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Item 7. Management’s Discussion and Analysis

2024-06-26 compared with 2023-07-12 · 253 added, 299 removed, 38 unchanged (94% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides our highlights and commentary related to factors impacting our financial conditions and further describes the results of operations.

The most significant risks and uncertainties are discussed in "Item 1A.

Risk Factors."

This discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in this Form 10-K.

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

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

Our mission is to be a world leader at informing and entertaining audiences through dynamic audio-visual communication systems.

We organize into business units to focus on customer loyalty over time and earn new and replacement business, as our products have a finite lifetime.

Segment Reporting" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information.

Our strategies include the creation of a comprehensive line of innovative solutions and systems and our ability to create and leverage platform designs and technologies.

These strategies align us to effectively deliver value to our varied customers and their market needs, while serving our stakeholders over the long-term.

We focus on creating local capabilities for sales, service, and manufacturing in geographies with expected digital market opportunities.

We believe consistently generating profitable growth will provide value to our stakeholders (customers, employees, shareholders, suppliers, and communities).

We measure our success using a variety of measures including:

• our percentage of market share by comparing our estimated revenue to the total estimated global digital display revenue;

• our order growth compared to the overall digital market order change;

• financial metrics such as annual order volume and profit change as compared to our previous financial results;

• customer retention and expansion rates;

• our ability to generate profits over the long-term to provide a shareholder return.

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

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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides a narrative from the perspective of management relating to the financial condition, results of operations, liquidity, and other factors that may impact our financial performance.

The MD&A should be read in conjunction with the accompanying Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in this Form 10-K.

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.

The fiscal years ended April 27, 2024, April 29, 2023 and April 30, 2022 contained operating results for 52 weeks.

The year-over-year comparisons in this MD&A are as of and for the fiscal years ended April 27, 2024 and April 29, 2023, unless stated otherwise.

The comparison of fiscal 2023 with fiscal 2022, including the results of operations and liquidity, can be found in Item 7 section of our Annual Report on Form 10-K for fiscal 2023 filed with the SEC on July 12, 2023, which comparison is incorporated by reference herein.

Non-GAAP Measures

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), the cost of customer relationship management/marketing systems, bad debt expenses, third-party commissions, and other expenses.

In addition to gross profit, management uses contribution margin as another measure of assessing segment profitability and allocating selling resources to each segment.

Management believes that contribution margin is useful to investors because it permits investors to view and evaluate our segment financial performance through the same lens as management.

Daktronics, Inc.

and its subsidiaries are industry leaders in designing and manufacturing electronic scoreboards, programmable display systems and large screen video displays for sporting, commercial and transportation applications.

We serve our customers by providing high quality standard display products as well as custom-designed and integrated systems.

We offer a complete line of products, from small scoreboards and electronic displays to large multimillion-dollar video display systems as well as related control, timing, and sound systems.

We are recognized as a technical leader with the capabilities to design, market, manufacture, install and service complete integrated systems displaying real-time data, graphics, animation and video.

We engage in a full range of activities:

marketing and sales, engineering and product design and development, manufacturing, technical contracting, professional services and customer service and support.

Known Trends and Uncertainties:

The supply chain and operating environment continued to stabilize over the past eighteen months post-pandemic and allowed for a more efficient production and fulfillment of orders.

The expansion of use of digital display systems in the global market continues post-pandemic despite a number of factors that can impact customers committing to a system.

In addition to often being discretionary purchases, a customer's decision to purchase a system can be dependent on factors such as macroeconomic environment, interest rates levels, regulatory environments, geopolitical events, and competitive factors.

Display and control technologies and related professional services continue to advance.

A majority of digital displays are constructed using standard surface mount display technology.

Micro-LED technologies (also referred to as narrow pixel pitch) are being used and advanced, especially for displays installed for short viewing distances.

Global investments have been made to advance these technologies and to increase manufacturing capacity.

The use of artificial intelligence and other software advances continues to improve content creation and digital display monitoring systems.

Inflation in parts supply, labor, and other resources continued to stabilize during fiscal 2024.

Over the past decade, the cost to produce digital solutions has declined, which has caused a decline of digital solution pricing.

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.

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

Projects with multimillion-dollar revenue potential attract competition, and competitors can use marketing or other tactics to win business.

Each business unit's long-term performance can be impacted by economic conditions in different ways and to different degrees.

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.

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:

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

• Standard display product market growth due to market adoption and lower product costs, which drive marketplace expansion.

