Daktronics(DAKT) - 2024 Q2 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (Unaudited) This section presents the company's unaudited condensed consolidated financial statements for the periods ended October 28, 2023 - The unaudited condensed consolidated financial statements contain all necessary adjustments for fair presentation, with estimates and assumptions made in accordance with GAAP[28][29] - The company operates on a 52- or 53-week fiscal year, with the six months ended October 28, 2023, and October 29, 2022, each comprising 26 operating weeks[30] Condensed Consolidated Balance Sheets Total Assets: | Metric | October 28, 2023 (in thousands) | April 29, 2023 (in thousands) | | :--- | :--- | :--- | | Total Assets | $510,948 | $468,104 | | Current Assets | $386,343 | $342,657 | | Cash and cash equivalents | $64,740 | $23,982 | | Restricted cash | $8,246 | $708 | | Inventories | $141,646 | $149,448 | | Accounts receivable, net | $115,052 | $109,979 | Total Liabilities and Shareholders' Equity: | Metric | October 28, 2023 (in thousands) | April 29, 2023 (in thousands) | | :--- | :--- | :--- | | Total Liabilities and Shareholders' Equity | $510,948 | $468,104 | | Total Current Liabilities | $189,936 | $210,163 | | Long-term debt, net | $55,087 | $17,750 | | Total Shareholders' Equity | $223,221 | $200,878 | Condensed Consolidated Statements of Operations Three Months Ended October 28, 2023 vs. October 29, 2022: | Metric | Oct 28, 2023 (in thousands) | Oct 29, 2022 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net sales | $199,369 | $187,439 | $11,930 | 6.4% | | Gross profit | $54,199 | $31,704 | $22,495 | 70.9% | | Operating income (loss) | $19,436 | $1,526 | $17,910 | 1173.7% | | Net income (loss) | $2,165 | $(12,984) | $15,149 | N/A | | Basic EPS | $0.05 | $(0.29) | $0.34 | N/A | | Diluted EPS | $0.05 | $(0.29) | $0.34 | N/A | Six Months Ended October 28, 2023 vs. October 29, 2022: | Metric | Oct 28, 2023 (in thousands) | Oct 29, 2022 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net sales | $431,900 | $359,359 | $72,541 | 20.2% | | Gross profit | $125,346 | $57,498 | $67,848 | 118.0% | | Operating income (loss) | $59,652 | $(3,993) | $63,645 | N/A | | Net income (loss) | $21,361 | $(18,310) | $39,671 | N/A | | Basic EPS | $0.47 | $(0.40) | $0.87 | N/A | | Diluted EPS | $0.46 | $(0.40) | $0.86 | N/A | Condensed Consolidated Statements of Comprehensive Income (Loss) Comprehensive Income (Loss) - Three Months Ended: | Metric | October 28, 2023 (in thousands) | October 29, 2022 (in thousands) | | :--- | :--- | :--- | | Net income (loss) | $2,165 | $(12,984) | | Total other comprehensive (loss), net of tax | $(1,181) | $(1,522) | | Comprehensive income (loss) | $984 | $(14,506) | Comprehensive Income (Loss) - Six Months Ended: | Metric | October 28, 2023 (in thousands) | October 29, 2022 (in thousands) | | :--- | :--- | :--- | | Net income (loss) | $21,361 | $(18,310) | | Total other comprehensive (loss), net of tax | $(1,426) | $(2,163) | | Comprehensive income (loss) | $19,935 | $(20,473) | Condensed Consolidated Statements of Shareholders' Equity Shareholders' Equity Changes (April 29, 2023 to October 28, 2023): | Metric | April 29, 2023 (in thousands) | October 28, 2023 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Common Stock | $63,023 | $64,643 | $1,620 | | Additional Paid-In Capital | $50,259 | $51,047 | $788 | | Retained Earnings | $103,410 | $124,771 | $21,361 | | Treasury Stock | $(10,285) | $(10,285) | $0 | | Accumulated Other Comprehensive Loss | $(5,529) | $(6,955) | $(1,426) | | Total Shareholders' Equity | $200,878 | $223,221 | $22,343 | - Key activities impacting equity for the six months ended October 28, 2023, include net income contributing $21,361 thousand to retained earnings, share-based compensation adding $1,091 thousand to additional paid-in capital, exercise of stock options increasing common stock by $1,005 thousand, and cumulative translation adjustments resulting in a loss of $1,442 thousand[20][26] Condensed Consolidated Statements of Cash Flows Cash Flow Summary (Six Months Ended October 28, 2023 vs. October 29, 2022): | Metric | Oct 28, 2023 (in thousands) | Oct 29, 2022 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $44,311 | $(21,938) | $66,249 | | Net cash used in investing activities | $(12,073) | $(15,192) | $3,119 | | Net cash provided by financing activities | $15,919 | $26,278 | $(10,359) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $48,296 | $(10,865) | $59,161 | | Cash, cash equivalents and restricted cash, end of period | $72,986 | $7,143 | $65,843 | - Operating activities generated $44.3 million in cash, a $66.2 million improvement year-over-year, driven by a $39.7 million increase in net income, a $17.9 million non-cash fair value change of the Convertible Note, and improved working capital positions, including a $7.1 million decrease in inventories[26][134][135] - Investing activities used $12.1 million, with purchases of property and equipment decreasing to $9.2 million from $16.2 million in the prior year, and investments in convertible and promissory notes of affiliates totaling $2.9 million[26][40][135][136] - Financing activities provided $15.9 million, primarily from $40.0 million in borrowings on notes payable, offset by $18.1 million in payments on notes payable and $6.5 million in debt issuance costs[26][137] Notes to the Condensed Consolidated Financial Statements Note 1. Basis of Presentation This note outlines the preparation basis for the financial statements, including key estimates and accounting policies - Daktronics, Inc. designs and manufactures electronic scoreboards, programmable display systems, and large screen video displays for sporting, commercial, and transportation applications[27] - Management uses estimates for revenue recognition, warranty expenses, fair value of long-term debt and investments, income tax expenses, and stock-based compensation[28] - In Q1 fiscal 2024, the company adopted ASU 2020-06, simplifying accounting for convertible debt instruments and requiring the if-converted method for diluted EPS calculation, specifically for the Convertible Note issued May 11, 2023[36] Cash and Restricted Cash Reconciliation (October 28, 2023): | Item | Amount (in thousands) | | :--- | :--- | | Cash and cash equivalents | $64,740 | | Restricted cash | $8,246 | | Total cash, cash equivalents, and restricted cash | $72,986 | Note 2. Investments in Affiliates This note details the company's investments in affiliates Xdisplay and Miortech and their accounting treatment - Daktronics invests in Xdisplay (micro-LED mass transfer) and Miortech (low power electrowetting technology), with Miortech accounted for under the equity method as a non-primary beneficiary VIE[38] Aggregate Equity Method Investments: | Metric | October 28, 2023 (in thousands) | April 29, 2023 (in thousands) | | :--- | :--- | :--- | | Aggregate equity method investments | $9,819 | $11,934 | Share of Affiliate Losses: | Period | October 28, 2023 (in thousands) | October 29, 2022 (in thousands) | | :--- | :--- | :--- | | Three months ended | $771 | $811 | | Six months ended | $1,461 | $1,701 | - During the six months ended October 28, 2023, the company invested $2,250 thousand in convertible notes and $649 thousand in promissory notes of affiliates, bringing the total Affiliate Notes to $11,663 thousand[40] Note 3. Earnings Per Share ("EPS") This note explains the calculation of basic and diluted EPS, including the adoption of ASU 2020-06 - In the first quarter of fiscal 2024, the company adopted ASU 2020-06, prospectively utilizing the if-converted method to calculate the dilutive impact of its Convertible Note[42] EPS Reconciliation (Three Months Ended October 28, 2023 vs. October 29, 2022): | Metric | Oct 28, 2023 | Oct 29, 2022 | | :--- | :--- | :--- | | Net income (loss) | $2,165 | $(12,984) | | Basic EPS | $0.05 | $(0.29) | | Diluted EPS | $0.05 | $(0.29) | | Weighted average shares outstanding (basic) | 46,030 | 45,317 | | Weighted average shares outstanding (diluted) | 46,705 | 45,317 | EPS Reconciliation (Six Months Ended October 28, 2023 vs. October 29, 2022): | Metric | Oct 28, 2023 | Oct 29, 2022 | | :--- | :--- | :--- | | Net income (loss) | $21,361 | $(18,310) | | Basic EPS | $0.47 | $(0.40) | | Diluted EPS | $0.46 | $(0.40) | | Weighted average shares outstanding (basic) | 45,838 | 45,258 | | Weighted average shares outstanding (diluted) | 46,454 | 45,258 | - Options to purchase 521 shares (three months) and 1,039 shares (six months) were anti-dilutive and excluded from diluted EPS, as were shares from the Convertible Note[44][45] Note 4. Revenue Recognition This note disaggregates revenue by segment and details contract balances and remaining performance obligations Revenue Disaggregation (Three Months Ended October 28, 2023): | Segment | Unique Configuration (in thousands) | Limited Configuration (in thousands) | Service