What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-07-12 compared with 2022-06-16 · 133 added, 129 removed, 204 unchanged (56% of the section changed)

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Management's Discussion and Analysis - Fiscal 2022 compared to Fiscal 2021

The comparison of fiscal 2021 with fiscal 2020, including the results of operations and liquidity, can be found in the "Management's Discussion and Analysis" section of our Annual Report on Form 10-K for fiscal 2021, which comparison is incorporated by reference herein.

The comparison of fiscal 2022 with fiscal 2021, including the results of operations and liquidity, can be found in the "Management's Discussion and Analysis" section of our Annual Report on Form 10-K for fiscal 2022 filed with the SEC on June 16, 2022, which comparison is incorporated by reference herein.

EXECUTIVE OVERVIEW

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Certain factors impact our ability to succeed in these strategies and impact our business units to varying degrees.

For example, the overall manufacturing costs and the selling prices of our products impact profitability.

Due to volatility in our supply chain and labor conditions, our manufacturing costs and selling prices of our products have increased during the 2022 fiscal year and may continue to increase for some time into the future.

Our competitors outside the U.S.

are impacted differently by the global trade environment allowing them to avoid tariff costs and have access to parts supplies and lower costs of doing business, which may allow them to maintain lower prices or reduce prices.

As a result, additional competitors have entered the market, and each year we must sell more product to generate the same or greater level of net sales as in previous fiscal years.

However, the decline of digital solution pricing over the years and increased user adoption and applications have increased the size of the global market.

For example, due to volatility in our supply chain and labor conditions through the last two years, our lead times and manufacturing and fulfillment costs increased.

We deployed various pricing strategies and redesigned products to utilize available raw materials and components.

However, not all of our competitors were impacted to the same degree in accessibility to parts and components or reacted similarly with pricing.

As a result, in some instances, competitors were awarded more business.

The cost to produce digital solutions has declined, which has caused a decline of digital solution pricing over the years.

We must sell more products to generate the same or a greater level of net sales as in previous fiscal years.

However, the increased user adoption and number of applications available have increased the size of the global market.

Competitors' offerings, actions and reactions also can vary and change over time or in certain customer situations.

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The effects of an adverse economy are generally less severe on our sports related business as compared to our other businesses, although in severe economic downturns with social changes causing decreases in sporting event revenues, the sports business can also be seriously impacted.

Impacts to and changes in global economic conditions are expected as the world economies recover from and react to the COVID-19 pandemic, adjust to changing supply chain conditions and disruptions, and react to the evolving war and geopolitical environment.

Supply chain disruptions continue as a result of several factors, including the pandemic lockdowns, shipping container shortages, labor shortages, war and other conflicts, and changes in global demand.

We are specifically impacted by the global shortage of semiconductors and related electronic components.

Our production schedules were disrupted because of supply shortages, and we experienced increased input costs in many areas including material, commodity, freight, and tariff costs.

Personnel spend also increased throughout the 2022 fiscal year.

We have responded to input cost increases by increasing pricing, and we began quoting at the new price levels across the business areas in the third quarter of fiscal 2022.

Certain areas will see additional increases at the beginning of fiscal 2023.

We also use pricing policies and opportunity evaluations across markets to manage price levels.

We will continue to monitor our supply chains and our marketplaces and adapt our pricing methodologies as we see appropriate.

Although we cannot predict the length or severity of these conditions, we expect continued disruptions in obtaining material, commodities, labor, and freight availability and an increase in inflation.

We also expect impacts to the global economic conditions in reaction to the evolving war and geopolitical environment.

Due to longer planning horizons and volatility in supply chains, we plan to carry higher quantities of inventory and anticipate changes in the timing of payments from our customers as we work through different disruptions and fulfill our backlog, all likely creating a consumption of cash.

We are also planning additional cash use for capital spending to grow our manufacturing capacity.

All of these conditions have and will continue to cause volatility in our cash flow, pricing, order volumes, lead-times, competitiveness, revenue cycles, and production costs, and it is likely these conditions will have some negative impact in fiscal 2023.

However, the full impact to our financial condition, results of operations and cash flows cannot be determined at this time.

In addition to the COVID-19 and supply chain impacts described above, the outlook and unique key growth drivers and challenges by our business units include the following:

Daktronics endured a dynamic operating environment through the pandemic years.

At the beginning of the pandemic, orders pulled back swiftly and abruptly, and we lowered capacity.

Then order volumes recovered sharply while supply chain disruptions coupled with a tight labor market constrained our ability to deliver efficiently at traditional lead times and service levels.

Inflation in parts, components, and labor increased our operating costs and decreased gross margins.

To adapt to these conditions, our teams came together to take decisive and deliberate actions to improve our customers' experience while implementing strategies to improve our profitability and working capital levels.

Supply chains have gradually been stabilizing, which should allow reduced inventory levels in the coming months as our production levels continue to increase and we are able to purchase less safety stock.