Standard display products are used to attract or communicate with customers and potential customers of retail, commercial, and other establishments.

Pricing and economic conditions are the principal factors that impact our success in this business unit.

We utilize a reseller network to distribute our standard products.

• National accounts standard display market opportunities due to customers' desire to communicate their message, advertising and content consistently across the country.

Increased demand is possible from national retailers, quick-serve restaurants, petroleum retailers, and other nationwide organizations.

• Additional standard display offerings using micro-LED designs.

• 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.

• New market adoption and expansion for use of LED in government and military and corporate campuses.

• Dynamic messaging systems demand growth due to market adoption and expanded use of this technology.

• The use of architectural lighting products for commercial buildings, which real estate owners use to add accents or effects to an entire side or circumference of a building to communicate messages or to decorate the building.

• The continued deployment of digital billboards as OOH advertising companies continue developing new sites and replacing digital billboards reaching end of life.

This is dependent on no adverse changes occurring in the digital billboard regulatory environment restricting future billboard deployments, as well as maintaining our current market share in a business that is concentrated in a few large OOH companies.

• Replacement cycles within each of these areas.

Live Events Business Unit:

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.

• Lower product costs, driving an expansion of the marketplace.

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

• The competitive nature of sports teams, which strive to out-perform their competitors with display systems.

• The desire for high-definition video displays, which typically drive larger displays or higher resolution displays, both of which increase the average transaction size.

• Dynamic messaging system needs throughout a sports facility.

• Increasing use of LED technologies replacing signage previously using LCD technology in and surrounding live events facilities.

• Replacement cycles within each of these areas.

High School Park and Recreation Business Unit:

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

• Increased demand for video systems in high schools as school districts realize the revenue generating potential of these displays compared to traditional scoreboards and these systems' ability to provide or enhance academic curriculum offerings for students.

• Increased demand for different types of displays and dynamic messaging systems, such as message centers at schools to communicate to students, parents and the broader community.

• Lower system costs driving the use of more sophisticated displays in school athletic facilities, such as large integrated video systems.

• Expanding control system options tailored for the markets' needs.

• Certain display requirements for sporting events.

Transportation Business Unit:

Daktronics has experienced governmental agencies placing orders as a way to spend their allocated budgets for their fiscal years.

In addition, the Infrastructure Investment and Jobs Act signed into law in November 2021 is expected to have a positive impact on all segments of United States transportation terminals and public transit facilities.

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

• 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.

This growth is highly dependent on government spending, primarily by state and federal governments, along with the continuing acceptance of private/public partnerships as an alternative funding source.

• Expanded use of dynamic messaging systems for advertising and wayfinding use in public transport and airport terminals due to expanded market usage and displays, with LED technology replacing prior LCD installations and additional display offerings using micro-LEDs.

International Business Unit:

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

• Achieving greater penetration in various geographies and building products more suited to individual markets.

We continue to broaden our product offerings into the transportation segment in Europe and the Middle East.

• Continued focus on sports facility, spectacular-type, OOH advertising products, and architectural lighting market opportunities and the factors listed in each of the other business units to the extent they apply outside of the United States and Canada.

• New market adoption and expansion of use of LED in government and military and corporate campuses.

• 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.

• Growing our reseller channels to promote our products and gain market share.

We believe the audiovisual industry fundamentals of increased use of LED display systems across industries and our development of new technologies, services, and sales channels will drive long-term growth for our Company.

RESULTS OF OPERATIONS

Consolidated Performance Summary

The following is an analysis of changes in key items included in the statements of operations for fiscal year 2024 as compared to fiscal year 2023.

2024 % of Net sales (1)

2023 % of Net sales (1)

Dollar Change (1)

Percent Change (1)

Net sales $ 818,083 100.0 % $ 754,196 100.0 % $ 63,887 8.5 %

Cost of sales 595,640 72.8 602,841 79.9 (7,201) (1.2)

Gross profit 222,443 27.2 151,355 20.1 71,088 47.0

Operating expenses:

Selling 56,954 7.0 56,655 7.5 299 0.5

General and administrative 42,632 5.2 38,747 5.1 3,885 10.0

Product design and development 35,742 4.4 29,989 4.0 5,753 19.2

Goodwill impairment — — 4,576 0.6 (4,576) (100.0)

Total operating expenses 135,328 16.5 129,967 17.2 5,361 4.1

Operating income 87,115 10.6 21,388 2.8 65,727 307.3

Nonoperating (expense) income:

Interest (expense) income, net (3,418) (0.4) (920) (0.1) (2,498) 271.5

Change in fair value of convertible note (16,550) (2.0) — — (16,550) —

Other expense and debt issuance costs write-off, net (13,096) (1.6) (7,211) (1.0) (5,885) 81.6

Income before income taxes 54,051 6.6 13,257 1.8 40,794 307.7

Income tax expense 19,430 2.4 6,455 0.9 12,975 201.0

Net income $ 34,621 4.2 % $ 6,802 0.9 % $ 27,819 409.0 %

Diluted earnings per share $ 0.74 $ 0.15 $ 0.59 397.8 %

Diluted weighted average shares outstanding 46,543 45,521 1,022 2.2 %

Orders $ 740,171 $ 680,954 $ 59,217 8.7 %

( 1) Amounts are calculated based on unrounded numbers and therefore may not recalculate using the rounded numbers provided.

In addition, percentages may not add in total due to rounding.

The stable operating environment and supply chain combined with our past investments in capacity resulted in a more efficient fulfillment process and a return to market expected lead times.

These conditions and strong order levels resulted in the growth of net sales.

These conditions are in contrast to the fiscal year 2023 operating environment where we

faced manufacturing material supply and labor shortages which extended lead times and delayed the conversion of orders into sales.

For the years ended April 27, 2024 and April 29, 2023, our operating income was positively impacted by a net amount of 1.0% and 0.3% of overtime revenue or $4.1 million and $1.2 million, respectively, as a result of changes in contract estimates related to projects in progress at the beginning of the respective period.

These changes in estimates resulted primarily from favorable project execution of 1.5% of overtime revenue or $6.5 million, reduced cost estimates and contingencies that were relieved when conditions were resolved.

Gross unfavorable changes in contract estimates were 0.6% of overtime revenue or $2.4 million and immaterial for the years ended April 27, 2024 and April 29, 2023, respectively.

Nature of Business and Summary of Significant Accounting Policies" for more information regarding revenue recognition.

Order volume growth is attributable to a stable macroeconomic environment in North America, to the continued use and market adoption of digital display technology, and to our success in capturing existing and new customers orders for larger project-based sports and transportation business.

As we are a project-based business, large sized project orders can impact levels of orders.

During fiscal 2024, fewer large sized projects were booked to orders in Commercial and International because there were fewer large projects available in the market place.

Gross profit percentage increase is attributable to past strategic pricing actions, the record sales volume over our fixed manufacturing cost structure, stabilization of input costs, and fewer supply chain and operational disruptions during fiscal 2024 as compared to fiscal 2023.

Factors impacting gross profit in fiscal 2023 included ongoing supply chain disruptions and inflationary challenges in materials, freight and personnel related costs.

Total warranty expense as a percent of sales increased to 2.3 percent for fiscal 2024 as compared to 2.1 percent during fiscal 2023.

All expense lines increased for variable compensation and profit sharing linked to operating margins achieved in fiscal year 2024 as compared to amounts achieved in fiscal year 2023.

For fiscal 2024, these expenses totaled $6.5 million, including $3.1 million in cost of sales, $1.2 million in selling, $1.4 million in general and administrative, and $0.8 million in product design and development.

In fiscal 2023, the amounts achieved were immaterial.

Selling expense s were relatively flat.

Personnel related wages and benefits expense increases were offset by less bad debt charges and third party commission related costs.

General and administrative increased for additional personnel wage and benefits and increased staffing levels for our digital transformation strategies, offset by lower professional fees.

Product design and development increased primarily due to personnel-related expenses and increased staffing levels.

Our focus has been to advance product features aligned with customer needs and to reduce product costs.

We focused these efforts on both standard product and control offerings and in new emerging areas, including microLED products and new control capabilities.

Interest (expense) income, net increase was the result of the May 2023 closing on the Convertible Note and asset-based and mortgage financings at higher borrowed values and interest rates than the utilization of our previous line of credit during fiscal 2023 .

Change in fair value of Convertible Note results from accounting for the Convertible Note we issued during fiscal 2024, under the fair value option.

The fair value change was primarily caused by the increase in value of the embedded features of the note as the stock price has increased since inception of the note.

Other expense and debt issuance costs write-off, net is primarily comprised of $10.1 million of losses and impairments recorded for equity method affiliates, and expensing of $3.4 million of debt issuance costs related to the Convertible Note.