and Other (in thousands) | Total (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Commercial | $9,511 | $28,752 | $4,190 | $42,453 | | Live Events | $47,496 | $13,771 | $6,943 | $68,210 | | High School Park and Recreation | $11,539 | $36,277 | $1,126 | $48,942 | | Transportation | $11,047 | $8,469 | $727 | $20,243 | | International | $9,993 | $7,302 | $2,226 | $19,521 | | Total | $89,586 | $94,571 | $15,212 | $199,369 | Revenue Disaggregation (Six Months Ended October 28, 2023): | Segment | Unique Configuration (in thousands) | Limited Configuration (in thousands) | Service and Other (in thousands) | Total (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Commercial | $22,429 | $58,665 | $8,242 | $89,336 | | Live Events | $124,043 | $23,732 | $12,434 | $160,209 | | High School Park and Recreation | $26,658 | $76,614 | $1,904 | $105,176 | | Transportation | $23,631 | $16,536 | $1,445 | $41,612 | | International | $18,783 | $12,541 | $4,243 | $35,567 | | Total | $215,544 | $188,088 | $28,268 | $431,900 | Contract Balances (October 28, 2023 vs. April 29, 2023): | Metric | October 28, 2023 (in thousands) | April 29, 2023 (in thousands) | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Contract assets | $45,210 | $46,789 | $(1,579) | (3.4)% | | Contract liabilities - current | $78,293 | $91,549 | $(13,256) | (14.5)% | | Contract liabilities - noncurrent | $15,390 | $13,096 | $2,294 | 17.5% | - As of October 28, 2023, the aggregate amount of remaining performance obligations was $369,879 thousand, with approximately $310,470 thousand expected to be recognized in the next 12 months[53] Note 5. Segment Reporting This note provides detailed financial information for the company's five reporting segments and geographic areas Net Sales by Segment (Three Months Ended October 28, 2023 vs. October 29, 2022): | Segment | Oct 28, 2023 (in thousands) | Oct 29, 2022 (in thousands) | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Commercial | $42,453 | $37,047 | $5,406 | 14.6% | | Live Events | $68,210 | $69,239 | $(1,029) | (1.5)% | | High School Park and Recreation | $48,942 | $42,006 | $6,936 | 16.5% | | Transportation | $20,243 | $16,679 | $3,564 | 21.4% | | International | $19,521 | $22,468 | $(2,947) | (13.1)% | | Total | $199,369 | $187,439 | $11,930 | 6.4% | Gross Profit by Segment (Three Months Ended October 28, 2023 vs. October 29, 2022): | Segment | Oct 28, 2023 (in thousands) | Oct 29, 2022 (in thousands) | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Commercial | $7,231 | $6,197 | $1,034 | 16.7% | | Live Events | $19,234 | $7,983 | $11,251 | 140.9% | | High School Park and Recreation | $16,420 | $11,811 | $4,609 | 39.0% | | Transportation | $6,780 | $4,084 | $2,696 | 66.0% | | International | $4,534 | $1,629 | $2,905 | 178.3% | | Total | $54,199 | $31,704 | $22,495 | 70.9% | Net Sales by Geography (Six Months Ended October 28, 2023 vs. October 29, 2022): | Geography | Oct 28, 2023 (in thousands) | Oct 29, 2022 (in thousands) | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | :--- | :--- | | United States | $392,737 | $312,580 | $80,157 | 25.6% | | Outside United States | $39,163 | $46,779 | $(7,616) | (16.3)% | | Total | $431,900 | $359,359 | $72,541 | 20.2% | Note 6. Financing Agreements This note details the company's financing structure, including a new senior credit facility and a secured Convertible Note Long-term Debt (October 28, 2023 vs. April 29, 2023): | Metric | October 28, 2023 (in thousands) | April 29, 2023 (in thousands) | | :--- | :--- | :--- | | ABL credit facility/prior line of credit | $0 | $17,750 | | Mortgage | $14,625 | $0 | | Convertible note | $25,000 | $0 | | Long-term debt, gross | $39,625 | $17,750 | | Debt issuance costs, net | $(948) | $0 | | Change in fair value of convertible note | $17,910 | $0 | | Current portion | $(1,500) | $0 | | Long-term debt, net | $55,087 | $17,750 | - On May 11, 2023, the company closed a $75 million senior credit facility, comprising a $60 million asset-based revolving credit facility (ABL) and a $15 million delayed draw loan (mortgage)[59][62] - A $25 million secured Convertible Note was issued on May 11, 2023, due May 11, 2027, and is accounted for at fair value using a Level 3 binomial lattice model[63][66][67][68] - As of October 28, 2023, the company had $50.6 million in ABL borrowing capacity and was in compliance with all financial covenants[60][69] Note 7. Commitments and Contingencies This note addresses