Although the post-pandemic

geopolitical situation and global trade patterns continue to evolve, we believe that the levels of uncertainty and volatility will not be as great in the coming months and will continue to stabilize in the coming fiscal year.

We believe the audiovisual industry fundamentals and the development of new technologies and services will drive long-term growth for our business;

however, our customers may reduce their spend on audiovisual systems and related services because of the impacts of global economic conditions, war and geopolitical situations, or other factors outside of our control.

The outlook and unique key growth drivers and challenges by our business units include the following:

Commercial Business Unit:

Our customers who rely on advertising revenues for Out-of-Home ("OOH") advertising or who rely on customer foot-traffic to drive sales are beginning to increase their capital spending through the COVID-19 economic recovery.

Businesses using our displays for self-promotion or on-premise advertising may have reduced budgets for the foreseeable future or choose to utilize displays as part of their recovery, both actions creating an impact to the Commercial near-term outlook.

Over the long-term, we believe growth in the Commercial business unit will result from a number of factors, including:

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• Increasing use of LED technologies replacing signage previously using LCD technology by existing and new customers.

• Development and marketing alternative low-power and sustainable solutions for installations in power constrained areas or for customers desiring these types of products.

• Increasing interest in spectaculars, which include very large and sometimes highly customized displays as part of entertainment venues such as casinos, shopping centers, cruise ships and Times Square type locations.

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Live Events Business Unit:

During fiscal year 2022, as the restrictions on gathering started to decrease, more customers chose to invest or upgrade current audiovisual systems in their locations.

Some live events customers took advantage of the downtime during the COVID-19 pandemic to build new or renovate existing arenas and sport stadiums.

This created large orders being booked during fiscal year 2022 that are expected to be recognized as sales in future fiscal years.

Over the long-term, we believe growth in the Live Events business unit will result from a number of factors, including:

We believe growth in the Live Events business unit will result from a number of factors, including:

• Facilities spending more on larger display systems to enhance the game-day and event experience for attendees.

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High School Park and Recreation Business Unit:

In the near-term, our customers are upgrading their equipment as the pandemic eases and advertising revenue is available.

Over the long-term, we believe growth in the High School Park and Recreation business unit will result from a number of factors, including:

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• Increasing applications and acceptance of electronic displays to manage transportation systems, including roadway, airport, parking, transit and other applications.

• Development and marketing alternative low-power and sustainable solutions for installations in power constrained areas or for customers desiring these types of products.

• Effective use of the United States transportation infrastructure requires intelligent transportation systems.

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International Business Unit:

As most restrictions on gathering are reduced across geographies, more customers are choosing to invest in their digital needs.

Over the long-term, we believe growth in the International business unit will result from a number of factors, including:

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• Additional opportunities exist with expanded market usage of LED technology due to price considerations, usage of LED technology replacing prior LCD installations and additional display offerings using micro-LEDs.

• Development and marketing alternative low-power and sustainable solutions for installations in power constrained areas or for customers desiring these types of products.

• Our product and service offerings, including additional micro-LED offerings, which remain the most integrated and comprehensive offerings in the industry.

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A critical accounting policy is defined as a policy that is both very important to the portrayal of a company's financial condition and results and requires management's most difficult, subjective or complex judgments.

We regularly review our critical accounting policies and evaluate them based on these factors.

We regularly review our

critical accounting policies and evaluate them based on these factors.

We believe the estimation process for uniquely configured contracts and warranties are most material and critical.

These areas contain estimates with a reasonable

likelihood to change, and those changes could have a material impact on our financial condition and reported results of operations.

These areas contain estimates with a reasonable likelihood to change, and those changes could have a material impact on our financial condition and reported results of operations.

The estimation processes for these areas are also difficult, subjective and use complex judgments.

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Revenue recognition on uniquely configured contracts.

Revenue for uniquely configured (custom) or integrated systems is recognized over time using the cost incurred input method.

Over time revenue recognition is appropriate because we have no alternative use for the uniquely configured system and have an enforceable right to payment for work performed.

The cost incurred input method measures cost incurred to date compared to estimated total costs for each contract.

Revenue for uniquely configured (custom) or integrated systems is recognized over time using the cost-to-cost input method by comparing cumulative costs incurred to the total estimated costs and applying that percentage of completion to the transaction price to recognize revenue.

Over time revenue recognition is appropriate because we have no alternative use for the uniquely configured system and have an enforceable right to payment for work performed, including a reasonable profit margin.

The cost-to-cost input method measures cost incurred to date compared to estimated total costs for each contract.

This method is the most faithful depiction of our performance because it measures the value of the contract transferred to the customer.

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Although prior estimates have been materially correct, estimates for warranty liabilities can change based on actual versus estimated defect rates over the lifetime of the warranty coverage, a difference in actual to estimated costs to conduct repairs for the components and related labor needed, and other site related actual to estimated cost changes.

