Item 1. Financial Statements
Item 1. FINANCIAL STATEMENTS
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data) (unaudited)
October 29,
2022 April 30,
2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,431 $ 17,143
Restricted cash 712 865
Marketable securities 525 4,020
Accounts receivable, net 114,720 101,099
Inventories 167,892 134,392
Contract assets 39,330 41,687
Current maturities of long-term receivables 1,744 2,798
Prepaid expenses and other current assets 11,063 14,963
Income tax receivables 3,215 603
Total current assets 345,632 317,570
Property and equipment, net 74,271 66,765
Long-term receivables, less current maturities 734 1,490
Goodwill 7,637 7,927
Intangibles, net 1,253 1,472
Investment in affiliates and other assets 34,341 32,321
Deferred income taxes — 13,331
TOTAL ASSETS $ 463,868 $ 440,876
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 86,705 $ 76,313
Contract liabilities 90,403 90,393
Accrued expenses 38,169 34,959
Warranty obligations 11,320 11,621
Income taxes payable 455 408
Total current liabilities 227,052 213,694
Long-term warranty obligations 18,434 17,257
Long-term contract liabilities 12,303 10,998
Other long-term obligations 7,131 7,076
Line of Credit 26,418 —
Deferred income taxes — 287
Total long-term liabilities 64,286 35,618
SHAREHOLDERS' EQUITY:
Preferred Shares, no par value, authorized 50,000 shares; no shares issued and outstanding
— —
Common Stock, no par value, authorized 115,000,000 shares; 47,158,442 and 46,733,544 shares issued at October 29, 2022 and April 30, 2022, respectively
62,388 61,794
Additional paid-in capital 49,217 48,372
Retained earnings 78,298 96,608
Treasury Stock, at cost, 1,907,445 shares at October 29, 2022 and April 30, 2022, respectively
( 10,285 ) ( 10,285 )
Accumulated other comprehensive loss ( 7,088 ) ( 4,925 )
TOTAL SHAREHOLDERS' EQUITY 172,530 191,564
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 463,868 $ 440,876
See notes to condensed consolidated financial statements.
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DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
October 29,
2022 October 30,
2021 October 29,
2022 October 30,
2021
Net sales $ 187,439 $ 164,477 $ 359,359 $ 309,209
Cost of sales 155,735 132,213 301,861 244,757
Gross profit 31,704 32,264 57,498 64,452
Operating expenses:
Selling 14,525 12,482 28,958 24,277
General and administrative 8,687 8,201 18,128 15,772
Product design and development 6,966 7,196 14,405 14,358
30,178 27,879 61,491 54,407
Operating income (loss) 1,526 4,385 ( 3,993 ) 10,045
Nonoperating (expense) income:
Interest (expense) income, net ( 263 ) ( 59 ) ( 323 ) 78
Other expense, net ( 208 ) ( 952 ) ( 955 ) ( 1,820 )
Income (loss) before income taxes 1,055 3,374 ( 5,271 ) 8,303
Income tax expense 14,039 1,000 13,039 2,244
Net (loss) income $ ( 12,984 ) $ 2,374 $ ( 18,310 ) $ 6,059
Weighted average shares outstanding:
Basic 45,317 45,350 45,258 45,271
Diluted 45,317 45,499 45,258 45,490
Earnings (loss) per share:
Basic $ ( 0.29 ) $ 0.05 $ ( 0.40 ) $ 0.13
Diluted $ ( 0.29 ) $ 0.05 $ ( 0.40 ) $ 0.13
See notes to condensed consolidated financial statements.
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DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
(unaudited)
Three Months Ended Six Months Ended
October 29,
2022 October 30,
2021 October 29,
2022 October 30,
2021
Net (loss) income $ ( 12,984 ) $ 2,374 $ ( 18,310 ) $ 6,059
Other comprehensive (loss):
Cumulative translation adjustments ( 1,521 ) ( 50 ) ( 2,163 ) ( 423 )
Unrealized gain (loss) on available-for-sale securities, net of tax ( 1 ) — — —
Total other comprehensive (loss), net of tax ( 1,522 ) ( 50 ) ( 2,163 ) ( 423 )
Comprehensive (loss) income $ ( 14,506 ) $ 2,324 $ ( 20,473 ) $ 5,636
See notes to condensed consolidated financial statements.