legal proceedings, warranty obligations, and performance guarantees - The company is a party to legal proceedings and claims in the ordinary course of business, but management believes there is no reasonable probability of any material loss[73][74] Warranty Obligations (Six Months Ended October 28, 2023): | Metric | Amount (in thousands) | | :--- | :--- | | Balance as of April 29, 2023 | $32,541 | | Warranties issued during the period | $7,781 | | Settlements made during the period | $(6,209) | | Changes in accrued warranty obligations for pre-existing warranties | $700 | | Balance as of October 28, 2023 | $34,813 | - As of October 28, 2023, outstanding performance guarantees included $5,875 thousand in letters of credit, $558 thousand in bank guarantees, and $40,633 thousand in surety bonds[75] Note 8. Income Taxes This note discusses the company's effective tax rates and the impact of non-deductible fair value changes - The effective tax rate for the three and six months ended October 28, 2023, was 64.8% and 37.6%, respectively, impacted by non-deductible fair value changes of the Convertible Note[76] - As of October 28, 2023, undistributed earnings of foreign subsidiaries were considered indefinitely reinvested, and there were $527 thousand of unrecognized tax benefits[77] Note 9. Fair Value Measurement This note provides a fair value hierarchy for financial assets and liabilities, detailing the Convertible Note valuation Fair Value Hierarchy (October 28, 2023): | Item | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | Total (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $64,740 | — | — | $64,740 | | Restricted cash | $8,246 | — | — | $8,246 | | Convertible Note Payable | — | — | $42,910 | $42,910 | | US Government sponsored entities | — | $546 | — | $546 | | Total | $72,986 | $546 | $42,910 | $116,442 | - The Convertible Note is valued at fair value using a binomial lattice model, classified as Level 3 due to significant unobservable inputs[79][80] Key Assumptions for Convertible Note Valuation: | Metric | Value | | :--- | :--- | | Risk-Free Rate (Annual) | 4.76 % | | Implied Yield | 19.48 % | | Volatility (Annual) | 55.00 % | | Dividend Yield (Annual) | — % | Note 10. Related Party Transactions This note describes the company's policy and procedures for related party transactions, including the Convertible Note agreement - The Audit Committee oversees a policy for related party transactions, generally defined as transactions exceeding $120 thousand involving a 'related person'[81][82] - On May 11, 2023, the company issued a $25 million Convertible Note to Alta Fox Opportunities Fund, LP, which was a related party at the time[83] - On June 9, 2023, Alta Fox's beneficial ownership was reduced to 4.99%, ceasing its 'related party' status[87] - A $150 thousand contract for video display systems was entered into with Dakota State University, where a company board member serves as President[88] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, liquidity, and future outlook for the reported periods - Daktronics designs, markets, and manufactures integrated electronic display systems and related services globally, with five business segments: Commercial, Live Events, High School Park and Recreation, Transportation, and International[95] - The company benefits from a stable supply chain and efficient production due to past investments, with long-term growth expected from increased LED display use and new technologies[97][98] Forward-Looking Statements - This section contains forward-looking statements, identified by terms like 'expect' and 'estimate,' which reflect management's current views and are subject to uncertainties[91] - Actual results may differ materially due to factors such as market conditions, financing needs, and other risks detailed in the Annual Report on Form 10-K[91] - The company undertakes no obligation to publicly update or revise any forward-looking statements[93] Overview - Daktronics is a leader in designing, marketing, and manufacturing integrated electronic display systems and related products and services globally[95] - The company operates through five business segments: Commercial, Live Events, High School Park and Recreation, Transportation, and International[95] Current Conditions - Past investments in capacity and a stable supply chain have enabled efficient production and order fulfillment[97] - The company anticipates continued stabilization in supply chain