Income tax expense increased due to the year-over-year increase in Income before income taxes.

O ur effective tax rate for fiscal 2024 was 35.9 percent.

The effective income tax rate for fiscal 2024 was primarily impacted due to the convertible note fair value adjustment to expense that is not deductible for tax purposes.

Additional other items impacting the rate were valuation allowances on equity investments, state taxes, 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 2023 was 48.7 percent.

than in the United States, as well as a prior year provision to return adjustments reduced in part by tax benefits from permanent tax credits.

See "Note 12.

Income Taxes" for further information.

Reportable Segment Performance Summary

The following table shows information regarding our reportable segment financial performance of contribution margin reconciled to GAAP operating income for the fiscal years ended April 27, 2024 and April 29, 2023:

Fiscal Year 2024

Commercial Percent of net sales (1)

Live Events Percent of net sales (1)

High School Park and

Recreation Percent of net sales (1)

Transportation Percent of net sales (1)

International Percent of net sales (1)

Total Percent of net sales (1)

Net sales $ 161,626 $ 338,508 $ 170,349 $ 85,390 $ 62,210 $ 818,083

Cost of sales 127,393 78.8 % 242,524 71.6 % 112,985 66.3 % 59,369 69.5 % 53,369 85.8 % 595,640 72.8 %

Gross profit 34,233 21.2 95,984 28.4 57,364 33.7 26,021 30.5 8,841 14.2 222,443 27.2

Selling 17,425 10.8 10,991 3.2 14,276 8.4 4,127 4.8 10,136 16.3 56,954 7.0

Contribution margin 16,808 10.4 84,993 25.1 43,088 25.3 21,894 25.6 (1,295) (2.1) 165,489 20.2

General and administrative — — — — — — — — — — 42,632 5.2

Goodwill impairment — — — — — — — — — — — —

Product design and development — — — — — — — — — — 35,742 4.4

Operating income (loss) $ 16,808 10.4 % $ 84,993 25.1 % $ 43,088 25.3 % $ 21,894 25.6 % $ (1,295) (2.1) % $ 87,115 10.6 %

Orders $ 135,251 $ 321,191 $ 148,505 $ 80,107 $ 55,117 $ 740,171

Fiscal Year 2023

Commercial Percent of net sales (1)

Live Events Percent of net sales (1)

High School Park and

Recreation Percent of net sales (1)

Transportation Percent of net sales (1)

International Percent of net sales (1)

Total Percent of net sales (1)

Net sales $ 170,590 $ 284,900 $ 141,748 $ 72,306 $ 84,652 754,196

Cost of sales 139,435 81.7 % 235,645 82.7 % 100,603 71.0 % 52,481 72.6 % 74,677 88.2 % 602,841 79.9 %

Gross profit 31,155 18.3 49,255 17.3 41,145 29.0 19,825 27.4 9,975 11.8 151,355 20.1

Selling 17,130 10.0 10,240 3.6 13,524 9.5 3,924 5.4 11,837 14.0 56,655 7.5

Contribution margin 14,025 8.2 39,015 13.7 27,621 19.5 15,901 22.0 (1,862) (2.2) 94,700 12.6

General and administrative — — — — — — — — — — 38,747 5.1

Goodwill impairment — — 2,281 0.8 — — — — 2,295 2.7 4,576 0.6

Product design and development — — — — — — — — — — 29,989 4.0

Operating income (loss) $ 14,025 8.2 % $ 36,734 12.9 % $ 27,621 19.5 % $ 15,901 22.0 % $ (4,157) (4.9) % $ 21,388 2.8 %

Orders $ 158,028 $ 259,653 $ 144,919 $ 66,751 $ 51,603 $ 680,954

Net Dollar and % Change (1)

Commercial Percent Change (1)

Live Events Percent Change (1)

High School Park and

Recreation Percent Change (1)

Transportation Percent Change (1)

International Percent Change (1)

Total Percent Change (1)

Net sales $ (8,964) (5.3) $ 53,608 18.8 $ 28,601 20.2 $ 13,084 18.1 $ (22,442) (26.5) $ 63,887 8.5

Cost of sales (12,042) (8.6) 6,879 2.9 12,382 12.3 6,888 13.1 (21,308) (28.5) (7,201) (1.2)

Gross profit 3,078 9.9 46,729 94.9 16,219 39.4 6,196 31.3 (1,134) (11.4) 71,088 47.0

Selling 295 1.7 751 7.3 752 5.6 203 5.2 (1,701) (14.4) 299 0.5

Contribution 2,783 19.8 45,978 117.8 15,467 56.0 5,993 37.7 567 (30.5) 70,789 74.8

General and administrative — — — — — — — — — — 3,885 10.0

Goodwill impairment — — (2,281) (100.0) — — — — (2,295) (100.0) (4,576) (100.0)

Product design and development — — — — — — — — — — 5,752 19.2

Operating income (loss) $ 2,783 19.8 % $ 48,259 131.4 % $ 15,467 56.0 % $ 5,993 37.7 % $ 2,862 (68.8) % $ 65,727 307.3 %

Orders $ (22,776) (14.4) % $ 61,538 23.7 % $ 3,585 2.5 % $ 13,356 20.0 % $ 3,514 6.8 % $ 59,217 8.7 %

( 1) Amounts are calculated based on unrounded numbers and therefore may not recalculate using the rounded numbers provided.

In addition, percentages may not add in total due to rounding

All segments' improved contribution margin is mostly attributable to improved gross profit as a percentage of sales.

Gross profit improved due to past strategic pricing actions, stabilization of input costs, and the record sales volume over our fixed manufacturing cost structure aided by fewer supply chain and operational disruptions during fiscal 2024 as compared to fiscal 2023.

Fewer supply chain and operational disruptions paired with our investments to increase capacity allowed for improved operational efficiency and fulfillment of beginning year backlog and new orders to result in increased sales.

During fiscal year 2024, we returned to market expected lead times.

We regularly adjust our sales and marketing activities and staffing levels to achieve current and expected future sales levels.

Gross unfavorable changes in contract estimates were 0.6% of overtime revenue or $2.4 million and immaterial for the years ended April 27, 2024 and April 29, 2023, respectively.

Live Events business unit had the largest dollar impact of $4.5 million and $0.9 million gross negative impacts, there were 1.7% and 0.3% of overtime revenue sales in Live Events.

The remaining business units had immaterial gross positive and gross negative changes.

Nature of Business and Summary of Significant Accounting Policies" for more information regarding revenue recognition.

The decrease in net sales and orders was driven by volatility in order bookings of larger sized Spectacular LED video displays projects, there were fewer projects in the market as compared to prior years, and a contraction in digital billboards deployed by our OOH customers.

Gross profit as a percentage of sales improved 2.9 points for the factors noted above.

Selling expenses remained relatively flat in dollars and increased as a percentage of sales because of the change in sales volume.

Live Events :

The increase in net sales was driven by fulfilling pent-up order backlog and returning to market acceptable lead times for new order bookings.

Order bookings increased because of an active market of upgrades in sports-related facilities, primarily in colleges and universities.

Gross profit as a percentage of sales improved a total of 11.1 points primarily due to the pricing strategies and volume increases attributable to the stabilization factors cited above and the net favorable estimate changes for overtime revenue recognition of 1.1 points, offset by a 1.0 points or $3.3 million warranty charge to resolve a discrete product issue.

Selling expenses increased primarily for personnel related costs yet declined as a percent of sales.

In fiscal 2023, we recorded a goodwill impairment of $2.3 million impacting operating income, with no such impact in fiscal 2024.

High School Park and Recreation :

The increase in net sales was driven by fulfilling pent-up orders in backlog and similar market demand for video related products in High Schools.

Video projects are a larger dollar-sized transaction than traditional scoreboard products.

Segment contribution margin profitability was primarily driven by the gross profit factors described above, offset by selling expense increases for personnel-related expenses.

Transportation :

The increase in net sales was driven by fulfilling orders in backlog and continued buildable order bookings, especially in large intelligent transportation system projects.

Gross profit as a percentage of sales increased 3.1 points primarily for strategic pricing actions.

Selling expense increases were for personnel-related expenses.

Segment contribution margin improvements were primarily driven by gross profit factors described above, offset by $1.7 million warranty charges to resolve a discrete product issue.

International :

The decrease in net sales was driven by lower backlog and lower orders.

Global geopolitical events have driven down the amount of market activity for digital display systems and large-sized projects causing the decrease in orders.

Gross margin increased 2.4 points primarily due to strategic pricing actions.

Even with efforts to lower selling and other operational costs, International operated at a negative $1.3 million contribution margin.