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DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive
Loss Total
Balance as of April 30, 2022 $ 61,794 $ 48,372 $ 96,608 $ ( 10,285 ) $ ( 4,925 ) $ 191,564
Net loss — — ( 5,326 ) — — ( 5,326 )
Cumulative translation adjustments — — — — ( 642 ) ( 642 )
Unrealized gain (loss) on available-for-sale securities, net of tax — — — — 1 1
Share-based compensation — 511 — — — 511
Employee savings plan activity 594 — — — — 594
Balance as of July 30, 2022 62,388 48,883 91,282 ( 10,285 ) ( 5,566 ) 186,702
Net loss — — ( 12,984 ) — — ( 12,984 )
Cumulative translation adjustments — — — — ( 1,521 ) ( 1,521 )
Unrealized (loss) gain on available-for-sale securities, net of tax — — — — ( 1 ) ( 1 )
Share-based compensation — 474 — — — 474
Tax payments related to RSU issuances — ( 140 ) — — — ( 140 )
Balance as of October 29, 2022 $ 62,388 $ 49,217 $ 78,298 $ ( 10,285 ) $ ( 7,088 ) $ 172,530
See notes to condensed consolidated financial statements.
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DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)
(in thousands)
(unaudited)
Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive
Loss Total
Balance as of May 1, 2021 $ 60,575 $ 46,595 $ 96,016 $ ( 7,297 ) $ ( 2,335 ) $ 193,554
Net income — — 3,685 — — 3,685
Cumulative translation adjustments — — — — ( 373 ) ( 373 )
Share-based compensation — 518 — — — 518
Employee savings plan activity 597 — — — — 597
Treasury stock reissued — 4 — 196 — 200
Balance as of July 31, 2021 61,172 47,117 99,701 ( 7,101 ) ( 2,708 ) 198,181
Net income — — 2,374 — — 2,374
Cumulative translation adjustments — — — — ( 50 ) ( 50 )
Share-based compensation — 494 — — — 494
Exercise of stock options 3 — — — — 3
Tax payments related to RSU issuances — ( 199 ) — — — ( 199 )
Balance as of October 30, 2021 $ 61,175 $ 47,412 $ 102,075 $ ( 7,101 ) $ ( 2,758 ) $ 200,803
See notes to condensed consolidated financial statements .
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DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
October 29,
2022 October 30,
2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ ( 18,310 ) $ 6,059
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization 8,225 7,789
Gain on sale of property, equipment and other assets ( 412 ) ( 676 )
Share-based compensation 985 1,012
Equity in loss of affiliates 1,701 1,565
Provision for doubtful accounts, net of recovery 573 ( 588 )
Deferred income taxes, net 13,037 ( 41 )
Change in operating assets and liabilities ( 27,737 ) ( 23,654 )
Net cash (used in) operating activities ( 21,938 ) ( 8,534 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ( 16,237 ) ( 4,507 )
Proceeds from sales of property, equipment and other assets 432 760
Proceeds from sales or maturities of marketable securities 3,495 —
Purchases of equity and loans to equity investees ( 2,882 ) ( 6,129 )
Net cash (used in) investing activities ( 15,192 ) ( 9,876 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable 190,608 —
Payments on notes payable ( 164,190 ) —
Principal payments on long-term obligations — ( 200 )
Proceed from exercise of stock options — 3
Tax payments related to RSU issuances ( 140 ) ( 199 )
Net cash provided by (used in) financing activities 26,278 ( 396 )
EFFECT OF EXCHANGE RATE CHANGES ON CASH ( 13 ) 8
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH ( 10,865 ) ( 18,798 )
CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
Beginning of period 18,008 80,402
End of period $ 7,143 $ 61,604
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 337 $ —
Income taxes, net of refunds 2,471 1,270
Supplemental schedule of non-cash investing and financing activities:
Demonstration equipment transferred to inventory $ — $ 53
Purchases of property and equipment included in accounts payable 4,093 1,283
Contributions of common stock under the ESPP 594 597
See notes to condensed consolidated financial statements.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share data)
(unaudited)
Note 1. Basis of Presentation
Daktronics, Inc. and its subsidiaries (the “Company”, “Daktronics”, “we”, “our”, or “us”) are an industry leader in designing and manufacturing electronic scoreboards, programmable display systems and large screen video displays for sporting, commercial and transportation applications.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present our financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions affecting the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.
Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The balance sheet at April 30, 2022 has been derived from the audited financial statements at that date, but it does not include all the information and disclosures required by GAAP for complete financial statements. These financial statements should be read in conjunction with our financial statements and notes thereto for the fiscal year ended April 30, 2022, which are contained in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission ("SEC"). The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.
Daktronics, Inc. operates on a 52- or 53-week fiscal year, with our fiscal year ending on the Saturday closest to April 30 of each year. When April 30 falls on a Wednesday, the fiscal year ends on the preceding Saturday. Within each fiscal year, each quarter is comprised of 13-week periods following the beginning of each fiscal year. In each 53-week fiscal year, an additional week is added to the first quarter, and each of the last three quarters is comprised of a 13-week period. The six months ended October 29, 2022 and October 30, 2021 contained operating results for 26 weeks.
Cash and cash equivalents and restricted cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the totals of the same amounts shown in the condensed consolidated statements of cash flows. Restricted cash consists of cash and cash equivalents held in bank deposit accounts to secure issuances of foreign bank guarantees.
October 29,
2022 October 30,
2021
Cash and cash equivalents $ 6,431 $ 59,727
Restricted cash 712 1,877
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows $ 7,143 $ 61,604
Liquidity and Going Concern
The accompanying condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
We continue to experience volatility in our business driven by global economic conditions and supply chain disruptions. All of these conditions have caused volatility in our cash flow, pricing, order volumes, lead-times, competitiveness, revenue cycles, and production costs. We believe it is likely these conditions will continue to have negative impacts in fiscal 2023. To improve operations and cash flows, we have increased prices of our goods and services. We have also increased investment in inventory levels to add production stability. To adapt, we used cash and line of credit borrowings to source inventory to add stability to our production processes to fulfill backlog. We also continue to invest in property
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and equipment to expand our capacity and add automation. Our ability to fund inventory levels, operations and capital expenditures in the future will be dependent on our ability to generate cash flow from operations in these conditions, to maintain or improve margins, and to use funds from our credit facility. Our credit facility expires in April 2025, and it requires us to comply with certain covenants.
Although supply chain disruptions have started to ease and we expect our inventory levels to decline, we cannot be certain we will not experience future disruptions or need additional liquidity to fund inventory levels, operations, and capital expenditures. We will need additional liquidity to meet our obligations as they come due in the 12 months following the date of this Report and we cannot be assured that such liquidity will be available or the form of such liquidity, such as equity raises or debt financing. These conditions raise substantial doubt about our ability to continue as a going concern. In response to these conditions, we are pursuing additional liquidity through various means, including but not limited to obtaining financing secured by a mortgage on our facilities, a sales-leaseback transaction, leasing property and equipment, and continued focus on reducing working capital. Since these plans are not finalized and are subject to market conditions and restrictions from our existing financing agreements that are not within our control, they cannot be deemed probable. As a result, we have concluded that our plans do not alleviate substantial doubt about our ability to continue as a going concern.
Refer to Note 7 for additional considerations related to our financing agreements.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Recent Accounting Pronouncements
There have been no material changes to our significant accounting policies and estimates as described in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022.
Accounting Standards Adopted
There were no standards adopted since the last quarterly report.
Accounting Standards Not Yet Adopted
There are no significant ASUs issued that the Company has not yet adopted as of October 29, 2022.
Note 2. Investments in Affiliates
The aggregate amount of our investments accounted for under the equity method was $ 18,040 and $ 16,916 as of October 29, 2022 and April 30, 2022, respectively. Our proportional share of the respective affiliates' earnings or losses is included in the "Other expense, net" line item in our condensed consolidated statements of operations. For the three and six months ended October 29, 2022, our share of the losses of our affiliates was $ 811 and $ 1,701 as compared to $ 819 and $ 1,565 for the three and six months ended October 30, 2021. We purchased services for research and development activities from our equity method investees. The total of these related party transactions for the six months ended October 29, 2022 and October 30, 2021 was $ 672 and $ 898 , respectively, which is included in the "Product design and development" line item in our condensed consolidated statements of operations, and for the six months ended October 29, 2022, $ 52 remains unpaid and is included in the "Accounts payable" line item in our condensed consolidated balance sheets. During the six months ended October 29, 2022, we invested $ 2,882 of convertible notes ("Notes"), which are included in the "Investment in affiliates and other assets" line item in our condensed consolidated balance sheets. During the six months ended October 29, 2022, we converted $ 2,824 from Notes to stock ownership.
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Note 3. Earnings Per Share ("EPS")
The following is a reconciliation of the net (loss) income and common share amounts used in the calculation of basic and diluted EPS for the three and six months ended October 29, 2022 and October 30, 2021:
Net (loss) income Shares Per share (loss) income
For the three months ended October 29, 2022
Basic and diluted (loss) earnings per share $ ( 12,984 ) 45,317 $ ( 0.29 )
Diluted (loss) earnings per share $ ( 12,984 ) 45,317 $ ( 0.29 )
For the three months ended October 30, 2021
Basic earnings per share $ 2,374 45,350 $ 0.05
Dilution associated with stock compensation plans — 149 —
Diluted earnings per share $ 2,374 45,499 $ 0.05
For the six months ended October 29, 2022
Basic and diluted (loss) earnings per share $ ( 18,310 ) 45,258 $ ( 0.40 )
Diluted (loss) earnings per share $ ( 18,310 ) 45,258 $ ( 0.40 )
For the six months ended October 30, 2021
Basic earnings per share $ 6,059 45,271 $ 0.13
Dilution associated with stock compensation plans — 219 —
Diluted earnings per share $ 6,059 45,490 $ 0.13
Options outstanding to purchase 2,063 shares of common stock with a weighted average exercise price of $ 7.51 for the three months ended October 29, 2022 and 1,943 shares of common stock with a weighted average exercise price of $ 9.22 for the three months ended October 30, 2021 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
Options outstanding to purchase 2,082 shares of common stock with a weighted average exercise price of $ 7.82 for the six months ended October 29, 2022 and 1,877 shares of common stock with a weighted average exercise price of $ 9.37 for the six months ended October 30, 2021 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
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Note 4. Revenue Recognition
Disaggregation of revenue
The following table presents our disaggregation of revenue by segments:
Three Months Ended October 29, 2022
Commercial Live Events High School
Park and Recreation
Transportation International Total
Type of performance obligation
Unique configuration $ 5,582 $ 52,862 $ 7,856 $ 11,398 $ 6,123 $ 83,821
Limited configuration 26,768 9,675 32,975 4,542 14,285 88,245
Service and other 4,697 6,702 1,175 739 2,060 15,373
$ 37,047 $ 69,239 $ 42,006 $ 16,679 $ 22,468 $ 187,439
Timing of revenue recognition
Goods/services transferred at a point in time $ 28,078 $ 11,682 $ 31,129 $ 4,749 $ 15,019 $ 90,657
Goods/services transferred over time 8,969 57,557 10,877 11,930 7,449 96,782
$ 37,047 $ 69,239 $ 42,006 $ 16,679 $ 22,468 $ 187,439
Six Months Ended October 29, 2022
Commercial Live Events High School
Park and Recreation
Transportation International Total
Type of performance obligation
Unique configuration $ 10,269 $ 95,030 $ 14,448 $ 23,884 $ 12,624 $ 156,255
Limited configuration 58,544 18,155 61,258 10,641 25,786 174,384
Service and other 8,352 12,437 2,109 1,694 4,128 28,720
$ 77,165 $ 125,622 $ 77,815 $ 36,219 $ 42,538 $ 359,359
Timing of revenue recognition
Goods/services transferred at a point in time $ 60,635 $ 20,904 $ 58,219 $ 11,131 $ 26,895 $ 177,784
Goods/services transferred over time 16,530 104,718 19,596 25,088 15,643 181,575
$ 77,165 $ 125,622 $ 77,815 $ 36,219 $ 42,538 $ 359,359
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Three Months Ended October 30, 2021
Commercial Live Events High School
Park and Recreation
Transportation International Total
Type of performance obligation
Unique configuration $ 4,559 $ 43,528 $ 6,908 $ 8,976 $ 11,562 $ 75,533
Limited configuration 25,977 8,825 24,916 4,552 10,466 74,736
Service and other 3,927 7,043 923 525 1,790 14,208
$ 34,463 $ 59,396 $ 32,747 $ 14,053 $ 23,818 $ 164,477
Timing of revenue recognition
Goods/services transferred at a point in time $ 26,362 $ 11,508 $ 23,115 $ 4,634 $ 10,815 $ 76,434
Goods/services transferred over time 8,101 47,888 9,632 9,419 13,003 88,043
$ 34,463 $ 59,396 $ 32,747 $ 14,053 $ 23,818 $ 164,477
Six Months Ended October 30, 2021
Commercial Live Events High School
Park and Recreation
Transportation International Total
Type of performance obligation
Unique configuration $ 8,146 $ 85,036 $ 11,074 $ 15,517 $ 17,445 $ 137,218
Limited configuration 51,884 14,667 47,873 9,904 22,011 146,339
Service and other 7,214 12,080 1,694 1,190 3,474 25,652
$ 67,244 $ 111,783 $ 60,641 $ 26,611 $ 42,930 $ 309,209
Timing of revenue recognition
Goods/services transferred at a point in time $ 52,741 $ 18,337 $ 45,056 $ 10,205 $ 22,834 $ 149,173
Goods/services transferred over time 14,503 93,446 15,585 16,406 20,096 160,036
$ 67,244 $ 111,783 $ 60,641 $ 26,611 $ 42,930 $ 309,209
See "Note 5. Segment Reporting" for a disaggregation of revenue by geography.
Contract balances
Contract assets represent revenue recognized in excess of amounts billed and include unbilled receivables. Unbilled receivables, which represent an unconditional right to payment subject only to the passage of time, are reclassified to accounts receivable when they are billed according to the contract terms. Contract liabilities represent amounts billed to the customers in excess of revenue recognized to date.
The following table reflects the changes in our contract assets and liabilities:
October 29,
2022 April 30,
2022 Dollar
Change Percent
Change
Contract assets $ 39,330 $ 41,687 $ ( 2,357 ) ( 5.7 ) %
Contract liabilities - current 90,403 90,393 10 —
Contract liabilities - noncurrent 12,303 10,998 1,305 11.9
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The changes in our contract assets and contract liabilities from April 30, 2022 to October 29, 2022 were due to the timing of billing schedules and revenue recognition, which can vary significantly depending on the contractual payment terms and the seasonality of the sports markets. We had no impairments of contract assets for the six months ended October 29, 2022.
For service-type warranty contracts, we allocate revenue to this performance obligation, recognize the revenue over time, and recognize costs as incurred. Earned and unearned revenues for these contracts are included in the "Contract assets" and "Contract liabilities". Changes in unearned service-type warranty contracts, net were as follows:
October 29,
2022
Balance at beginning of period $ 26,346
New contracts sold 25,860
Less: reductions for revenue recognized ( 21,381 )
Foreign currency translation and other ( 270 )
Balance at end of period $ 30,555
Contracts in progress identified as loss contracts as of October 29, 2022 were $ 482 and as of April 30, 2022 were immaterial. Loss provisions are recorded in the "Accrued expenses" line item in our condensed consolidated balance sheets.
During the six months ended October 29, 2022, we recognized revenue of $ 65,533 related to our contract liabilities as of April 30, 2022.
Remaining performance obligations
As of October 29, 2022, the aggregate amount of the transaction price allocated to the remaining performance obligations was $ 524,251 . Remaining performance obligations related to product and service agreements at October 29, 2022 were $ 463,084 and $ 61,167 , respectively. We expect approximately $ 467,498 of our remaining performance obligations to be recognized over the next 12 months, with the remainder recognized thereafter. Although remaining performance obligations reflect business that is considered to be legally binding, cancellations, deferrals or scope adjustments may occur. Any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations, and project deferrals are reflected or excluded in the remaining performance obligation balance, as appropriate.
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Note 5. Segment Reporting
The following table sets forth certain financial information for each of our five reporting segments for the periods indicated:
Three Months Ended Six Months Ended
October 29,
2022 October 30,
2021 October 29,
2022 October 30,
2021
Net sales:
Commercial $ 37,047 $ 34,463 $ 77,165 $ 67,244
Live Events 69,239 59,396 125,622 111,783
High School Park and Recreation 42,006 32,747 77,815 60,641
Transportation 16,679 14,053 36,219 26,611
International 22,468 23,818 42,538 42,930
187,439 164,477 359,359 309,209
Gross profit:
Commercial 6,197 7,445 11,018 14,623
Live Events 7,983 5,585 11,769 14,167
High School Park and Recreation 11,811 10,749 21,788 20,258
Transportation 4,084 4,404 9,922 8,155
International 1,629 4,081 3,001 7,249
31,704 32,264 57,498 64,452
Operating expenses:
Selling 14,525 12,482 28,958 24,277
General and administrative 8,687 8,201 18,128 15,772
Product design and development 6,966 7,196 14,405 14,358
30,178 27,879 61,491 54,407
Operating income (loss) 1,526 4,385 ( 3,993 ) 10,045
Nonoperating (expense) income:
Interest (expense) income, net ( 263 ) ( 59 ) ( 323 ) 78
Other expense, net ( 208 ) ( 952 ) ( 955 ) ( 1,820 )
Income (loss) before income taxes $ 1,055 $ 3,374 $ ( 5,271 ) $ 8,303
Depreciation and amortization:
Commercial $ 834 $ 601 $ 1,637 $ 1,303
Live Events 1,627 1,248 3,193 2,585
High School Park and Recreation 383 340 722 778
Transportation 128 127 253 266
International 566 752 1,111 1,478
Unallocated corporate depreciation 662 669 1,309 1,379
$ 4,200 $ 3,737 $ 8,225 $ 7,789
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No single geographic area comprises a material amount of our net sales or property and equipment, net of accumulated depreciation, other than the United States. The following table presents information about net sales and property and equipment, net of accumulated depreciation, in the United States and elsewhere:
Three Months Ended Six Months Ended
October 29,
2022 October 30,
2021 October 29,
2022 October 30,
2021
Net sales:
United States $ 163,142 $ 138,821 $ 312,580 $ 262,303
Outside United States 24,297 25,656 46,779 46,906
$ 187,439 $ 164,477 $ 359,359 $ 309,209
October 29,
2022 April 30,
2022
Property and equipment, net of accumulated depreciation:
United States $ 66,150 $ 58,643
Outside United States 8,121 8,122
$ 74,271 $ 66,765
We have numerous customers worldwide for sales of our products and services, and no customer accounted for 10 percent or more of net sales for the three and six months ended October 29, 2022 and October 30, 2021; therefore, we are not economically dependent on a limited number of customers for the sale of our products and services.
We have numerous raw material and component suppliers, and no supplier accounts for 10 percent or more of our cost of sales; however, we have a complex global supply chain subject to geopolitical and transportation risks and a number of single-source suppliers that could limit our supply or cause delays in obtaining raw materials and components needed in manufacturing.
Note 6. Goodwill
The changes in the carrying amount of goodwill related to each reportable segment for the six months ended October 29, 2022 were as follows:
Live Events Commercial Transportation International Total
Balance as of April 30, 2022 $ 2,296 $ 3,349 $ 68 $ 2,214 $ 7,927
Foreign currency translation ( 20 ) ( 146 ) ( 20 ) ( 104 ) ( 290 )
Balance as of October 29, 2022 $ 2,276 $ 3,203 $ 48 $ 2,110 $ 7,637
We perform an analysis of goodwill on an annual basis and test for impairment more frequently if events or changes in circumstances indicate that an asset might be impaired. Our annual analysis is performed during our third quarter of each fiscal year based on the goodwill amount as of the first business day of our third fiscal quarter. We performed our annual impairment test on October 31, 2021 and concluded no goodwill impairment existed. Our market capitalization has decreased since the completion of the October 31, 2021 evaluation which caused a trigger analysis to test goodwill impairment due to supply chain and labor supply uncertainty. After evaluating our results, events and circumstances, we determined no goodwill impairment was necessary.
Note 7. Financing Agreements
As of October 29, 2022, $ 26,418 had been advanced under the loan portion of our line of credit, and the balance of letters of credit outstanding was approximately $ 6,917 . As of October 29, 2022, $ 11,665 of the credit facility was available for borrowing. On October 31, 2022, we entered into an agreement to temporarily expand the line of credit by $ 10,000 through January 31, 2023. As of October 29, 2022, we were in compliance with our financial covenants. On December 9, 2022, we entered into the sixth amendment to our credit agreement. The Amendment clarifies certain definitions related to the
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deferred tax asset valuation allowance and adds additional financial reporting requirements and negative covenants. It also requires Daktronics to obtain the current lender’s approval of any additional indebtedness and receive an audit report on our fiscal 2023 financial statements that does not express substantial doubt about the Company’s ability to continue as a going concern.
As of October 29, 2022, we had $ 616 of bank guarantees or other financial instruments for display installations issued by another bank and secured by a restricted cash deposit. If we are unable to meet the terms of the arrangement, the bank would subrogate its loss by drawing on the secured cash deposit.
Note 8. Commitments and Contingencies
Litigation: We are a party to legal proceedings and claims which arise during the ordinary course of business. We review our legal proceedings and claims, regulatory reviews and inspections, and other legal matters on an ongoing basis and follow appropriate accounting guidance when making accrual and disclosure decisions. For unresolved legal proceedings or claims, we do not believe there is a reasonable probability that any material loss will be incurred. Accordingly, no material accrual or disclosure of a potential range of loss has been made related to these matters. We do not expect the ultimate liability of these unresolved legal proceedings or claims to have a material effect on our financial position, liquidity or capital resources.
Warranties: Changes in our warranty obligation for the six months ended October 29, 2022 consisted of the following:
October 29,
2022
Beginning accrued warranty obligations $ 28,878
Warranties issued during the period 5,951
Settlements made during the period ( 3,923 )
Changes in accrued warranty obligations for pre-existing warranties during the period, including expirations ( 1,152 )
Ending accrued warranty obligations $ 29,754
Performance guarantees: We have entered into standby letters of credit, bank guarantees and surety bonds with financial institutions relating to the guarantee of our future performance on contracts, primarily construction-type contracts. As of October 29, 2022, we had outstanding letters of credit, bank guarantees and surety bonds in the amount of $ 6,917 , $ 616 and $ 72,777 , respectively. Performance guarantees are issued to certain customers to guarantee the operation and installation of the equipment and our ability to complete a contract. These performance guarantees have various terms but are generally one year. We enter into written agreements with our customers, and those agreements often contain indemnification provisions that require us to make the customer whole if certain acts or omissions by us cause the customer financial loss. We make efforts to negotiate reasonable caps and limitations on the recovery of such damages. As of October 29, 2022, we were not aware of any indemnification claim from a customer.
Note 9. Income Taxes
The provision for income taxes during interim reporting periods is calculated by applying an estimate of the annual effective tax rate. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income (or loss) for the year, projections of the proportion of income (or loss) earned and taxed in foreign jurisdictions, and permanent and temporary differences and the likelihood of recovering deferred tax assets, then adjusted for any discrete items. The accounting estimates used to compute the provision for income taxes may change as new events occur, assumptions change, or additional information is obtained.
Under GAAP we are required to evaluate the recoverability of our deferred tax assets and establish a valuation allowance if necessary to reduce our deferred tax assets to an amount that is more likely than not to be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of such allowances. We establish or adjust valuation allowances for deferred tax assets when we estimate that it is more likely than not that we will be able to realize the value of the deferred tax assets. We evaluate all significant available positive and negative evidence as part of our analysis, including our past operating results, tax planning strategies, current and cumulative losses, and forecasts of future taxable income. The underlying assumptions we use in forecasting future taxable income requires
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significant judgment and takes into account our recent performance. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences are deductible or creditable. If actual experience differs from these estimates and assumptions, the recognized deferred tax asset value may not be fully realized, resulting in an increase to income tax expense in our results of operations. Due to various factors, including our estimated of annual income, our effective tax rate is subject to fluctuation.
Our effective tax rate for the three and six months ended October 29, 2022 was a tax rate of 1330.7 and a tax rate of ( 247.3 ) percent, as compared to an effective tax rate of 29.6 and 27.0 percent tax for the three and six months ended October 30, 2021. The increase in tax rate is primarily driven by 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 related information. See "Note 1. Basis of Presentation - Liquidity and Going Concern" of the Notes to our Condensed Consolidated Financial Statements included in this Report.
If, in the future, we determine we can support the recoverability of all or a portion of the deferred tax assets under the guidance, the tax benefits relating to any reversal of the valuation allowance on net deferred tax assets will be accounted for as a reduction of income tax expense and result in an increase in equity. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future.
We operate both domestically and internationally and, as of October 29, 2022, undistributed earnings of our foreign subsidiaries were considered to be reinvested indefinitely. Additionally, as of October 29, 2022, we had $ 593 of unrecognized tax benefits which would reduce our effective tax rate if recognized.
Note 10. Fair Value Measurement
The following table sets forth by Level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at October 29, 2022 and April 30, 2022 according to the valuation techniques we used to determine their fair values. There have been no transfers of assets or liabilities among the fair value hierarchies presented.
Fair Value Measurements
Level 1 Level 2 Level 3 Total
Balance as of October 29, 2022
Cash and cash equivalents $ 6,431 $ — $ — $ 6,431
Restricted cash 712 — — 712
Available-for-sale securities:
US Government securities — — — —
US Government sponsored entities — 525 — 525
Derivatives - asset position — 1,175 — 1,175
$ 7,143 $ 1,700 $ — $ 8,843
Balance as of April 30, 2022
Cash and cash equivalents $ 17,143 $ — $ — $ 17,143
Restricted cash 865 — — 865
Available-for-sale securities:
US Government securities 3,486 — — 3,486
US Government sponsored entities — 534 — 534
Derivatives - asset position — 934 — 934
Derivatives - liability position — ( 311 ) — ( 311 )
$ 21,494 $ 1,157 $ — $ 22,651
There have been no changes in the valuation techniques used by us to value our financial instruments since the end of fiscal 2022. For additional information, see our Annual Report on Form 10-K for the fiscal year ended April 30, 2022 for the methods and assumptions used to estimate the fair value of each class of financial instrument.
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Note 11. Subsequent Events
On December 9, 2022, we entered into the sixth amendment to our credit agreement as described in Note 7. T here were no other material subsequent events.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.