uncertainty and volatility during the current fiscal year[97] - Long-term growth is expected from the increased use of LED display systems across industries and the development of new technologies, services, and sales channels[98] Results of Operations - Three Months Ended October 28, 2023 and October 29, 2022 This section compares financial performance for the three months ended October 28, 2023, versus the prior-year period - Net sales increased by $11.9 million (6.4%) to $199.4 million, driven by fulfilling backlog, increased manufacturing capacity, and realization of price increases[105] - Gross profit improved significantly due to strategic pricing, efficient sales volume over cost structure, and fewer supply chain and operational disruptions[108] - Operating income dramatically increased to $19.4 million from $1.5 million in the prior year, and net income turned around to $2.2 million from a $13.0 million net loss[15] Product Order Backlog - Product order backlog decreased to $306.9 million as of October 28, 2023, from $463.1 million a year prior and $400.7 million at April 29, 2023[101] - The decrease in backlog is attributed to fulfilling orders at a greater pace due to stabilized supply chain conditions, improved production lead times, and increased capacity[101] - The current backlog as of October 28, 2023, is expected to be fulfilled within the next 24 months[102] Net Sales Net Sales Performance (Three Months Ended October 28, 2023 vs. October 29, 2022): | Segment | Oct 28, 2023 (in thousands) | Oct 29, 2022 (in thousands) | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Commercial | $42,453 | $37,047 | $5,406 | 14.6% | | Live Events | $68,210 | $69,239 | $(1,029) | (1.5)% | | High School Park and Recreation | $48,942 | $42,006 | $6,936 | 16.5% | | Transportation | $20,243 | $16,679 | $3,564 | 21.4% | | International | $19,521 | $22,468 | $(2,947) | (13.1)% | | Total Net Sales | $199,369 | $187,439 | $11,930 | 6.4% | Order Performance (Three Months Ended October 28, 2023 vs. October 29, 2022): | Segment | Oct 28, 2023 (in thousands) | Oct 29, 2022 (in thousands) | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Commercial | $34,209 | $42,711 | $(8,502) | (19.9)% | | Live Events | $79,016 | $80,999 | $(1,983) | (2.4)% | | High School Park and Recreation | $32,800 | $31,898 | $902 | 2.8% | | Transportation | $21,500 | $16,583 | $4,917 | 29.7% | | International | $16,168 | $10,616 | $5,552 | 52.3% | | Total Orders | $183,693 | $182,807 | $886 | 0.5% | - Sales growth was primarily driven by the High School Park and Recreation, Commercial, and Transportation business units[105] - Overall order volume was similar year-over-year, with higher orders in International and Transportation offsetting decreases in the Commercial business unit[106] Gross Profit and Contribution Margin Gross Profit (Three Months Ended October 28, 2023 vs. October 29, 2022): | Metric | Oct 28, 2023 (in thousands) | % of Net Sales | Oct 29, 2022 (in thousands) | % of Net Sales | | :--- | :--- | :--- | :--- | :--- | | Commercial | $7,231 | 17.0% | $6,197 | 16.7% | | Live Events | $19,234 | 28.2% | $7,983 | 11.5% | | High School Park and Recreation | $16,420 | 33.5% | $11,811 | 28.1% | | Transportation | $6,780 | 33.5% | $4,084 | 24.5% | | International | $4,534 | 23.2% | $1,629 | 7.3% | | Total Gross Profit | $54,199 | 27.2% | $31,704 | 16.9% | - Gross profit improvement was driven by strategic pricing, efficient generation of sales volume over the cost structure, and fewer supply chain and operational disruptions[108] - Total warranty costs as a percent of sales decreased to 2.2% for the three months ended October 28, 2023, from 2.7% in the prior year[109] Contribution Margin (Three Months Ended October 28, 2023 vs. October 29, 2022): | Metric | Oct 28, 2023 (in thousands) | % of Net Sales | Oct 29, 2022 (in thousands) | % of Net Sales | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Commercial | $2,403 | 5.7% | $484 | 1.3% | $1,919 | 396.5% | | Live Events | $16,572 | 24.3% | $5,214 | 7.5% | $11,358 | 217.8% | | High School Park and Recreation | $12,746 | 26.0% | $4,308 | 10.3% | $8,438 | 195.9% | | Transportation | $5,752 | 28.4% | $2,726 | 16.3% | $3,026 | 111.0% | | International | $2,073 | 10.6% | $(1,418) | (6.3)% | $3,491 | N/A | | Total Contribution Margin | $39,546 | 19.8% | $17,179 | 9.2% | $22,367 | 130.2% | Operating Expenses Operating Expenses (Three Months Ended October 28, 2023 vs. October 29, 