In fiscal 2023, we recorded a goodwill impairment of $2.3 million impacting operating income, with no such impact in fiscal 2024.

LIQUIDITY AND CAPITAL RESOURCES

(in thousands) April 27, 2024 April 29, 2023 Dollar Change

Net cash (used in) provided by:

Operating activities $ 63,241 $ 15,024 $ 48,217

Investing activities (21,306) (25,388) 4,082

Financing activities 15,122 17,568 (2,446)

Effect of exchange rate changes on cash (69) (522) 453

Net increase in cash, cash equivalents and restricted cash $ 56,988 $ 6,682 $ 50,306

Net cash provided by operating activities:

The $63.2 million in cash provided by operating activities was the result of improved profitability offset by the net growth in operating assets and liabilities.

Increases in contract assets, accounts receivable and decreases in customer deposits and contract liabilities use of cash were offset by reductions in inventory.

Net cash used in investing activities:

During fiscal 2024, purchases of property and equipment totaled $17.0 million and investments in and advances to affiliates were $5.1 million.

This compared to $25.4 million and $4.3 million in fiscal 2023, respectively.

Fiscal 2023 purchases were higher because of initiatives to upgrade existing or purchase new manufacturing equipment for capacity and automation.

Net cash provided by financing activities during fiscal 2024 resulted from closing on a $25.0 million Convertible Note financing and the $15.0 million mortgage financing to add liquidity to the Company.

These inflows were offset by the payoff of our previous credit line of $17.8 million, expending $7.2 million of debt issuance costs, and principal payments made on the mortgage.

Debt and Cash

We maintain the $60.0 million ABL maturing on May 11, 2027 subject to customary covenants and conditions.

As of April 27, 2024, our total borrowing capacity was $39.5 million, there were no borrowings outstanding, and there was $5.3 million used to secure letters of credit outstanding, leaving $34.2 million available to borrow.

The Credit Facility is secured by first priority lien on the Company's assets and is subject to certain factors that can impact our borrowing capacity.

We have a mortgage of $13.9 million secured by a first priority lien on our Brookings, South Dakota real estate and matures on May 11, 2026.

We also have a convertible note in the original principal amount of $25.0 million due May 11, 2027 (the "Convertible Note") is secured by a second priority lien on assets securing the ABL facility and a first priority lien on substantially all the other assets of the Company, excluding all real property.

On May 11, 2023, the Company paid all amounts outstanding on the prior credit agreement, and this prior credit agreement was terminated as of that date.

No gain or loss was recognized upon termination, and the Company incurred no early termination penalties in connection with such termination.

As of April 27, 2024, we had $81.3 million in cash and cash equivalents and $34.2 million in borrowing capacity under our ABL.

We believe cash flow from operations, existing lines of credit, and access to debt and capital markets will be sufficient to meet our current liquidity needs, and we have committed liquidity and cash reserves in excess of our anticipated funding requirements.

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

As of April 27, 2024, we were in compliance with our financial covenants under the Credit Agreement and the Convertible Note.

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

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.

Working Capital

Working capital was $209.7 million and $132.5 million as of April 27, 2024 and April 29, 2023, respectively.

The changes in working capital, particularly changes in inventory, accounts payable, accounts receivable, and 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.

We had $14.5 million of retainage on long-term contracts included in receivables and contract assets as of April 27, 2024, which we expect to collect within one year.

Other Liquidity and Capital Uses

Our long-term capital allocation strategy is to first fund operations and investments in growth, maintain a reasonable liquidity and leverage ratio that reflects a prudent and compliant capital structure in light of the cyclically of business, reduce debt, and then return excess cash over time to shareholders through dividends and share repurchases.

During fiscal year 2024, we did not repurchase shares of common stock, and we did not pay a dividend.

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 $27 million for fiscal 2025.

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.

In addition to capital expenditures, we plan to make additional investments in our general and administration expenses to execute our broad digital transformation strategies to modernize our service systems for field service automation, to advance our enterprise performance planning capabilities, and to improve and automate quoting and sales processes.

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

We are committed to invest an additional $0.5 million in fiscal 2025 in our current affiliates.

We may make additional investments beyond our commitments.

We are sometimes required to obtain performance bonds for display installations, and we have an aggregate of $190.0 million bonding line available through surety companies.

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 27, 2024, we had $44.5 million of bonded work outstanding.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are based upon, and should be read in conjunction with, our Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in this Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").

Our Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in this Form 10-K have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").