As of April 30, 2022 and May 1, 2021, we had approximately $28.9 million and $26.0 million accrued for these warranty obligations, respectively.

As of April 29, 2023 and April 30, 2022, we had approximately $32.5 million and $28.9 million accrued for these warranty obligations, respectively.

Due to the difficulty in estimating probable costs related to certain warranty obligations, there is a reasonable likelihood that the ultimate remaining costs to remediate the warranty claims could differ materially from the recorded accrued liabilities.

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In each 53-week 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 following table shows information regarding net sales for the fiscal years ended April 30, 2022 and May 1, 2021:

(in thousands) April 30, 2022 May 1, 2021 Dollar Change Percent Change

The following table shows information regarding net sales for the fiscal years ended April 29, 2023 and April 30, 2022:

(in thousands) April 29, 2023 April 30, 2022 Dollar Change Percent Change

Commercial $ 170,590 $ 154,211 $ 16,379 10.6 %

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Fiscal Year 2023 as compared to Fiscal Year 2022

During fiscal year 2022, sales and orders increased, as demand was up across all markets compared to fiscal 2021 as the world economies recovered from the economic downturn caused by the COVID-19 pandemic.

We reached record order levels because of the recovery, multi-million dollar orders for sport facilities, and bulk orders for OOH displays.

These orders are in the Live Events, Commercial, and International business segments.

Net sales during fiscal year 2022 increased due to the conversion of the higher order volume.

Throughout the year however, material supply and labor shortages created an increase in lead times, extending the timing of converting some orders to sales.

The increase in net sales for fiscal 2022 compared to fiscal 2021 was primarily due to an increase in OOH niche and spectaculars orders.

Fiscal 2021 had an overall low market activity in these two particular niches due to the pandemic, and their recovery was strong.

The increase in orders for fiscal 2022 compared to fiscal 2021 was primarily due to overall higher market activity in all commercial niches.

We continue to see increased adoption of video solutions in our Commercial business unit marketplace.

For fiscal year 2023, net sales were $754.2 million, an increase of $143.2 million from fiscal year 2022.

The year-over-year growth was driven by fulfilling orders in backlog and continued order bookings.

Sales growth was driven by strong market demand, increased capacity, and realization of price increases implemented beginning in late fiscal year 2022.

We have seen stabilizing and improving supply chain conditions and have invested in automated machinery and equipment and in labor capacity to increase the rate of conversion of orders into sales, creating more throughput in our factories.

Order volume decreased in fiscal year 2023 from fiscal year 2022.

Fiscal 2022 saw a record number of orders from pent-up demand after COVID, though orders for fiscal 2023 continued to be strong.

Macroeconomic and geopolitical conditions caused the decline in orders in the International business unit.

Due to a number of factors, such as the discretionary nature of customers committing to a system, long replacement cycles, the limited number of large custom projects and competitive factors, advertising revenues during macroeconomic changes, economic dependencies, regulatory environments, and competitive factors, it is difficult to predict orders and net sales for fiscal 2024.

The increase in net sales for fiscal 2023 compared to fiscal 2022 was driven by fulfilling orders in backlog and continued order bookings.

We continued to see increased adoption of video solutions in our Commercial business unit marketplace.

Depending on the duration of the current economic conditions, we see opportunities for orders and sales over the coming years in our OOH, on-premise, and spectacular focused niches due to replacement cycles, expansion of dynamic messaging systems usage, releases of new solutions, additional distribution methods, and increased market size due to the decline of digital pricing over the years as well as the desire for higher resolution technology.

Due to a number of factors, such as the discretionary nature of customers committing to a system, economic dependencies, regulatory environments, competitive factors, and supply chain constraints, it is difficult to predict orders and net sales for fiscal 2023.

We expect growth in the Commercial business unit over the long-term, assuming favorable economic conditions and our success in counteracting competitive pressures.

Live Events :

The increase in net sales and orders for fiscal 2022 compared to fiscal 2021 was primarily due to high demand for upgraded or new solutions for arenas, university venues, and sports stadiums.

This increase was due to the economic recovery from the COVID-19 pandemic, several large projects including in the bowl and other immersive displays through

the sports facilities, and replacement orders due to systems' ages.

Bookings of large multi-million dollar projects also contributed to the order increases and a record order year for Live Events.

The increase in net sales for fiscal 2023 compared to fiscal 2022 was driven by fulfilling orders in backlog and continued order bookings.

Sales growth was driven by strong market demand, increased capacity, and realization of price increases implemented beginning in late fiscal year 2022.

We continue to see ongoing interest from venues at all levels in increasing the size and capabilities of their display systems and in the usage of dynamic messaging systems throughout their facilities in our Live Events business unit marketplace.

A number of factors, such as the discretionary nature of customers committing to upgrade systems, long replacement cycles, the limited number of large custom projects, competitive factors, and the uncertainty of the overall impact of supply chain constraints, make forecasting fiscal 2023 orders and net sales difficult.