2022): | Metric | Oct 28, 2023 (in thousands) | % of Net Sales | Oct 29, 2022 (in thousands) | % of Net Sales | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | General and administrative | $10,889 | 5.5% | $8,687 | 4.6% | $2,202 | 25.3% | | Product design and development | $9,221 | 4.6% | $6,966 | 3.7% | $2,255 | 32.4% | | Total Operating Expenses | $20,110 | 10.1% | $15,653 | 8.3% | $4,457 | 28.5% | - General and administrative expenses increased primarily due to higher personnel-related expenses and professional fees[114] - Product design and development expenses increased mainly due to higher personnel-related expenses[115] Other Income and Expenses Nonoperating (Expense) Income (Three Months Ended October 28, 2023 vs. October 29, 2022): | Metric | Oct 28, 2023 (in thousands) | % of Net Sales | Oct 29, 2022 (in thousands) | % of Net Sales | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Interest (expense) income, net | $(1,326) | (0.7)% | $(263) | (0.1)% | $(1,063) | 404.2% | | Change in fair value of convertible note | $(10,650) | (5.3)% | $0 | 0.0% | $(10,650) | N/A | | Other expense and debt issuance costs write-off, net | $(1,303) | (0.7)% | $(208) | (0.1)% | $(1,095) | 526.4% | - The increase in net interest expense was primarily due to new convertible note, asset-based, and mortgage financings[116] - A $10.7 million expense was recorded for the change in fair value of the Convertible Note, driven by an increase in stock price[117] - Other expense, net, increased primarily due to losses from equity method affiliates and foreign currency volatility[118] Income Taxes - The effective tax rate for Q2 fiscal 2024 was 64.8%, impacted by the non-deductible fair value adjustment to income[119] Results of Operations - Six Months Ended October 28, 2023 and October 29, 2022 This section compares financial performance for the six months ended October 28, 2023, versus the prior-year period - Net sales increased by $72.5 million (20.2%) to $431.9 million, driven by higher throughput from capacity investments and a more stable operating environment[121] - Gross profit percentage rose to 29.0% from 16.0%, attributed to record sales volume, strategic pricing, and fewer supply chain disruptions[123] - Operating income significantly improved to $59.7 million from a loss of $4.0 million, and the company achieved net income of $21.4 million[15] Net Sales Net Sales Performance (Six Months Ended October 28, 2023 vs. October 29, 2022): | Segment | Oct 28, 2023 (in thousands) | Oct 29, 2022 (in thousands) | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Commercial | $89,336 | $77,165 | $12,171 | 15.8% | | Live Events | $160,209 | $125,622 | $34,587 | 27.5% | | High School Park and Recreation | $105,176 | $77,815 | $27,361 | 35.2% | | Transportation | $41,612 | $36,219 | $5,393 | 14.9% | | International | $35,567 | $42,538 | $(6,971) | (16.4)% | | Total Net Sales | $431,900 | $359,359 | $72,541 | 20.2% | Order Performance (Six Months Ended October 28, 2023 vs. October 29, 2022): | Segment | Oct 28, 2023 (in thousands) | Oct 29, 2022 (in thousands) | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | :--- | :--- | | Commercial | $66,643 | $90,389 | $(23,746) | (26.3)% | | Live Events | $131,219 | $132,752 | $(1,533) | (1.2)% | | High School Park and Recreation | $68,539 | $69,477 | $(938) | (1.4)% | | Transportation | $40,485 | $32,287 | $8,198 | 25.4% | | International | $35,437 | $28,125 | $7,312 | 26.0% | | Total Orders | $342,323 | $353,030 | $(10,707) | (3.0)% | - Net sales increased due to higher throughput from capacity investments and a more stable operating environment[121] - Overall order volume decreased, with higher orders in International and Transportation offsetting declines in Commercial markets[122] Gross Profit and Contribution Margin Gross Profit (Six Months Ended October 28, 2023 vs. October 29, 2022): | Metric | Oct 28, 2023 (in thousands) | % of Net Sales | Oct 29, 2022 (in thousands) | % of Net Sales | | :--- | :--- | :--- | :--- | :--- | | Commercial | $20,000 | 22.4% | $11,018 | 14.3% | | Live Events | $47,174 | 29.4% | $11,769 | 9.4% | | High School Park and Recreation | $37,245 | 35.4% | $21,788 | 28.0% | | Transportation | $13,869 | 33.3% | $9,922 | 27.4% | | International | $7,058 | 19.8% | $3,001 | 7.1% | | Total Gross Profit | $125,346 | 29.0% | $57,498 | 16.0% | - The increase in gross profit percentage is attributed to record sales volume over fixed manufacturing costs, strategic