Daktronics(DAKT) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for the period ended January 28, 2023 Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements and related notes for the quarter ended January 28, 2023 Condensed Consolidated Balance Sheets This section presents the company's financial position, including assets, liabilities, and equity, as of January 28, 2023 Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | January 28, 2023 | April 30, 2022 | Change | % Change | | :-------------------- | :--------------- | :------------- | :----- | :------- | | Total Assets | $453,652 | $440,876 | $12,776 | 2.9% | | Total Current Assets | $341,821 | $317,570 | $24,251 | 7.6% | | Total Liabilities | $274,311 | $249,312 | $24,999 | 10.0% | | Total Current Liabilities | $212,386 | $213,694 | $(1,308) | (0.6%) | | Total Shareholders' Equity | $179,341 | $191,564 | $(12,223) | (6.4%) | - Cash and cash equivalents decreased from $17,143 thousand at April 30, 2022, to $10,022 thousand at January 28, 2023, a 41.6% decrease[9] - Inventories increased from $134,392 thousand at April 30, 2022, to $164,879 thousand at January 28, 2023, reflecting increased investment[9] - The Line of Credit balance increased from $0 at April 30, 2022, to $23,638 thousand at January 28, 2023[9] Condensed Consolidated Statements of Operations This section details the company's revenues, expenses, and net income or loss for the three and nine months ended January 28, 2023 Condensed Consolidated Statements of Operations (in thousands) | Metric (in thousands) | Three Months Ended Jan 28, 2023 | Three Months Ended Jan 29, 2022 | Nine Months Ended Jan 28, 2023 | Nine Months Ended Jan 29, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net sales | $184,975 | $139,558 | $544,334 | $448,767 | | Gross profit | $41,713 | $22,308 | $99,211 | $86,760 | | Operating income (loss) | $7,118 | $(5,680) | $3,125 | $4,365 | | Net income (loss) | $3,713 | $(4,350) | $(14,597) | $1,709 | | Basic EPS | $0.08 | $(0.10) | $(0.32) | $0.04 | - Net sales increased by 32.5% for the three months ended January 28, 2023, and by 21.3% for the nine months ended January 28, 2023, compared to the prior year periods[12] - The company reported a net income of $3,713 thousand for the three months ended January 28, 2023, a significant improvement from a net loss of $(4,350) thousand in the prior year's comparable quarter. However, for the nine months, a net loss of $(14,597) thousand was recorded, compared to a net income of $1,709 thousand in the prior year[12] - A goodwill impairment charge of $4,576 thousand was recognized in both the three and nine months ended January 28, 2023[12] Condensed Consolidated Statements of Comprehensive (Loss) Income This section outlines the company's comprehensive income or loss, including other comprehensive income items, for the specified periods Condensed Consolidated Statements of Comprehensive (Loss) Income (in thousands) | Metric (in thousands) | Three Months Ended Jan 28, 2023 | Three Months Ended Jan 29, 2022 | Nine Months Ended Jan 28, 2023 | Nine Months Ended Jan 29, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) | $3,713 | $(4,350) | $(14,597) | $1,709 | | Total other comprehensive (loss), net of tax | $1,982 | $(724) | $(181) | $(1,147) | | Comprehensive income (loss) | $5,695 | $(5,074) | $(14,778) | $562 | - Comprehensive income for the three months ended January 28, 2023, was $5,695 thousand, a significant improvement from a comprehensive loss of $(5,074) thousand in the prior year's comparable quarter[15] - For the nine months ended January 28, 2023, the company reported a comprehensive loss of $(14,778) thousand, compared to a comprehensive income of $562 thousand in the prior year[15] Condensed Consolidated Statements of Shareholders' Equity This section details changes in the company's shareholders' equity, including common stock and retained earnings, over the period Condensed Consolidated Statements of Shareholders' Equity (in thousands) | Metric (in thousands) | Balance as of April 30, 2022 | Balance as of January 28, 2023 | Change | | :-------------------- | :--------------------------- | :----------------------------- | :----- | | Common Stock | $61,794 | $63,002 | $1,208 | | Additional Paid-In Capital | $48,372 | $49,719 | $1,347 | | Retained Earnings | $96,608 | $82,011 | $(14,597) | | Total Shareholders' Equity | $191,564 | $179,341 | $(12,223) | - Retained earnings decreased by $14,597 thousand from April 30, 2022, to January 28, 2023, primarily due to the net loss incurred during the nine-month period[18] - Total shareholders' equity decreased by $12,223 thousand, or 6.4%, from $191,564 thousand at April 30, 2022, to $179,341 thousand at January 28, 2023[18] Condensed Consolidated Statements of Cash Flows This section presents the cash inflows and outflows from operating, investing, and financing activities for the nine months ended January 28, 