We expect this business unit's size to remain stable over the long-term, assuming favorable economic condition, and success in maintaining market share by counteracting competitive pressures.

We expect this business unit's size to remain stable over the long-term, assuming favorable economic conditions, and success in maintaining market share by counteracting competitive pressures.

High School Park and Recreation :

The increase in net sales and orders for fiscal 2022 compared to fiscal 2021 was primarily due to higher market activity as schools are upgrading to video equipment systems and have COVID-19 related funding to invest in their facilities.

We expect larger video systems and our classic scoring and message centers to remain in demand in fiscal 2023, primarily in high school facilities, which benefit from our sports marketing services that generate advertising revenue to fund the display systems and because of schools' desire to communicate with students and parents using these systems.

Some growth is also expected for regulatory requirements of certain display types for sports events.

Several factors, such as the potential reduction in the availability of advertising revenues, the discretionary nature of customers committing to upgrade systems, replacement cycles, competitive factors, and the uncertainty of the overall impact of supply chain constraints, make forecasting fiscal 2023 orders and net sales difficult.

The increase in net sales for fiscal 2023 compared to fiscal 2022 was driven by fulfilling orders in backlog and strong market demand, increased capacity, and realization of price increases implemented beginning in late fiscal year 2022.

We expect sales to continue to grow in fiscal year 2024 because of the adoption of video displays for sporting and educational use.

Trends towards deploying professional grade technology, especially in high schools, has expanded the market size.

These facilities benefit from our sports marketing services that generate advertising revenue to fund the display systems, from our curriculum program designed to increase educational use, and because of schools' desire to communicate with students and parents using these systems.

Some growth is also expected because of regulatory requirements for certain display types for sports events.

We expect growth in this business unit over the long-term, assuming favorable economic conditions.

Transportation :

The increase in net sales and orders for fiscal 2022 compared to fiscal 2021 was primarily due to pent up demand from fiscal 2021 for Intelligent Transportation Systems ("ITS") which had been delayed due to the COVID-19 pandemic.

Several factors, such as transportation funding, the competitive environment, customer delivery changes, and the uncertainty of the impacts of supply chain constraints, make forecasting orders and net sales difficult for fiscal 2023.

The increase in net sales for fiscal 2023 compared to fiscal 2022 was driven by fulfilling orders in backlog and continued order bookings.

Sales growth was driven by strong market demand, increased capacity, and realization of price increases implemented in late fiscal year 2022 and the beginning of fiscal year 2023.

Several factors, such as transportation funding, the competitive environment, and customer delivery changes, make forecasting orders and net sales difficult for fiscal 2024.

However, the stability of long-term federal transportation funding and the number of capital projects for highways and public transit that include dynamic message signs and for advertising and wayfinding use in public transport and airport terminals continue to rise.

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International :

The increase in net sales and orders for fiscal 2022 compared to fiscal 2021 was primarily due to the economic recovery from the COVID-19 pandemic in OOH, transportation, and sport stadium projects.

Net sales were relatively flat for fiscal 2023 compared to fiscal 2022.

We expect demand for larger video systems for commercial and sports applications, indoor and outdoor OOH applications, and transportation applications to remain strong over the long-term.

Macroeconomic factors, the discretionary nature of customers committing to new systems or replacements, the pace of market growth, and the uncertainty of the impacts of the supply chain constraints, may impact order bookings and timing, making it difficult to predict order and sales levels for fiscal 2023.

Macroeconomic factors, the discretionary nature of customers committing to new systems or replacements, and the pace of market growth, have impacted order bookings and timing, making it difficult to predict order and sales levels for fiscal 2024.

For the long-term, we believe the International business unit has the potential for sales growth as we penetrate markets with our established sales networks to increase our International market share, continue to enhance our tailored portfolio of product and control solution offerings, invest in additional distribution methods, and expect the trend of increased use and adoption of our technology globally to continue.

Gross Profit and Contribution Margin

April 30, 2022 May 1, 2021

April 29, 2023 April 30, 2022

(in thousands) Amount As a Percent of Net Sales Amount As a Percent of Net Sales

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Fiscal Year 2023 as compared to Fiscal Year 2022

The decline in gross profit percentage in fiscal 2022 is primarily related to the ongoing supply chain disruptions and inflationary challenges in materials, freight, tariff, and personnel related costs;

the difference in sales mix between periods;

other factors experienced during fiscal 2021 which had a positive impact on fiscal 2021 margins;

and an increase in warranty expense in fiscal 2022.

The increase in gross profit percentage in fiscal 2023 was primarily due to strategic pricing actions implemented in late fiscal year 2022 and the beginning of fiscal year 2023 and increased productivity starting late in the second quarter of fiscal

2023 because of fewer supply chain and operational disruptions and investments in capacity.