pricing actions, and stabilization of input costs[123] - Total warranty costs as a percent of sales remained consistent at 2.2% for both periods[124] Contribution Margin (Six Months Ended October 28, 2023 vs. October 29, 2022): | Metric | Oct 28, 2023 (in thousands) | % of Net Sales | Oct 29, 2022 (in thousands) | % of Net Sales | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Commercial | $11,124 | 12.5% | $2,119 | 2.7% | $9,005 | 425.0% | | Live Events | $41,987 | 26.2% | $6,188 | 4.9% | $35,799 | 578.5% | | High School Park and Recreation | $30,209 | 28.7% | $15,019 | 19.3% | $15,190 | 101.1% | | Transportation | $11,942 | 28.7% | $3,973 | 22.0% | $7,969 | 200.6% | | International | $2,502 | 7.0% | $(2,755) | (6.5)% | $5,257 | N/A | | Total Contribution Margin | $97,764 | 22.6% | $28,540 | 7.9% | $69,224 | 242.6% | Operating Expenses Operating Expenses (Six Months Ended October 28, 2023 vs. October 29, 2022): | Metric | Oct 28, 2023 (in thousands) | % of Net Sales | Oct 29, 2022 (in thousands) | % of Net Sales | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | General and administrative | $20,488 | 4.7% | $18,128 | 5.0% | $2,360 | 13.0% | | Product design and development | $17,624 | 4.1% | $14,405 | 4.0% | $3,219 | 22.3% | | Total Operating Expenses | $38,112 | 8.8% | $32,533 | 9.0% | $5,579 | 17.1% | - General and administrative expenses increased primarily due to higher personnel-related expenses[128] - Product design and development expenses increased mainly due to higher personnel-related expenses[129] Other Income and Expenses Nonoperating (Expense) Income (Six Months Ended October 28, 2023 vs. October 29, 2022): | Metric | Oct 28, 2023 (in thousands) | % of Net Sales | Oct 29, 2022 (in thousands) | % of Net Sales | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Interest (expense) income, net | $(2,207) | (0.5)% | $(323) | (0.1)% | $(1,884) | 583.3% | | Change in fair value of convertible note | $(17,910) | (4.1)% | $0 | 0.0% | $(17,910) | N/A | | Other expense, net | $(5,282) | (1.2)% | $(955) | (0.3)% | $(4,327) | 453.1% | - The increase in net interest expense was primarily due to new convertible note, asset-based, and mortgage financings[130] - A $17.9 million expense was recorded for the change in fair value of the Convertible Note, driven by an increase in stock price[131] - Other expense, net, increased primarily due to losses from equity method affiliates, foreign currency volatility, and expensing of $3.4 million in debt issuance costs[132] Income Tax - The effective tax rate for the first six months of fiscal 2024 was 37.6%, influenced by the non-deductible fair value adjustment to income[133] - The company expects its full-year effective tax rate to be in the mid-twenties, before the impacts of fair value accounting for the convertible note[133] Liquidity and Capital Resources Cash Flow Summary (Six Months Ended October 28, 2023 vs. October 29, 2022): | Metric | Oct 28, 2023 (in thousands) | Oct 29, 2022 (in thousands) | Dollar Change (in thousands) | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $44,311 | $(21,938) | $66,249 | | Net cash used in investing activities | $(12,073) | $(15,192) | $3,119 | | Net cash provided by financing activities | $15,919 | $26,278 | $(10,359) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $48,296 | $(10,865) | $59,161 | - Net cash provided by operating activities improved by $66.2 million, driven by a $39.7 million increase in net income, the $17.9 million non-cash fair value change of the Convertible Note, and improved working capital positions[134] - As of October 28, 2023, the company had $64.7 million in cash and cash equivalents and $50.6 million in borrowing capacity under its ABL facility[138][139] - Working capital increased to $196.4 million as of October 28, 2023, from $132.5 million at April 29, 2023[141][144][145] Significant Accounting Policies and Estimates - For detailed information on significant accounting policies and critical accounting estimates, readers are referred to the company's Annual Report on Form 10-K for the fiscal year ended April 29, 2023[148] New Accounting Pronouncements - A summary of recently issued accounting pronouncements and their effects on financial results can be found in 'Note 1. Basis of Presentation' within this Report[149] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section notes the company's exposure to interest rate, foreign currency, and commodity risks - The company