The preparation of these financial statements requires us to make estimates and judgments affecting the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.

2 unchanged sentences

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.

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

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

Our critical accounting estimates are based on historical experience;

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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-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.

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.

The cost-to-cost input method measures costs 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.

Costs to perform the contract include direct and indirect costs for contract design, production, integration, installation, and assurance-type warranty reserve.

Direct costs include material and components;

Direct costs include materials and components;

manufacturing, project management and engineering labor;

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For a summary of recently issued accounting pronouncements and the effects those pronouncements have on our financial results, refer to "Note 1.

Nature of Business and Summary of Significant Accounting Policies" of the Notes to our Consolidated Financial Statements included elsewhere in this Form 10-K.

RESULTS OF OPERATIONS

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 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 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 %

Live Events 284,900 199,106 85,794 43.1

High School Park and Recreation 141,748 111,816 29,932 26.8

Transportation 72,306 62,707 9,599 15.3

International 84,652 83,130 1,522 1.8

$ 754,196 $ 610,970 $ 143,226 23.4 %

Commercial $ 158,028 $ 192,917 $ (34,889) (18.1) %

Live Events 259,653 313,940 (54,287) (17.3)

High School Park and Recreation 144,919 156,305 (11,386) (7.3)

Transportation 66,751 77,993 (11,242) (14.4)

International 51,603 104,916 (53,313) (50.8)

$ 680,954 $ 846,071 $ (165,117) (19.5) %

Fiscal Year 2023 as compared to Fiscal Year 2022

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.

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 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.

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 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 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.

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

International :

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, 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 29, 2023 April 30, 2022

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

Gross Profit:

Commercial $ 31,155 18.3 % $ 31,851 20.7 %

Live Events 49,255 17.3 21,787 10.9

High School Park and Recreation 41,145 29.0 35,477 31.7

Transportation 19,825 27.4 18,172 29.0

International 9,975 11.8 9,410 11.3

$ 151,355 20.1 % $ 116,697 19.1 %

Fiscal Year 2023 as compared to Fiscal Year 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.

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;

improving reliability to reduce warranty expenses;

expanding our global capacity and planning;

meeting customer solution expectations;

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

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

Contribution Margin:

Commercial $ 14,025 8.2 % $ (2,048) (12.7) % $ 16,073 10.4 %

Live Events 39,015 13.7 27,112 227.8 11,903 6.0

High School Park and Recreation 27,621 19.5 4,034 17.1 23,587 21.1

Transportation 15,901 22.0 1,348 9.3 14,553 23.2

International (1,862) (2.2) (1,368) 276.6 (494) (0.6)

$ 94,700 12.6 % $ 29,078 44.3 % $ 65,622 10.7 %

Fiscal Year 2023 as compared to Fiscal Year 2022

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

Contribution margin $ 94,700 12.6 % $ 29,078 44.3 % $ 65,622 10.7 %

General and administrative 38,747 5.1 6,184 19.0 32,563 5.3

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 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.

Generally, a significant portion of our engineering time is spent on product design and development, while the rest is allocated to large contract work and included in cost of sales.

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 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 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

Interest income (expense), net $ (920) (0.1) % $ (1,091) (638.0) % $ 171 — %

Other expense, net $ (7,211) (1.0) % $ (4,102) 131.9 % $ (3,109) (0.5) %

Fiscal Year 2023 as compared to Fiscal Year 2022

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 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.

Due to various factors, and because we operate in multiple state and foreign jurisdictions, our effective tax rate is subject to fluctuation.

See "Note 12.

Income Taxes" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information.

LIQUIDITY AND CAPITAL RESOURCES

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

Net cash (used in) provided by:

Operating activities $ 15,024 $ (27,035) $ 42,059

Investing activities (25,388) (31,384) 5,996

Financing activities 17,568 (3,576) 21,144

Effect of exchange rate changes on cash (522) (399) (123)

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

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.

Cash Flow Information" of the Notes to our Consolidated Financial Statements included in this Form 10-K.

Net cash used in investing activities:

Net cash used in investing activities totaled $25.4 million for fiscal 2023 compared to $31.4 million in fiscal 2022.

Purchases of property and equipment totaled $25.4 million in fiscal 2023 compared to $20.4 million in fiscal 2022.

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

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.

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 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.

Nature of Business and Summary of Significant Accounting Policies" of the Notes to our Consolidated Financial Statements included in this Form 10-K.

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