These improvements were offset by higher material, component, freight and labor costs throughout fiscal 2023.

Factors impacting gross profit in fiscal 2022 included ongoing supply chain disruptions and inflationary challenges in materials, freight and personnel related costs, the difference in sales mix between periods, and increases in warranty reserves for inflation.

Total warranty expense as a percent of sales increased to 2.1 percent for fiscal 2023 as compared to 1.9 percent during fiscal 2022.

Factors impacting the gross profit in fiscal 2021 included the positive $2.1 million litigation claim reversal in the High School Park and Recreation business unit and $1.8 million of COVID relief governmental subsidies offset by $2.8 million of severance costs to reduce our workforce to adjust to the impacts of the COVID-19 pandemic.

In addition, we earned a higher rate of gross profit on our service agreements in fiscal 2021 due to reduced stand ready services conducted during the year because of the pandemic.

During fiscal year 2022, we had more large project sales which generally have lower gross profit because of their competitive nature.

It is difficult to project gross profit levels for fiscal 2023 because of the uncertainty regarding the level of sales, the sales mix, price strategy and timing of sales generation, the COVID-19 impact, potential inflation and the availability of materials, labor, and freight, and the competitive factors in our business.

It is difficult to project gross profit levels for fiscal 2024 because of the uncertainty regarding the level of sales, the sales mix, price strategy and timing of sales generation, potential inflation, the availability of materials, labor, and freight, and the competitive factors in our business.

We are focused on improving our gross profit margins as we execute our strategies for improved profitability, which include selectively increasing pricing, releasing new product designs to lower overall costs of the product;

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and continued improvements in operational effectiveness in manufacturing, installation, and service delivery areas.

Cost reductions made during the pandemic vary in permanency and may not be sustainable in future periods as orders and sales volumes recover.

April 30, 2022 May 1, 2021

April 29, 2023 April 30, 2022

(in thousands) Amount As a Percent of Net Sales Dollar Change Percent Change Amount As a Percent of Net Sales

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Contribution margin is a non-GAAP measure and consists of gross profit less selling expenses.

Selling expenses consist primarily of personnel related costs, travel and entertainment expenses, marketing related expenses (show rooms, product demonstration, depreciation and maintenance, conventions and trade show expenses), customer relationship management/marketing systems, bad debt expenses, third-party commissions, and other expenses.

Contribution margin in fiscal 2022 was impacted by the previously discussed sales levels and impacts on gross profit, as well as a 5.0% increase in selling expenses in fiscal 2022 compared to fiscal 2021.

Since the beginning of fiscal 2022, we have adjusted our sales and marketing activities and staffing levels to achieve current and expected future sales levels.

During fiscal 2021, we had lowered overall staffing and furloughed employees to achieve lower operating costs to align with the uncertainties created by the COVID-19 pandemic.

These fiscal 2021 savings were partially offset by a $1.4 million increase in bad debt expenses.

Reconciliation from non-GAAP contribution margin to operating income (loss) GAAP measure is as follows:

April 30, 2022 May 1, 2021

Selling expenses consist primarily of personnel related costs, travel and entertainment expenses, marketing related expenses (show rooms, product demonstration, depreciation and maintenance, conventions and trade show expenses), the cost of customer relationship management/marketing systems, bad debt expenses, third-party commissions, and other expenses.

Contribution margin in fiscal 2023 was positively impacted by the previously discussed sales levels and impacts on gross profit.

We have adjusted our sales and marketing activities and staffing levels to achieve current and expected future sales levels.

Reconciliation from non-GAAP contribution margin to operating income GAAP measure is as follows:

April 29, 2023 April 30, 2022

(in thousands) Amount As a Percent of Net Sales Dollar Change Percent Change Amount As a Percent of Net Sales

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Product design and development 29,989 4.0 976 3.4 29,013 4.7

Goodwill Impairment 4,576 0.6 4,576 — — —

Operating income $ 21,388 2.8 % $ 17,342 428.6 % $ 4,046 0.7 %

Fiscal Year 2023 as compared to Fiscal Year 2022

General and administrative expenses for fiscal 2022 increased as compared to the same period one year ago primarily due to increases in personnel related expenses.

We expect general and administrative expenses to increase for fiscal 2023 as compared to fiscal 2022 as labor rates continue to rise and further increase in personnel may be needed to keep up with the increased demand.

General and administrative expenses for fiscal 2023 increased as compared to the same period one year ago due to compensation and staffing, marketing expenses, other expense growth, and approximately $4.5 million of discrete professional fees related to the going concern and internal control consultation and shareholder engagement fees.

Our costs for product design and development represent an allocated amount of costs based on time charges, professional services, material costs and the overhead of our engineering departments.

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Product design and development expenses in fiscal 2023 increased as compared to fiscal 2022 primarily due to an increase in personnel related expenses.