is exposed to certain interest rate, foreign currency, and commodity risks[150] - The new ABL and $15.0 million delayed draw loan, entered into during the first quarter of fiscal 2024, are subject to interest rate risks[150] - There have been no other material changes in the company's exposure to these risks during the first six months of fiscal 2024[151] Item 4. Controls and Procedures This section addresses the effectiveness of disclosure controls, a material weakness in internal controls, and the remediation plan - As of October 28, 2023, management concluded that the company's disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting[152] - Despite the material weakness, the CEO and CFO believe the condensed consolidated financial statements fairly represent the financial condition, results of operations, and cash flows[153] Evaluation of Disclosure Controls and Procedures - Management concluded that disclosure controls and procedures were not effective as of October 28, 2023, due to a material weakness in internal control over financial reporting[152] Material Weakness in Internal Control Over Financial Reporting - A material weakness was identified related to the ineffective operation of certain transactional level controls for revenue contracts recognized over time[154] - The root cause was insufficient training of control operators regarding the level of precision expected when executing revenue controls[154] Remediation Plan - The remediation plan involves providing additional training to revenue control operators on the expected precision level for executing these controls[155] - Additional training for control operators was conducted during the first six months of fiscal 2024[155] Changes in Internal Control Over Financial Reporting - During the quarter ended October 28, 2023, there were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[156] Part II. Other Information Item 1. Legal Proceedings The company believes that ongoing legal actions will not materially affect its financial condition or operations - The company is a party to legal proceedings and claims arising during the normal course of business[157] - Management's opinion is that the disposition of these matters will not have a material adverse effect on the company's financial condition or results of operations[157] - Further information is available in 'Note 7. Commitments and Contingencies' of the Notes to Condensed Consolidated Financial Statements[157] Item 1A. Risk Factors This section directs readers to the company's Annual Report on Form 10-K for a comprehensive discussion of risk factors - Readers should refer to Item 1A of Part I of the Annual Report on Form 10-K for the fiscal year ended April 29, 2023, for a full description of various risks and uncertainties[158] - New risks may emerge at any time, and the company cannot predict these risks or estimate their potential effect on its financial condition or results[158] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities The company did not repurchase any shares of its common stock during the three months ended October 28, 2023 - During the three months ended October 28, 2023, the company did not repurchase any shares of its common stock[159] Item 3. Defaults Upon Senior Securities This item is marked as "Not applicable," indicating no defaults upon senior securities - This item is not applicable, indicating no defaults upon senior securities[160] Item 4. Mine Safety Disclosures This item is marked as "Not applicable," indicating no mine safety disclosures - This item is not applicable, indicating no mine safety disclosures[161] Item 5. Other Information This item is marked as "Not applicable," indicating no other information to disclose - This item is not applicable, indicating no other information to disclose[162] Item 6. Exhibits This section provides an index of exhibits filed as part of the report, including corporate and financing documents - A list of exhibits filed as part of this Report is provided, including corporate documents, financing agreements, and CEO/CFO certifications[163][165][166] - Many of the exhibits are incorporated by reference from prior SEC filings[165][166] Signatures This section contains the required signatures for the Form 10-Q, confirming its submission by authorized personnel - The report is duly signed on behalf of Daktronics, Inc. by Sheila M. Anderson, Chief Financial Officer[167] - The signature date is December 5, 2023[167]