2023 Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Nine Months Ended Jan 28, 2023 | Nine Months Ended Jan 29, 2022 | Dollar Change | | :-------------------- | :----------------------------- | :----------------------------- | :------------ | | Net cash used in operating activities | $(9,487) | $(25,464) | $15,977 | | Net cash used in investing activities | $(20,947) | $(19,926) | $(1,021) |\n| Net cash provided by (used in) financing activities | $23,498 | $(3,391) | $26,889 | | Net decrease in cash, cash equivalents and restricted cash | $(7,278) | $(48,683) | $41,405 | - Net cash used in operating activities significantly decreased from $(25,464) thousand in the prior year to $(9,487) thousand for the nine months ended January 28, 2023, primarily due to changes in net operating assets and liabilities[24][129] - Net cash provided by financing activities was $23,498 thousand for the nine months ended January 28, 2023, driven by draws on the line of credit, a reversal from cash used in financing activities in the prior year[24][132] - Purchases of property and equipment increased to $21,809 thousand for the nine months ended January 28, 2023, from $10,024 thousand in the prior year, indicating increased capital investments[24][131] Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1. Basis of Presentation This note describes the company's business, basis of financial statement preparation, and going concern assessment - The company is an industry leader in designing and manufacturing electronic scoreboards, programmable display systems, and large screen video displays[25] - Management has concluded that there is substantial doubt about the company's ability to continue as a going concern due to global economic conditions, supply chain disruptions, and the need for additional liquidity, despite ongoing efforts to secure financing and improve cash flow[33][34] - The Board of Directors formed an independent Strategy and Financing Review Committee in December 2022 to explore alternatives for strengthening the company's financial structure and liquidity profile[34] Note 2. Investments in Affiliates This note details the company's investments in affiliates and their impact on financial results Investments in Affiliates (in thousands) | Metric (in thousands) | January 28, 2023 | April 30, 2022 | | :-------------------- | :--------------- | :------------- | | Aggregate investments accounted for under equity method | $17,145 | $16,916 | Share of Losses of Affiliates (in thousands) | Metric (in thousands) | Three Months Ended Jan 28, 2023 | Three Months Ended Jan 29, 2022 | Nine Months Ended Jan 28, 2023 | Nine Months Ended Jan 29, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Share of losses of affiliates | $895 | $401 | $2,596 | $1,966 | - The company's ownership in Miortech increased to 54.5% after converting $2,823 thousand in notes to stock ownership during the nine months ended January 28, 2023[47][48] Note 3. Earnings Per Share ("EPS") This note provides the basic and diluted earnings per share calculations for the reporting periods Earnings Per Share | Metric | Three Months Ended Jan 28, 2023 | Three Months Ended Jan 29, 2022 | Nine Months Ended Jan 28, 2023 | Nine Months Ended Jan 29, 2022 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic EPS | $0.08 | $(0.10) | $(0.32) | $0.04 | | Diluted EPS | $0.08 | $(0.10) | $(0.32) | $0.04 | - For the three months ended January 28, 2023, basic and diluted EPS improved to $0.08 from $(0.10) in the prior year. However, for the nine months, EPS declined to $(0.32) from $0.04 in the prior year[49] Note 4. Revenue Recognition This note outlines the company's revenue recognition policies and disaggregates net sales by segment Net Sales by Segment (in thousands) | Segment (in thousands) | 3 Months Ended Jan 28, 2023 | 3 Months Ended Jan 29, 2022 | 9 Months Ended Jan 28, 2023 | 9 Months Ended Jan 29, 2022 | | :--------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Commercial | $49,967 | $40,095 | $127,132 | $107,339 | | Live Events | $67,748 | $39,057 | $193,370 | $150,840 | | High School Park and Recreation | $28,312 | $23,721 | $106,127 | $84,362 | | Transportation | $17,578 | $15,823 | $53,797 | $42,434 | | International | $21,370 | $20,862 | $63,908 | $63,792 | | Total Net Sales | $184,975 | $139,558 | $544,334 | $448,767 | Contract Balances (in thousands) | Contract Balances (in thousands) | January 28, 2023 | April 30, 2022 | Dollar Change | Percent Change | | :------------------------------- | :--------------- | :------------- | :------------ | :------------- | | Contract assets | $36,098 | $41,687 | $(5,589) | (13.4)% | | Contract liabilities - current | $97,703 | $90,393 | $7,310 | 8.1% | | Contract liabilities - noncurrent | $12,674 | $10,998 | $1,676 | 15.2% | - The aggregate amount of transaction price allocated to remaining performance obligations was $491,345 thousand as of January 28, 2023, with $430,602 thousand expected to be recognized within the next 12 months[60] Note 5. Segment Reporting This note provides financial information by operating segment, including net sales and gross profit Net Sales by Segment (in thousands) | Segment (in thousands) | 3 Months Ended Jan 28, 2023 Net Sales | 3 Months Ended Jan 29, 2022 Net Sales | 9 Months Ended Jan 28, 2023 Net Sales | 9 Months Ended Jan 29, 2022 Net Sales | | :--------------------- | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Commercial | $49,967 | $40,095 | $127,132 | $107,339 | | Live Events | $67,748 | $39,057 | $193,370 | $150,840 | | High School Park and Recreation | $28,312 | $23,721 | $106,127 | $84,362 | | Transportation | $17,578 | $15,823 | $53,797 | $42,434 | | International | $21,370 | $20,862 | $63,908 | $63,792 | | Total Net Sales | $184,975 | $139,558 | $544,334 | $448,767 | Gross Profit by Segment (in thousands) | Segment (in thousands) | 3 Months Ended Jan 28, 2023 Gross Profit | 3 Months Ended Jan 29, 2022 Gross Profit | 9 Months Ended Jan 28, 2023 Gross Profit | 9 Months Ended Jan 29, 2022 Gross Profit | | :--------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Commercial | $10,547 | $8,239 | $21,565 | $22,862 | | Live Events | $14,405 | $3,094 | $26,174 | $17,261 | | High School Park and Recreation | $7,555 | $6,958 | $29,343 | $27,216 | | Transportation | $5,534 | $4,108 | $15,456 | $12,263 | | International | $3,672 | $(91) | $6,673 | $7,158 |\n| Total Gross Profit | $41,713 | $22,308 | $99,211 | $86,760 | - Live Events segment showed the most significant growth in net sales for both the three-month (73.5%) and nine-month (28.2%) periods, and a substantial increase in gross profit for the three-month period (from $3,094 thousand to $14,405 thousand)[61][102] Note 6. Goodwill This note details changes in goodwill, including impairment charges, for the reporting period Goodwill by Segment (in thousands) | Segment (in thousands) | Balance as of April 30, 2022 | Goodwill Impairment | Balance as of January 28, 2023 | | :--------------------- | :--------------------------- | :------------------ | :----------------------------- | | Live Events | $2,296 | $(2,281) | $0 | | Commercial | $3,349 | $0 | $3,240 | | Transportation | $68 | $0 | $53 | | International | $2,214 | $(2,295) | $0 | | Total Goodwill | $7,927 | $(4,576) | $3,293 | - A non-cash goodwill impairment charge of $4,576 thousand was recorded for the Live Events and International reporting units, primarily due to a higher weighted average cost of capital driven by liquidity strains from supply chain disruptions and geopolitical conditions[65] Note 7. Financing Agreements This note describes the company's line of credit and compliance with financial covenants - The company has a $35,000 thousand line of credit expiring in April 2025, which was temporarily expanded by $10,000 thousand through May 1, 2023[66] - As of January 28, 2023, $23,638 thousand had been advanced under the line of credit, and the company was in compliance with its financial covenants[66][67] Note 8. Commitments and Contingencies This note discloses legal proceedings, warranty obligations, and other contractual commitments - A putative class action lawsuit was filed on December 21, 2022, alleging materially false and misleading statements; the company believes the claims are without merit and the likelihood of loss is remote[70] Warranty Obligations (in thousands) | Warranty Obligations (in thousands) | January 28, 2023 | | :---------------------------------- | :--------------- | | Beginning accrued warranty obligations | $28,878 | | Warranties issued during the period | $9,423 | | Settlements made during the period | $(8,251) | | Ending accrued warranty obligations | $30,214 | - As of January 28, 2023, the company had outstanding letters of credit, bank guarantees, and surety bonds totaling $7,516 thousand, $616 thousand, and $63,312 thousand, respectively, related to performance guarantees on contracts[71] Note 9. Income Taxes This note explains the company's income tax expense, effective tax rates, and deferred tax assets Effective Tax Rate | Effective Tax Rate | Three Months Ended Jan 28, 2023 | Three Months Ended Jan 29, 2022 | Nine Months Ended Jan 28, 2023 | Nine Months Ended Jan 29, 2022 | | :----------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Effective Tax Rate | 30.5% | 32.2% | Significantly impacted by valuation allowance | 9.4% | - The effective tax rate for the nine months ended January 28, 2023, was significantly impacted by the recording of a full valuation allowance on deferred tax assets during the second quarter of fiscal 2023[74] Note 10. Fair Value Measurement This note provides fair value measurements for financial assets and liabilities Financial Assets and Liabilities Fair Value (in thousands) | Financial Assets/Liabilities (in thousands) | January 28, 2023 Total Fair Value | April 30, 2022 Total Fair Value | | :---------------------------------------- | :-------------------------------- | :------------------------------ | | Cash and cash equivalents | $10,022 | $17,143 | | Restricted cash | $708 | $865 | | Available-for-sale securities | $530 | $4,020 | | Derivatives - liability position | $(6) | $(311) | | Derivatives - asset position | $0 | $934 | - The total fair value of financial assets and liabilities decreased from $22,651 thousand at April 30, 2022, to $11,254 thousand at January 28, 2023, primarily due to a decrease in cash and marketable securities[79] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition, operations, and liquidity, addressing challenges and plans FORWARD-LOOKING STATEMENTS This section cautions readers about forward-looking statements and the inherent risks and uncertainties that could affect future results - The report contains forward-looking statements subject to uncertainties that could cause actual results to differ materially, including market conditions, financing needs, ability to mitigate 'substantial doubt' about going concern, and future goodwill impairment charges[82] OVERVIEW This section provides a general description of Daktronics' business, products, and operating segments - 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[86] CURRENT CONDITIONS This section discusses current market demand, operational challenges, macroeconomic impacts, and the company's risk mitigation strategies - The company experienced increased demand but faced capacity constraints due to part shortages, labor challenges, and COVID-19 disruptions, leading to increased input costs[88] - Macroeconomic events, including high inflation, tightening financial conditions, and geopolitical conflicts, are expected to cause continued volatility in cash flow, pricing, order volumes, and production costs through fiscal 2023 and into fiscal 2024[90] - To manage risks, the company increased inventory, implemented price increases, redesigned products for component flexibility, and initiated a liquidity enhancement program focusing on working capital reductions, productivity improvements, and seeking additional financing[92][94][95] - The Board of Directors formed an independent Strategy and Financing Review Committee in December 2022 to explore alternatives for strengthening the company's financial structure and liquidity profile, including mortgage-secured financing, sales-leaseback, and asset-based lending[96] RESULTS OF OPERATIONS This section analyzes the company's financial performance, including net sales, gross profit, and net income, for the reporting periods COMPARISON OF THE THREE MONTHS ENDED JANUARY 28, 2023 AND JANUARY 29, 2022 This section compares the company's financial results for the three-month periods ended January 28, 2023, and January 29, 2022 Key Financial Metrics (in thousands) | Metric (in thousands) | Jan 28, 2023 | Jan 29, 2022 | Dollar Change | Percent Change | | :-------------------- | :----------- | :----------- | :------------ | :------------- | | Net Sales | $184,975 | $139,558 | $45,417 | 32.5% | | Gross Profit | $41,713 | $22,308 | $19,405 | 87.0% | | Operating Income (Loss) | $7,118 | $(5,680) | $12,798 | 225.3% | | Net Income (Loss) | $3,713 | $(4,350) | $8,063 | 185.4% | - Product order backlog increased by $75.8 million to $429.1 million as of January 28, 2023, compared to the prior year, driven by record order volume and softer conversion to sales due to supply challenges[100] - Gross profit percentage increased to 22.6% from 16.0% in the prior year, primarily due to strategic pricing changes and fewer supply chain disruptions[105][106] - A $4.6 million non-cash goodwill impairment charge contributed to increased operating expenses[111] COMPARISON OF THE NINE MONTHS ENDED JANUARY 28, 2023 AND JANUARY 29, 2022 This section compares the company's financial results for the nine-month periods ended January 28, 2023, and January 29, 2022 Key Financial Metrics (in thousands) | Metric (in thousands) | Jan 28, 2023 | Jan 29, 2022 | Dollar Change | Percent Change | | :-------------------- | :----------- | :----------- | :------------ | :------------- |\n| Net Sales | $544,334 | $448,767 | $95,567 | 21.3% | | Gross Profit | $99,211 | $86,760 | $12,451 | 14.4% | | Operating Income | $3,125 | $4,365 | $(1,240) | (28.4)% | | Net Loss | $(14,597) | $1,709 | $(16,306) | (954.1)% | - Order volume decreased by 10.5% for the first nine months of fiscal 2023 compared to the prior year, which saw record orders due to pent-up demand post-COVID[116][118] - Overall gross profit percentage declined to 18.2% from 19.3% in the prior year, impacted by inflationary challenges in materials, freight, and personnel costs, and extraordinary supply chain disruptions[119] - General and administrative expenses increased by $3.9 million, primarily due to $2.1 million in professional fees for legal, accounting, and auditing services[123] LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's cash flows, working capital, financing arrangements, and capital expenditure plans Cash Flow Activities (in thousands) | Cash Flow Activity (in thousands) | Nine Months Ended Jan 28, 2023 | Nine Months Ended Jan 29, 2022 | Dollar Change | | :-------------------------------- | :----------------------------- | :----------------------------- | :------------ | | Net cash used in operating activities | $(9,487) | $(25,464) | $15,977 | | Net cash used in investing activities | $(20,947) | $(19,926) | $(1,021) |\n| Net cash provided by (used in) financing activities | $23,498 | $(3,391) | $26,889 | | Net decrease in cash, cash equivalents and restricted cash | $(7,278) | $(48,683) | $41,405 | - The company's cash decreased by $7.3 million for the first nine months of fiscal 2023, primarily due to investments in inventory to support backlog conversion and capital assets for capacity expansion, funded by utilizing its line of credit[128] - Working capital increased to $129.4 million as of January 28, 2023, from $103.9 million at April 30, 2022, influenced by sports market and construction seasonality[137] - The company expects to be in compliance with credit facility covenants through the next fiscal year but acknowledges uncertainty due to supply chain volatility and its going concern condition[139] - Projected capital expenditures for fiscal 2023 are approximately $28.8 million, focusing on manufacturing equipment, capacity expansion, automation, and information infrastructure[143] Significant Accounting Policies and Estimates This section confirms no material changes in significant accounting policies or critical accounting estimates - There have been no material changes in significant accounting policies or critical accounting estimates since the end of fiscal 2022[146] New Accounting Pronouncements This section states there are no significant new accounting standards not yet adopted - There are no significant new Accounting Standards Updates that the Company has not yet adopted as of January 28, 2023[43][147] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate, foreign currency, and commodity risks, with no material changes in exposure during the first nine months of fiscal 2023 - No material changes in exposure to interest rate, foreign currency, and commodity risks were reported during the first nine months of fiscal 2023[148] Item 4. Controls and Procedures Disclosure controls and procedures were ineffective due to material weaknesses in internal control over financial reporting - Disclosure controls and procedures were deemed ineffective as of January 28, 2023, due to material weaknesses in internal control over financial reporting[149] - The material weaknesses involved the failure to timely communicate the going concern assessment to all appropriate internal parties and the lack of appropriate design in the going concern policy control to evaluate income tax implications[151] - Despite the material weaknesses, the unaudited condensed consolidated financial statements are concluded to fairly present the financial position, results of operations, and cash flows[150] - A remediation plan is underway, including implementing policies for communicating going concern analysis and considering its impact on deferred tax valuations, but full remediation is not yet complete[152][153] PART II. OTHER INFORMATION This section includes legal proceedings, risk factors, equity sales, and other miscellaneous information Item 1. Legal Proceedings A class action lawsuit alleging false statements was filed, which the company believes is without merit - A class action lawsuit was filed on December 21, 2022, alleging materially false and misleading statements, which the company believes is without merit and has a remote likelihood of loss[154] Item 1A. Risk Factors This section refers readers to previous filings for a comprehensive discussion of risk factors, noting new risks - Readers are directed to previous filings for a comprehensive discussion of risk factors, noting that new risks can emerge and materially affect the company[155] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any shares of its common stock during the three months ended January 28, 2023 - No shares of common stock were repurchased during the three months ended January 28, 2023[156] Item 3. Defaults Upon Senior Securities This item is not applicable to the current report Item 4. Mine Safety Disclosures This item is not applicable to the current report Item 5. Other Information This item is not applicable to the current report Item 6. Exhibits This section provides an index to exhibits filed as part of the report, including corporate documents and certifications SIGNATURES This section contains the required signatures for the financial report - The report was signed by Sheila M. Anderson, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) on March 13, 2023[165]