We expect product design and development expenses to increase for fiscal 2023 as compared to fiscal 2022 due to continued increases in labor costs.

We will continue to actively invest in new technologies.

We expect general and administrative and product design and development expenses to increase for fiscal 2024 as compared to fiscal 2023 due to continued increases in labor costs and for planned investments in digital transformation initiatives and to enhance and develop existing and new product technologies.

Other Income and Expenses

April 30, 2022 May 1, 2021

April 29, 2023 April 30, 2022

(in thousands) Amount As a Percent of Net Sales Dollar Change Percent Change Amount As a Percent of Net Sales

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Fiscal Year 2023 as compared to Fiscal Year 2022

The change in interest (expense) income, net for fiscal 2022 as compared to fiscal 2021 was primarily due to the change in investment levels and interest expense for our drawings on the line of credit.

The change in interest income and expense, net for fiscal 2023 as compared to fiscal 2022 was primarily due to utilizing our previous bank line of credit during fiscal 2023 for our strategic investments in inventory.

Other expense, net:

The change in other income and expense, net for fiscal 2022 as compared to fiscal 2021 , was primarily due to a $0.6 million increase in losses from affiliates accounted for under the equity method of accounting.

Our effective tax rate was approximately 46.6 percent for fiscal year 2022.

The effective income tax rate for fiscal 2022 was impacted due to tax benefits from permanent tax credits offset by valuation allowances as well as other various permanent tax adjustments and state taxes with additional expense for prior year provision to return adjustments.

Our fiscal 2021 effective tax rate was approximately 22.3 percent resulting from the tax benefit of permanent tax credits and previous year provision to return adjustments offset by valuation allowances as well as other various permanent tax adjustments and state taxes.

The change in other expense, net for fiscal 2023 as compared to fiscal 2022 was primarily due to losses and impairments recorded for equity method affiliates and foreign currency volatility.

Our effective tax rate for fiscal 2023 was 48.7 percent.

The effective income tax rate for fiscal 2023 was impacted due to valuation allowances on equity investments and on foreign net operating losses in Ireland, goodwill impairment, state taxes, a mix of taxes in foreign countries where the tax rate is higher than the United States, as well as prior year provision to return adjustments reduced in part by tax benefits from permanent tax credits.

Our effective tax rate for fiscal 2022 was 46.6 percent resulting from the tax benefit of permanent tax credits reduced by valuation allowances, various permanent tax adjustments and state taxes and prior year provision to return adjustments.

Our consolidated effective tax rate is impacted by the statutory income tax rates applicable to each of the jurisdictions in which we operate.

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LIQUIDITY AND CAPITAL RESOURCES

(in thousands) April 30, 2022 May 1, 2021 Dollar Change

(in thousands) April 29, 2023 April 30, 2022 Dollar Change

Net cash (used in) provided by:

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Net (decrease) increase in cash, cash equivalents and restricted cash $ 6,682 $ (62,394) $ 69,076

Cash decreased by $62.4 million in fiscal 2022 as compared to an increase of $40.0 million in fiscal 2021.

Operating assets and liabilities decreased cash flow by $45.4 million during fiscal 2022 as the business expanded compared to a $31.7 million increase in cash flow during fiscal 2021 as the business contracted and management conserved the Company's cash.

Net cash used in operating activities:

Net cash used in operating activities was $27.0 million for fiscal 2022 compared to $66.2 million net cash provided by operating activities in fiscal 2021.

The $93.2 million decrease in cash from operating activities was primarily the result of changes in net operating assets and liabilities and a decrease of $10.3 million in net

Net cash (used in) provided by operating activities:

Net cash provided by operating activities was $15.0 million for fiscal 2023 compared to $27.0 million net cash used in operating activities in fiscal 2022.

The $42.0 million increase in cash provided by operating activities was primarily the result of changes in net operating assets and liabilities and an increase of $6.2 million in net income.

For specific quantitative changes in operating assets and liabilities, see "Note 13.

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Proceeds from the sales of property and equipment totaled $0.8 million in fiscal 2023 compared to $0.9 million in fiscal 2022.

Purchase of marketable securities totaled $4.0 million in fiscal 2022 compared to no purchases of marketable securities in fiscal 2021.

Net cash used in financing activities:

Net cash used in financing activities was $3.6 million for fiscal 2022 compared to $15.6 million in fiscal 2021.

During fiscal 2021, we paid $15.0 million on notes payable.

During fiscal 2021, there were no share repurchases compared to $3.2 million of share repurchases in fiscal 2022.

Purchases of marketable securities totaled $4.0 million in fiscal 2022 compared to the sale of $3.5 million of marketable securities in fiscal 2023.

Net cash (used in) provided by financing activities:

Net cash provided by financing activities was $17.6 million for fiscal 2023 due to draws on our previous bank line of credit compared to $3.6 million of net cash used by financing activities for other investing activities in fiscal 2022.

