liabilities | $230,961 | $289,092 | | Total Stockholders' Equity | $271,931 | $238,792 | Consolidated Statement of Operations Highlights (in thousands) | Account | FY 2025 | FY 2024 | FY 2023 | | :--- | :--- | :--- | :--- | | Net Sales | $756,477 | $818,083 | $754,196 | | Gross Profit | $195,487 | $222,443 | $151,355 | | Operating Income | $33,118 | $87,115 | $21,388 | | Net (Loss) Income | $(10,121) | $34,621 | $6,802 | Notes to the Consolidated Financial Statements The notes detail revenue recognition policies, segment performance, the full conversion of a $25 million convertible note, $29.5 million in share repurchases, a $15.5 million credit loss provision, and subsequent events including tariff reductions - The company's investment in affiliates (Miortech and XDC) is accounted for using the equity method, and during FY2025, a provision for expected credit losses of $15.5 million was recorded for a loan to an affiliate deemed uncollectible[286][289] - The $25.0 million Convertible Note issued to Alta Fox was fully settled through forced conversions into common stock during fiscal 2025[376][377] - The company repurchased 2,071 thousand shares of common stock for $29.5 million in fiscal 2025 under its share repurchase program[383] - Subsequent to year-end, the U.S. government announced a significant reduction in tariffs on certain Chinese imports, which could favorably impact future costs, though no adjustments were made to the FY2025 financial statements[457] Controls and Procedures Management and the independent auditor concluded that Daktronics' disclosure controls and internal control over financial reporting were effective as of April 26, 2025, with no material changes reported - Management concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year[464] - Management's assessment concluded that the company's internal control over financial reporting was effective as of April 26, 2025[467] - The independent registered public accounting firm, Deloitte & Touche, LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[468][471] Part III Directors, Executive Compensation, and Corporate Governance This section incorporates information from the 2025 Proxy Statement regarding directors, executive compensation, corporate governance, security ownership, and principal accountant fees, including the company's Clawback Policy - Information regarding directors, executive officers, corporate governance, executive compensation, and security ownership is incorporated by reference from the company's forthcoming 2025 Proxy Statement[478][480][483] - The company has adopted a Clawback Policy in compliance with SEC and Nasdaq rules, allowing for the recoupment of incentive-based compensation from executive officers in the event of a material accounting restatement[481] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, encompassing corporate governance documents, material contracts, and required certifications - This section contains the list of all financial statements and exhibits filed with the Form 10-K, including governance documents, material contracts, and required certifications[487][488][489]