Daktronics(DAKT) - 2023 Q2 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive (loss) income, shareholders' equity, and cash flows, with detailed notes for the periods ended October 29, 2022 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in millions) | ASSETS | October 29, 2022 | April 30, 2022 | | :--------------------------- | :------------------------------ | :---------------------------- | | Total current assets | $345.6 | $317.6 | | TOTAL ASSETS | $463.9 | $440.9 | | Total current liabilities | $227.1 | $213.7 | | Total long-term liabilities | $64.3 | $35.6 | | TOTAL SHAREHOLDERS' EQUITY | $172.5 | $191.6 | | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $463.9 | $440.9 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in millions) | Metric | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 30, 2021 | Six Months Ended Oct 29, 2022 | Six Months Ended Oct 30, 2021 | | :-------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Net sales | $187.4 | $164.5 | $359.4 | $309.2 | | Gross profit | $31.7 | $32.3 | $57.5 | $64.5 | | Operating income (loss) | $1.5 | $4.4 | $(4.0) | $10.0 | | Income (loss) before income taxes | $1.1 | $3.4 | $(5.3) | $8.3 | | Income tax expense | $14.0 | $1.0 | $13.0 | $2.2 | | Net (loss) income | $(13.0) | $2.4 | $(18.3) | $6.1 | | Basic EPS | $(0.29) | $0.05 | $(0.40) | $0.13 | | Diluted EPS | $(0.29) | $0.05 | $(0.40) | $0.13 | Condensed Consolidated Statements of Comprehensive (Loss) Income Condensed Consolidated Statements of Comprehensive (Loss) Income (in millions) | Metric | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 30, 2021 | Six Months Ended Oct 29, 2022 | Six Months Ended Oct 30, 2021 | | :-------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Net (loss) income | $(13.0) | $2.4 | $(18.3) | $6.1 | | Total other comprehensive (loss), net of tax | $(1.5) | $(0.1) | $(2.2) | $(0.4) | | Comprehensive (loss) income | $(14.5) | $2.3 | $(20.5) | $5.6 | Condensed Consolidated Statements of Shareholders' Equity Condensed Consolidated Statements of Shareholders' Equity (in millions) | Shareholder's Equity | Balance as of April 30, 2022 | Balance as of October 29, 2022 | | :---------------------------------- | :--------------------------- | :----------------------------- | | Common Stock | $61.8 | $62.4 | | Additional Paid-In Capital | $48.4 | $49.2 | | Retained Earnings | $96.6 | $78.3 | | Treasury Stock | $(10.3) | $(10.3) | | Other Comprehensive Loss | $(4.9) | $(7.1) | | Total | $191.6 | $172.5 | - Total shareholders' equity decreased from $191.6 million as of April 30, 2022, to $172.5 million as of October 29, 2022, primarily due to net losses and cumulative translation adjustments[20] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in millions) | Cash Flow Activity | Six Months Ended Oct 29, 2022 | Six Months Ended Oct 30, 2021 | | :-------------------------------- | :---------------------------- | :---------------------------- | | Net cash (used in) operating activities | $(21.9) | $(8.5) | | Net cash (used in) investing activities | $(15.2) | $(9.9) | | Net cash provided by (used in) financing activities | $26.3 | $(0.4) | | Net decrease in cash, cash equivalents and restricted cash | $(10.9) | $(18.8) | | Cash, cash equivalents and restricted cash, End of period | $7.1 | $61.6 | Notes to the Condensed Consolidated Financial Statements Note 1. Basis of Presentation - The company is an industry leader in designing and manufacturing electronic scoreboards, programmable display systems, and large screen video displays[30] - Management has concluded that there is substantial doubt about the company's ability to continue as a going concern due to volatility in cash flow, pricing, order volumes, lead-times, competitiveness, revenue cycles, and production costs driven by global economic conditions and supply chain disruptions[37][40] - The company is pursuing additional liquidity through various means, including financing secured by a mortgage, sales-leaseback, leasing property and equipment, and reducing working capital, but these plans are not finalized and cannot be deemed probable to alleviate going concern doubt[40] Note 2. Investments in Affiliates Investments in Affiliates (in millions) | Metric | October 29, 2022 | April 30, 2022 | | :-------------------- | :--------------- | :------------- | | Aggregate investments accounted for under equity method | $18.0 | $16.9 | - The company's share of losses from affiliates was $0.8 million for the three months ended October 29, 2022, and $1.7 million for the six months ended October 29, 2022[45] - During the six months ended October 29, 2022, the company invested $2.9 million in convertible notes and converted $2.8 million from notes to stock ownership[45] Note 3. Earnings Per Share ("EPS") Earnings Per Share ("EPS") (per share) | EPS | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 30, 2021 | Six Months Ended Oct 29, 2022 | Six Months Ended Oct 30, 2021 | | :-------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Basic | $(0.29) | $0.05 | $(0.40) | $0.13 | | Diluted | $(0.29) | $0.05 | $(0.40) | $0.13 | - Options to purchase 2,063 shares (three months) and 2,082 shares (six months) were anti-dilutive and excluded from diluted EPS calculation for the period ended October 29, 2022[47][48] Note 4. Revenue Recognition Revenue by Segment (in millions) | Revenue by Segment | Three Months Ended Oct 29, 2022 | Six Months Ended Oct 29, 2022 | | :-------------------------------- | :------------------------------ | :---------------------------- | | Commercial | $37.0 | $77.2 | | Live Events | $69.2 | $125.6 | | High School Park and Recreation | $42.0 | $77.8 | | Transportation | $16.7 | $36.2 | | International | $22.5 | $42.5 | | Total | $187.4 | $359.4 | Contract Balances (in millions) | Contract Balances | October 29, 2022 | April 30, 2022 | Dollar Change | Percent Change | | :------------------------------- | :--------------- | :------------- | :------------ | :------------- | | Contract assets | $39.3 | $41.7 | $(2.4) | (5.7)% | | Contract liabilities - current | $90.4 | $90.4 | $0.0 | — | | Contract liabilities - noncurrent | $12.3 | $11.0 | $1.3 | 11.9% | - As of October 29, 2022, the aggregate amount of transaction price allocated to remaining performance obligations was $524.3 million, with $463.1 million for product and $61.2 million for service agreements. Approximately $467.5 million is expected to be recognized over the next 12 months[59] Note 5. Segment Reporting Net Sales by Segment (in millions) | Net Sales by Segment | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 30, 2021 | Six Months Ended Oct 29, 2022 | Six Months Ended Oct 30, 2021 | | :---------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Commercial | $37.0 | $34.5 | $77.2 | $67.2 | | Live Events | $69.2 | $59.4 | $125.6 | $111.8 | | High School Park and Recreation | $42.0 | $32.7 | $77.8 | $60.6 | | Transportation | $16.7 | $14.1 | $36.2 | $26.6 | | International | $22.5 | $23.8 | $42.5 | $42.9 | | Total | $187.4 | $164.5 | $359.4 | $309.2 | Gross Profit by Segment (in millions) | Gross Profit by Segment | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 30, 2021 | Six Months Ended Oct 29, 2022 | Six Months Ended Oct 30, 2021 | | :----------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Commercial | $6.2 | $7.4 | $11.0 | $14.6 | | Live Events | $8.0 | $5.6 | $11.8 | $14.2 | | High School Park and Recreation | $11.8 | $10.7 | $21.8 | $20.3 | | Transportation | $4.1 | $4.4 | $9.9 | $8.2 | | International | $1.6 | $4.1 | $3.0 | $7.2 | | Total | $31.7 | $32.3 | $57.5 | $64.5 | - The United States accounts for the material amount of net sales and property and equipment, net of accumulated depreciation[63] Note 6. Goodwill Goodwill by Segment (in thousands) | Goodwill by Segment | Balance as of April 30, 2022 | Foreign currency translation | Balance as of October 29, 2022 | | :--------------------------------- | :--------------------------- | :--------------------------- | :----------------------------- | | Live Events | $2.3 | $(20.0) | $2.3 | | Commercial | $3.3 | $(146.0) | $3.2 | | Transportation | $0.1 | $(20.0) | $0.0 | | International | $2.2 | $(104.0) | $2.1 | | Total | $7.9 | $(290.0) | $7.6 | - Despite a decrease in market capitalization and supply chain/labor uncertainty, no goodwill impairment was deemed necessary after evaluation[65] Note 7. Financing Agreements - As of October 29, 2022, $26.4 million had been advanced under the line of credit, with $6.9 million in outstanding letters of credit, leaving $11.7 million available for borrowing[66] - On October 31, 2022, the line of credit was temporarily expanded by $10.0 million through January 31, 2023[66] - A sixth amendment to the credit agreement was entered into on December 9, 2022, clarifying deferred tax asset valuation allowance definitions, adding financial reporting requirements, negative covenants, and requiring lender approval for additional indebtedness[68] Note 8. Commitments and Contingencies - The company is a party to legal proceedings and claims in the ordinary course of business, but no material loss is currently believed to be reasonably probable[70] Warranty Obligations (in millions) | Warranty Obligations | October 29, 2022 | | :---------------------------------- | :--------------- | | Beginning accrued warranty obligations | $28.9 | | Warranties issued during the period | $6.0 | | Settlements made during the period | $(3.9) | | Changes in accrued warranty obligations for pre-existing warranties | $(1.2) | | Ending accrued warranty obligations | $29.8 | - As of October 29, 2022, outstanding letters of credit, bank guarantees, and surety bonds totaled $6.9 million, $0.6 million, and $72.8 million, respectively, related to performance guarantees on contracts[71] Note 9. Income Taxes Effective Tax Rate | Effective Tax Rate | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 30, 2021 | Six Months Ended Oct 29, 2022 | Six Months Ended Oct 30, 2021 | | :----------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Effective Tax Rate | 1330.7% | 29.6% | (247.3)% | 27.0% | - The significant increase in the effective tax rate for the three and six months ended October 29, 2022, is primarily due to the requirement to record a full valuation allowance on deferred tax assets during the second quarter of fiscal 2023, related to GAAP accounting for income taxes and the company's going concern status[76] - As of October 29, 2022, undistributed earnings of foreign subsidiaries were considered indefinitely reinvested, and there were $0.6 million of unrecognized tax benefits[78] Note 10. Fair Value Measurement Financial Assets (in millions) | Financial Assets | October 29, 2022 | April 30, 2022 | | :------------------------------ | :--------------- | :------------- | | Cash and cash equivalents | $6.4 | $17.1 | | Restricted cash | $0.7 | $0.9 | | Marketable securities | $0.5 | $4.0 | | Derivatives - asset position | $1.2 | $0.9 | | Derivatives - liability position | — | $(0.3) | | Total | $8.8 | $22.7 | - There have been no changes in the valuation techniques used for financial instruments since the end of fiscal 2022[80] Note 11. Subsequent Events - On December 9, 2022, the company entered into the sixth amendment to its credit agreement, as detailed in Note 7[82] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, results of operations, and liquidity, highlighting the impacts of global economic conditions and supply chain disruptions FORWARD-LOOKING STATEMENTS - The report contains forward-looking statements reflecting current views on future events and financial performance, subject to uncertainties and factors that could cause actual results to differ materially[85][86] OVERVIEW - Daktronics designs, markets, and manufactures integrated electronic display systems and related products globally, operating through five business segments: Commercial, Live Events, High School Park and Recreation, Transportation (all domestic), and International[89] CURRENT CONDITIONS - Supply chain disruptions, including semiconductor shortages, labor issues, and COVID-19 related shutdowns, continue to impact capacity, increase input costs, and extend lead times, though some easing has begun[91][93] - The company has responded by increasing prices, redesigning products for component flexibility, and carrying higher inventory levels to stabilize production and fulfill backlog[93][94] - Macroeconomic events like high inflation, tightening financial conditions, and geopolitical conflicts are expected to negatively impact fiscal 2023, leading to a focus on cash flow, liquidity, productivity, and margin improvement[95][96] RESULTS OF OPERATIONS Comparison of the Three Months Ended October 29, 2022 and October 30, 2021 Product Order Backlog Product Order Backlog (in millions) | Metric | October 29, 2022 | October 30, 2021 | April 30, 2022 | | :------------------- | :--------------- | :--------------- | :------------- | | Product order backlog | $463.1 | $281.6 | $471.6 | - The backlog increased by $181.5 million year-over-year due to record order volume and slower conversion to sales from supply challenges[101] - Backlog is expected to be fulfilled within the next 24 months, though timing may be affected by supply chain disruptions[102] Net Sales Net Sales (in millions) | Net Sales | Oct 29, 2022 | Oct 30, 2021 | Dollar Change | Percent Change | | :----------------------- | :----------- | :----------- | :------------ | :------------- | | Commercial | $37.0 | $34.5 | $2.6 | 7.5% | | Live Events | $69.2 | $59.4 | $9.8 | 16.6% | | High School Park and Recreation | $42.0 | $32.7 | $9.3 | 28.3% | | Transportation | $16.7 | $14.1 | $2.6 | 18.7% | | International | $22.5 | $23.8 | $(1.4) | (5.7)% | | Total | $187.4 | $164.5 | $23.0 | 14.0% | - Net sales increased by $23.0 million (14.0%) to $187.4 million, driven by fulfilling backlog despite supply chain disruptions and labor shortages[105] - Order volume increased, primarily in Live Events, but declined in Commercial (normalizing after record fiscal 2022) and International (due to economic outlook, geopolitical events, and currency headwinds)[106] Gross Profit and Contribution Margin Gross Profit (in millions) | Gross Profit | Oct 29, 2022 | % of Net Sales | Oct 30, 2021 | % of Net Sales | | :-------------------------- | :----------- | :------------- | :----------- | :------------- | | Commercial | $6.2 | 16.7% | $7.4 | 21.6% | | Live Events | $8.0 | 11.5% | $5.6 | 9.4% | | High School Park and Recreation | $11.8 | 28.1% | $10.7 | 32.8% | | Transportation | $4.1 | 24.5% | $4.4 | 31.3% | | International | $1.6 | 7.3% | $4.1 | 17.1% | | Total | $31.7 | 16.9% | $32.3 | 19.6% | - Gross profit percentage declined to 16.9% from 19.6% due to inflationary material, freight, and personnel costs, and factory inefficiencies from supply chain disruptions[110] - Total warranty costs as a percent of sales increased to 2.7% from 1.4%, including a $1.0 million expense for a component and manufacturing quality issue[111] Other Income and Expenses Other Income/Expense (in thousands) | Other Income/Expense | Oct 29, 2022 | Oct 30, 2021 | Dollar Change | Percent Change | | :---------------------------------- | :----------- | :----------- | :------------ | :------------- | | Interest (expense) income, net | $(263.0) | $(59.0) | $(204.0) | 345.8% | | Other expense, net | $(208.0) | $(952.0) | $744.0 | (78.1)% | - Net interest expense increased significantly due to utilizing the line of credit for strategic inventory investments[118] - Other expense, net, decreased primarily due to lower losses from equity method affiliates and reduced foreign currency volatility[119] Income Taxes - The effective tax rate for the second quarter of fiscal 2023 was 1330.7%, a substantial increase from 29.6% in the prior year, primarily due to recording a full valuation allowance on net deferred tax assets[120] Comparison of the Six Months Ended October 29, 2022 and October 30, 2021 Net Sales Net Sales (in millions) | Net Sales | Oct 29, 2022 | Oct 30, 2021 | Dollar Change | Percent Change | | :----------------------- | :----------- | :----------- | :------------ | :------------- | | Commercial | $77.2 | $67.2 | $9.9 | 14.8% | | Live Events | $125.6 | $111.8 | $13.8 | 12.4% | | High School Park and Recreation | $77.8 | $60.6 | $17.2 | 28.3% | | Transportation | $36.2 | $26.6 | $9.6 | 36.1% | | International | $42.5 | $42.9 | $(0.4) | (0.9)% | | Total | $359.4 | $309.2 | $50.2 | 16.2% | - Net sales for the first six months of fiscal 2023 increased by $50.2 million (16.2%) to $359.4 million, driven by fulfilling backlog and strong order bookings, despite ongoing supply chain and labor challenges[123] - Order volume increased overall, with strong bookings in Live Events, while International markets experienced softening demand due to inflation and geopolitical events[124] Gross Profit and Contribution Margin Gross Profit (in millions) | Gross Profit | Oct 29, 2022 | % of Net Sales | Oct 30, 2021 | % of Net Sales | | :----------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Commercial | $11.0 | 14.3% | $14.6 | 21.7% | | Live Events | $11.8 | 9.4% | $14.2 | 12.7% | | High School Park and Recreation | $21.8 | 28.0% | $20.3 | 33.4% | | Transportation | $9.9 | 27.4% | $8.2 | 30.6% | | International | $3.0 | 7.1% | $7.2 | 16.9% | | Total | $57.5 | 16.0% | $64.5 | 20.8% | - Gross profit percentage declined to 16.0% from 20.8% due to inflationary costs, supply chain disruptions (including the Shanghai factory closure), and a $0.5 million provision for estimated losses on contracts[126] - Total warranty costs as a percent of sales increased to 2.2% from 1.3%, including a $1.0 million expense for a component and manufacturing quality issue[127] Other Income and Expenses Other Income/Expense (in thousands) | Other Income/Expense | Oct 29, 2022 | Oct 30, 2021 | Dollar Change | Percent Change | | :---------------------------------- | :----------- | :----------- | :------------ | :------------- | | Interest (expense) income, net | $(323.0) | $78.0 | $(401.0) | (514.1)% | | Other expense, net | $(955.0) | $(1,820.0) | $865.0 | (47.5)% | - Net interest expense increased significantly due to increased borrowings on the line of credit for inventory investments[133] - Other expense, net, decreased due to lower losses from equity method affiliates and reduced foreign currency volatility[134] Income Taxes - The effective tax rate for the six months ended October 29, 2022, was (247.3)%, a significant change from 27.0% in the prior year, primarily due to recording a full valuation allowance on net deferred tax assets[135] LIQUIDITY AND CAPITAL RESOURCES Cash Flow (in millions) | Cash Flow | Six Months Ended Oct 29, 2022 | Six Months Ended Oct 30, 2021 | Dollar Change | | :----------------------- | :---------------------------- | :---------------------------- | :------------ | | Operating activities | $(21.9) | $(8.5) | $(13.4) | | Investing activities | $(15.2) | $(9.9) | $(5.3) | | Financing activities | $26.3 | $(0.4) | $26.7 | | Net decrease in cash | $(10.9) | $(18.8) | $7.9 | - Net cash used in operating activities increased to $21.9 million from $8.5 million, primarily due to investments in inventory to support backlog conversion and a net loss in fiscal 2023[137][138] - Net cash provided by financing activities was $26.3 million, driven by draws on the line of credit to fund operations and capital expenditures, including $16.2 million for property and equipment[141][142] - Working capital increased to $118.6 million as of October 29, 2022, from $103.9 million as of April 30, 2022, influenced by seasonality and inventory management[146] - The company has a $35.0 million line of credit expiring in April 2025, with $26.4 million advanced and $6.9 million used for letters of credit as of October 29, 2022, and an additional $10.0 million temporary expansion through January 31, 2023[147] - The company projects total capital expenditures of approximately $30 million for fiscal 2023, focusing on manufacturing equipment, capacity expansion, automation, and information infrastructure[153] Significant Accounting Policies and Estimates - There have been no material changes in significant accounting policies or critical accounting estimates since the end of fiscal 2022[156] New Accounting Pronouncements - There are no significant ASUs issued that the Company has not yet adopted as of October 29, 2022[44] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section addresses the company's exposure to market risks, including interest rate, foreign currency, and commodity risks, noting no material changes since the last annual report - The company is exposed to interest rate, foreign currency, and commodity risks, but there have been no material changes in these exposures during the first six months of fiscal 2023[159] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures, identifying material weaknesses in internal control over financial reporting related to the going concern assessment and its income tax implications Evaluation of Disclosure Controls and Procedures - Management concluded that disclosure controls and procedures were not effective as of October 29, 2022, due to material weaknesses in internal control over financial reporting[160] - Despite material weaknesses, the unaudited condensed consolidated financial statements fairly present the financial position, results of operations, and cash flows[161] Background - A material adjustment of $14.8 million was recorded because the income tax implications of the going concern assessment were not considered[162] Material Weaknesses - A material weakness was identified in the information and communication component, specifically the failure to timely communicate the going concern assessment results to all appropriate internal parties, leading to not considering its impact on deferred tax asset valuation[163] - An additional material weakness was identified in control activities, as management did not appropriately design its going concern policy control to evaluate income tax implications when reaching a substantial doubt conclusion[164] Remediation Plan - The remediation plan includes implementing policies for communicating going concern analysis to relevant internal parties (e.g., tax department) and establishing control activities to consider going concern impacts on deferred tax valuation and financial reporting[167] Changes in Internal Control Over Financial Reporting - Except for the identified material weaknesses, there were no other changes in internal control over financial reporting during the quarter ended October 29, 2022[169] Part II. Other Information Item 1. Legal Proceedings This section states that there are no applicable legal proceedings to report - Not applicable[170] Item 1A. Risk Factors This section highlights significant risks, primarily focusing on ongoing volatility from global economic conditions and supply chain disruptions, impacting liquidity and raising going concern doubt - Global economic conditions and supply chain disruptions continue to cause volatility in cash flow, pricing, order volumes, lead times, competitiveness, revenue cycles, and production costs, likely having negative impacts in fiscal 2023[172][173] - The company's ability to fund operations and capital expenditures depends on generating cash flow, maintaining margins, and using its credit facility, which has covenants that, if breached, could lead to default and foreclosure on assets[173] - Substantial doubt about the company's ability to continue as a going concern exists due to liquidity needs and uncertainty regarding additional financing, which could materially adversely affect business and investor confidence[176] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports that the company did not repurchase any shares of its common stock during the three months ended October 29, 2022, or October 30, 2021 - No shares of common stock were repurchased during the three months ended October 29, 2022, and October 30, 2021[177] Item 3. Defaults Upon Senior Securities This section indicates that there are no applicable defaults upon senior securities to report - Not applicable[178] Item 4. Mine Safety Disclosures This section states that there are no applicable mine safety disclosures - Not applicable[179] Item 5. Other Information This section indicates that there is no other information to report - Not applicable[180] Item 6. Exhibits This section provides an index to the exhibits filed as part of this report, including corporate documents, credit agreements, stock incentive plans, and certifications Index to Exhibits - The index lists various exhibits, including Amended and Restated Articles of Incorporation and Bylaws, Rights Agreements, Credit Agreements and amendments, Stock Incentive Plans, and Certifications of the CEO and CFO[184] Signatures This section contains the required signatures for the report, confirming its submission on behalf of Daktronics, Inc. by its Chief Financial Officer - The report is signed by Sheila M. Anderson, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) of Daktronics, Inc., on December 13, 2022[188]