Other Liquidity and Capital Resources Discussion:

The timing and amounts of working capital changes, profitability, capital spending, investments in affiliates, repurchases of stock and dividend payments impact our liquidity.

Working capital was $103.9 million at April 30, 2022 and $118.4 million at May 1, 2021.

The changes in working capital, particularly changes in accounts receivable, accounts payable, inventory, and contract assets and liabilities, and the sports market seasonality, can have a significant impact on the amount of net cash provided by operating activities largely due to the timing of payments and receipts.

On multimillion-dollar orders, the time between order acceptance and project completion may extend up to or exceed 12 months or more depending on the amount of custom work and a customer’s delivery needs.

We often receive down payments or progress payments on these orders.

We expect to use cash in operations as our business returns and exceeds pre-pandemic levels.

As of April 29, 2023, we had $17.8 million borrowed under a previous bank line of credit.

Subsequent to the end of the 2023 fiscal year, we paid off and terminated that credit line on May 11, 2023 after closing on a $75.0 million senior credit facility (the "Credit Facility") and the sale of a $25.0 million senior secured convertible note (the "Convertible Note").

The Credit Facility consists of a $60.0 million asset-based revolving credit facility (the "ABL") maturing on May 11.

2026, secured by first priority lien on the Company's assets and which is subject to certain factors which can impact our borrowing capacity, and a $15.0 million delayed draw loan (the "Mortgage") secured by our Brookings, South Dakota real estate.

The ABL and Mortgage are evidenced by a Credit Agreement dated as of May 11, 2023 (the "Credit Agreement") between the Company and JPMorgan Chase Bank, N.A., as the lender.

Under the ABL, certain factors can impact our borrowing capacity.

As of May 11, 2023, our borrowing capacity was $47.5 million and there were no borrowings outstanding.

The interest rate on the ABL is set on a sliding scale based on the trailing twelve month fixed charge coverage and ranges from 2.5 percent to 3.5 percent over the standard overnight financing rate (SOFR).

The ABL is secured by a first priority lien on the Company's assets described in the Credit Agreement and the Pledge and Security Agreement dated as of May 11, 2023 by and among the Company, Daktronics Installation, Inc.

and the JPMorgan Chase Bank, N.A.

The $15.0 million delayed draw on the Mortgage closed on July 7, 2023, is secured by a mortgage on the Company's Brookings, South Dakota real estate, amortizes over 10 years and is payable monthly.

The Mortgage is subject to the terms of the Credit Agreement and matures on May 11, 2026.

The Mortgage interest rate is set on a sliding scale based on the trailing twelve month fixed charge coverage ratio and ranges between 3.5 percent to 4.5 percent..

On May 11, 2023, the Company entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") with Alta Fox Opportunities Fund, LP (the “Investor”) under which the Company agreed to sell and issue to the Investor its senior secured Convertible Note in exchange for the payment by the Investor to the Company of $25.0 million.

The Convertible Note allows the Investor and any of the Investor’s permitted transferees, donees, pledgees, assignees or successors-in-interest (collectively, the “Selling Shareholders”) to convert all or any portion of the principal amount of the

Convertible Note, together with any accrued and unpaid interest and any other unpaid amounts, including late charges, if any (together, the “Conversion Amount”), into shares of the Company’s common stock at an initial conversion price of $6.31 per share, subject to adjustment in accordance with the terms of the Convertible Note (the “Conversion Price”).The Company also has a forced conversion right, which is exercisable on the occurrence of certain conditions set forth in the Convertible Note, pursuant to which it can cause all or any portion of the outstanding and unpaid Conversion Amount to be converted into shares of common stock at the Conversion Price.

The Convertible Note incurs interest at an annual rate of 9.0 percent when interest is paid in cash or an annual rate of 10.0 percent if interest is capitalized.

Upon an event of default under the Convertible Note, the annual interest rate will increase to 12.0 percent.

Under the Pledge and Security Agreement dated as of May 11, 2023 between the Company and the Investor, the Convertible Note is secured by a second priority lien on assets securing the ABL facility and a first priority lien on substantially all of the other assets of the Company, excluding all real property, subject to the Intercreditor Agreement dated as of May 11, 2023 by and among the Company, JPMorgan Chase Bank, N.A., and the Investor.

The Convertible Note has a maturity date of May 11, 2027 (the “Maturity Date”).

On the Maturity Date, the Company must pay to the Investor and any Selling Shareholders an amount in cash representing all outstanding principal, any accrued and unpaid interest, and any accrued and unpaid late charges on such principal and interest.

We expect annual cash usage for interest of up to $2.3 million.

Effective on May 11, 2023, in connection with the Company’s entry into the Securities Purchase Agreement, the Company also entered into a Registration Rights Agreement with the Investor (the “Registration Rights Agreement”).

Pursuant to the Registration Rights Agreement, the Company agreed to file with the SEC by the dates set forth in the Registration Rights Agreement a registration statement covering the resale of the shares of common stock issuable upon conversion of the Convertible Note.

Pursuant to the Registration Rights Agreement, the Company is required to use reasonable best efforts to have such registration statement declared effective by the SEC by the dates set forth in the Registration Rights Agreement.

If the registration statement is not filed with the SEC or declared effective by the SEC on a timely basis, certain penalties would be applicable to the Company.

The Credit Agreement and the Convertible Note require a fixed charged coverage ratio of greater than 1.1 and include other customary non-financial covenants.

We expect to be in compliance with these covenants for the foreseeable future.

Refer to "Note 17.

Subsequent Events" of the Notes to our Consolidated Financial Statements included in this Form 10-K.

Our cash and cash equivalent balances consist of high-quality, short-term money market instruments.

Working capital was $132.5 million and $103.9 million as of April 29, 2023 and April 30, 2022, respectively.

The changes in working capital, particularly changes in inventory, accounts payable, accounts receivable, contract assets and liabilities, are impacted by the sports market and construction seasonality.

These changes can have a significant impact on the amount of net cash provided by or used in operating activities largely due to the timing of payments for inventory and subcontractors and receipts from our customers.

On multimillion-dollar orders, the time between order acceptance and project completion may extend up to or exceed 12 months depending on the amount of custom work and a customer’s delivery needs.

We use cash to purchase inventory and services at the beginning of these orders and often receive down payments or progress payments on these orders to balance cash flows.

Our business growth and profitability improvement strategies depend on investments in capital expenditures and strategic investments.

We are projecting total capital expenditures to be approximately $19.0 million for fiscal 2024.

Projected capital expenditures include purchasing manufacturing equipment for new or enhanced product production and expanded capacity and increased automation of processes;

investments in quality and reliability equipment and demonstration and showroom assets;

and continued information infrastructure investments.

We also evaluated and may make strategic investments in new technologies or in our affiliates or acquire companies aligned with our business strategy.

We had $10.4 million of retainage on long-term contracts included in receivables and contract assets as of April 29, 2023, which has an impact on our liquidity.

We expect to collect these amounts within one year.

We are sometimes required to obtain performance bonds for display installations, and we have a bonding line available through a surety company for an aggregate of $150.0 million in bonded work outstanding.

If we were unable to complete the work, and our customer would call upon the bond for payment, the surety company would subrogate its loss to Daktronics.

At April 30, 2022, we had $88.3 million of bonded work outstanding against this line.

Our business growth and profitability improvement strategies depend on investments in capital expenditures and strategic investments.

We projected capital expenditures to be approximately $30 million for fiscal 2023.

Projected capital expenditures include manufacturing equipment for new or enhanced product production, expanded capacity, investments in quality and reliability equipment, and continued information infrastructure investments.

The Board of Directors authorized reinstatement of the share repurchase program in December of 2021.

Shares may be repurchased from time to time in open market purchases, private transactions or other transactions.

The timing, volume, and nature of share repurchases will be at the sole discretion of management and will be dependent on market conditions, applicable securities laws and other factors, and share repurchases may be suspended or discontinued at any time.

The Board of Directors suspended dividends during fiscal 2020 as part of our cash conservation measures through the pandemic.

The timing and future reinstatement of dividends is at the discretion of the Board of Directors.

Future dividends are also impacted by the limitations imposed in our credit facility.

We believe the audiovisual industry fundamentals will drive long-term growth for our business;

however, for the near-term outlook, we expect to continue to have disruptions from our supply chain and logistics.

We also plan to use cash for capital spending to grow our manufacturing capacity.

When cash is needed, we expect to use borrowings under our bank credit agreement.

As of April 30, 2022, we were in compliance with all applicable bank loan covenants.

For additional information on financing agreements, see "Note 7.

Financing Agreements" of the Notes to our Consolidated Financial Statements included in this Form 10-K.

We are sometimes required to obtain performance bonds for display installations, and we have bonding capacity available through surety companies for an aggregate of $165.0 million in bonded work outstanding.

If we were unable to complete the installation work, and our customer would call upon the bond for payment, the surety company would subrogate its loss to Daktronics.

As of April 29, 2023, we had $56.4 million of bonded work outstanding.

We repurchase our common stock and pay dividends pursuant to programs approved by our Board of Directors.

Our long-term capital allocation strategy is to first fund operations and investments in growth, maintain reasonable liquidity, maintain a leverage ratio that reflects a prudent and compliant capital structure in light of the cyclicality of business, and

then return excess cash over time to shareholders through dividends and share repurchases.

During fiscal year 2023, we did not repurchase shares of common stock, and we did not pay a dividend.

We believe cash on hand, funds generated from operations, and the borrowing capacity available under our Credit Facility and other debt instruments will be sufficient to support our expected change in working capital, capital expenditures, strategic investments, and financing payments for the foreseeable future.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis