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Item 2. Management’s Discussion and Analysis

2024-09-04 compared with 2024-02-28 · 206 added, 192 removed, 94 unchanged (81% of the section changed)

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This section entitled "Management’s Discussion and Analysis of Financial Condition and Results of Operations" (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results.

The MD&A provides a narrative analysis explaining the reasons for material changes in the Company’s (i) financial condition during the period from the most recent fiscal year-end, April 29, 2023, to and including January 27, 2024 and (ii) results of operations during the current fiscal period(s) as compared to the corresponding period(s) of the preceding fiscal year.

The MD&A provides a narrative analysis explaining the reasons for material changes in the Company’s (i) financial condition during the period from the most recent fiscal year-end, April 27, 2024, to and including July 27, 2024 and (ii) results of operations during the current fiscal period(s) as compared to the corresponding period(s) of the preceding fiscal year.

This Quarterly Report on Form 10-Q, including the MD&A, contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.

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any future goodwill impairment charges;

and the other risk factors described more fully in the Company’s Annual Report on Form 10-K for the fiscal year ended April 29, 2023 filed with the Securities and Exchange Commission, as well as other publicly available information about the Company.

and the other risk factors described more fully in the Company’s Annual Report on Form 10-K for the fiscal year ended April 27, 2024 filed with the SEC, as well as other publicly available information about the Company.

We also wish to caution investors that other factors might in the future prove to be important in affecting our results of operations.

New factors emerge from time to time;

it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended April 27, 2024 (including the information presented therein under Risk Factors), as well as other publicly available information about our Company.

We are engaged principally in the design, marketing, and manufacture of a wide range of integrated electronic display systems and related products which are sold in a variety of markets throughout the world and the rendering of related maintenance and professional services.

We focus our sales and marketing efforts on markets, geographical regions and products.

Our five business segments consist of four domestic business units and the International business unit.

The four domestic business units consist of Commercial, Live Events, High School Park and Recreation, and Transportation, all of which include the geographic territories of the United States and Canada.

The following selected financial data should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended April 29, 2023 and the consolidated financial statements set forth in that Annual Report on Form 10-K, including the notes to consolidated financial statements included therein.

CURRENT CONDITIONS

Our past investments in people and plant capacity and the continued stable supply chain environment have allowed for efficient production and fulfillment of orders.

Although the post-pandemic geopolitical situation and global trade patterns continue to evolve, we believe that the levels of uncertainty and volatility in supply chain and demand will not be as great as it was through the pandemic and will continue to stabilize during this fiscal year.

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

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.

Daktronics, Inc.

operates on a 52- or 53-week fiscal year, with our fiscal year ending on the Saturday closest to April 30 of each year.

When April 30 falls on a Wednesday, the fiscal year ends on the preceding Saturday.

Within each fiscal year, each quarter is comprised of 13-week periods following the beginning of each fiscal year.

In each 53-week fiscal year, an additional week is added to the first quarter, and each of the last three quarters is comprised of a 13-week period.

The three months ended July 27, 2024 and July 29, 2023 contained operating results for 13 weeks.

Known Trends and Uncertainties

During fiscal 2024, we converted pandemic related pent-up backlog into record levels of sales and gross profit.

In fiscal 2025, we will be more dependent on the timing, size, and profitability profile of the orders we win to be able to generate sales and gross profit levels at similar levels.

We are investing in capacity and resources to grow the business and penetrate markets.

As a result, we currently expect that our order volume and operating expenses in fiscal 2025 will exceed that of fiscal 2024.

While the expansion of use of digital display systems in the global market is expected, actual market increases are uncertain and a number of factors can impact a customers timing to commit to a system.

We carefully evaluate the capacity and resource levels, however, there can be periods sales and expenses can be misaligned and impact our sales and profitability levels.

Global investments have been made in manufacturing capacity and advancement in display and control technologies.

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

Chip on board technologies are advancing for narrow pixel pitch (NPP) applications.

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

Advancements related to digital displays use continue related to professional services, including the use of artificial intelligence and other software which improve content creation, user interfaces, digital display monitoring systems, and security.

We are adopting our manufacturing, sourcing capabilities, and product development priorities for these evolving changes in market and technology trends.

Overall, we have a unique leadership position in our target markets, which are large, growing, and enjoy resilient demand driven by our customers’ desire to improve their audience experience in sports, commercial, and transportation environments.

To capitalize on this position, we are focused on digital and business transformation, improving our cost structure, and further growing our markets.

To accelerate these initiatives, we are projecting to spend between $8 and $10 million for transformation efforts impacting fiscal 2025 profitability.

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.

Orders and revenue levels are expected to be impacted by the timing of multi-million dollar projects and the impacts of global economic conditions, war and geopolitical situations, or other factors outside of our control.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED JANUARY 27, 2024 AND JANUARY 28, 2023

COMPARISON OF THE THREE MONTHS ENDED JULY 27, 2024 AND JULY 29, 2023

Product Order Backlog

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Certain orders for which we have received binding letters of intent or contracts will not be included in backlog until all required contractual documents and deposits are received.

Orders and backlog are not measures defined by accounting principles generally accepted in the United States of America ("GAAP"), and our methodology for determining orders and backlog may vary from the methodology used by other companies in determining their orders and backlog amounts.

backlog are not metrics defined by accounting principles generally accepted in the United States of America ("GAAP"), and our methodology for determining orders and backlog may vary from the methodology used by other companies in determining their orders and backlog amounts.

Order and backlog levels provide management and investors additional details surrounding the results of our business activities in the marketplace and highlight fluctuations caused by seasonality and multi-million dollar projects.

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We believe order information is useful to investors because it provides an indication of our market share and future revenues.

Our product order backlog as of January 27, 2024 was $328.3 million as compared to $429.1 million as of January 28, 2023 and $400.7 million at April 29, 2023.

The decrease in backlog is trending down to more historical levels as a result of fulfilling orders at a greater pace as supply chain conditions stabilized and production lead times improved, utilizing our increased capacity, and order pace returning to more normalized rates.

We expect to fulfill the backlog as of January 27, 2024 within the next 24 months.

The timing of backlog fulfillment may be impacted by project delays resulting from parts availability and other constraints stemming from the supply chain disruptions or by customer site conditions, which are outside our control.

The following table shows information regarding net sales for the three months ended January 27, 2024 and January 28, 2023:

Three Months Ended

(in thousands) January 27, 2024 January 28, 2023 Dollar Change Percent Change

Commercial $ 33,292 $ 49,967 $ (16,675) (33.4) %

Live Events 73,393 67,748 5,645 8.3

High School Park and Recreation 28,764 28,312 452 1.6

Transportation 19,605 17,578 2,027 11.5

International 15,249 21,370 (6,121) (28.6)

$ 170,303 $ 184,975 $ (14,672) (7.9) %

Commercial $ 34,524 $ 28,737 $ 5,787 20.1 %

Live Events 95,217 61,011 34,206 56.1

High School Park and Recreation 35,385 28,097 7,288 25.9

Transportation 18,924 13,525 5,399 39.9

International 8,013 17,005 (8,992) (52.9)

$ 192,063 $ 148,375 $ 43,688 29.4 %

(1) Orders are not measures defined by GAAP, and our methodology for determining orders may vary from the methodology used by other companies in determining their orders and amounts.

For the fiscal 2024 third quarter, net sales were $170.3 million, a decrease of $14.7 million from net sales in the prior year's third quarter.

The third quarter of every year is characterized by seasonally lower volume, and the decrease is attributable to the year-ago period’s unseasonably record revenue driven by high backorder fulfillment resulting from recovery of pandemic-related supply chain challenges and labor availability.

The sales decrease was driven by comparatively lower volumes in the Commercial and International business units, partially offset by order fulfillments in the Live Events, High School Park and Recreation, and Transportation business units.

Orders for the third quarter of fiscal 2024 increased by 29.4 percent from the third quarter of fiscal 2023 driven by strong demand in the Live Events business unit, rebounding demand in the Spectacular and Out-of-Home markets in our Commercial business unit, and solid growth in the High School Parks and Recreation and Transportation business units.

These higher orders offset an order decrease in the International business unit.

Gross Profit and Contribution Margin

Three Months Ended

January 27, 2024 January 28, 2023

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

Our product order backlog as of July 27, 2024 was $267.2 million as compared to $323.7 million as of July 29, 2023 and $316.9 million as of April 27, 2024.

The decrease in backlog, to more historical levels is a result of fulfilling orders at a greater pace as supply chain conditions stabilized and production lead times improved, utilizing our increased capacity, and order pace returning to more normalized rates.

We expect to fulfill the backlog as of July 27, 2024 within the next 24 months.

The timing of backlog fulfillment may be impacted by project delays resulting from customer site conditions, which are outside our control.

Consolidated Performance Summary

The following is an analysis of changes in key items included in the statements of operations for the three months ended July 27, 2024 and July 29, 2023:

July 27, 2024 % of Net sales (1)

July 29, 2023 % of Net sales (1)

Dollar Change (1)

Percent Change (1)

Net sales $ 226,088 100.0 % $ 232,531 100.0 % $ (6,443) (2.8) %

Cost of sales 166,390 73.6 161,384 69.4 5,006 3.1

Gross profit 59,698 26.4 71,147 30.6 (11,449) (16.1)

Commercial $ 5,546 16.7 % $ 10,547 21.1 %

Live Events 21,102 28.8 14,405 21.3

High School Park and Recreation 8,029 27.9 7,555 26.7

Transportation 6,180 31.5 5,534 31.5

International 861 5.6 3,672 17.2

$ 41,718 24.5 % $ 41,713 22.6 %

The gross profit improvement for the third quarter of fiscal 2024 as compared to the same period in fiscal 2023 is due to strategic pricing, greater efficiency of sales volume generation over the cost structure, and a more stable operating environment.

Total warranty costs as a percent of sales for the three months ended January 27, 2024 compared to the same period one year ago increased to 1.9 percent from 1.7 percent.

Three Months Ended

January 27, 2024 January 28, 2023

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

Contribution Margin:

Commercial $ 1,474 4.4 % $ (5,210) (77.9) % $ 6,684 13.4 %

Live Events 17,987 24.5 5,878 48.5 12,109 17.9

High School Park and Recreation 4,515 15.7 142 3.2 4,373 15.4

Transportation 5,202 26.5 759 17.1 4,443 25.3

International (1,718) (11.3) (2,914) (243.6) 1,196 5.6

$ 27,460 16.1 % $ (1,345) (4.7) % $ 28,805 15.6 %

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.

Contribution margin as a percent of net sales for the fiscal quarter ended January 27, 2024 was positively impacted by the previously discussed impacts on gross profit.

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

Three Months Ended

January 27, 2024 January 28, 2023

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

Contribution margin $ 27,460 16.1 % $ (1,345) (4.7) % $ 28,805 15.6 %

Operating expenses:

Selling 15,636 6.9 12,929 5.6 2,707 20.9

General and administrative 11,723 5.2 9,599 4.1 2,124 22.1

Product design and development 9,623 4.3 8,403 3.6 1,220 14.5

Goodwill impairment — — (4,576) (100.0) 4,576 2.5

Total operating expenses 36,982 16.4 30,931 13.3 6,051 19.6

Operating income 22,716 10.0 40,216 17.3 (17,500) (43.5)

General and administrative expenses in the third quarter of fiscal 2024 increased as compared to the third quarter of fiscal 2023 primarily due to an increase in personnel-related expenses.

Product design and development expenses in the third quarter of fiscal 2024 increased as compared to the third quarter of fiscal 2023 primarily due to an increase in personnel-related expenses.

We recorded a $4.6 million non-cash goodwill impairment charge during the third quarter of fiscal 2023 that was not repeated in the third quarter of fiscal 2024.

Other Income and Expenses

Three Months Ended

January 27, 2024 January 28, 2023

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

Nonoperating (expense) income:

Interest (expense) income, net (71) — (881) (0.4) 810 (91.9)

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Other expense and debt issuance costs write-off, net (835) (0.4) (3,979) (1.7) 3,144 (79.0)

Interest (expense) income, net:

The increase in interest income and expense, net for the third quarter of fiscal 2024 compared to the same period one year ago was primarily due to closing in May 2023 on the convertible note (the "Convertible Note") and asset-based and mortgage financings at higher values and interest rates than were in effect under our previous line of credit during the 2023 third quarter.

Change in fair value of Convertible Note:

For the three months ended January 27, 2024, we recorded income of $6.3 million related to the change in fair value of the Convertible Note payable, which is accounted for under the fair value option.

The fair value change was primarily caused by the decrease in our stock price during the third quarter of fiscal year 2024 compared to the second quarter of fiscal year 2024.

Other expense, net:

The change in other expense, net for the third quarter of fiscal 2024 as compared to the same period one year ago was primarily due to losses recorded for equity method affiliates and foreign currency volatility.

Our effective tax rate for the third quarter of fiscal 2024 was 15.0 percent as compared to an effective tax rate of 30.5 percent for the third quarter of fiscal 2023.

The lower tax rate for the third quarter of fiscal 2024 is caused by the reduction in fair value adjustment to income that is not taxable.

RESULTS OF OPERATIONS

COMPARISON OF THE NINE MONTHS ENDED JANUARY 27, 2024 AND JANUARY 28, 2023

The following table shows information regarding net sales for the nine months ended January 27, 2024 and January 28, 2023:

Nine Months Ended

(in thousands) January 27, 2024 January 28, 2023 Dollar Change Percent Change

Commercial $ 122,628 $ 127,132 $ (4,504) (3.5) %

Live Events 233,602 193,370 40,232 20.8

High School Park and Recreation 133,940 106,127 27,813 26.2

Transportation 61,217 53,797 7,420 13.8

International 50,816 63,908 (13,092) (20.5)

$ 602,203 $ 544,334 $ 57,869 10.6 %

Commercial $ 101,167 $ 119,126 $ (17,959) (15.1) %

Live Events 226,436 193,763 32,673 16.9

High School Park and Recreation 103,924 97,574 6,350 6.5

Transportation 59,409 45,812 13,597 29.7

International 43,450 45,130 (1,680) (3.7)

$ 534,386 $ 501,405 $ 32,981 6.6 %

(1) Orders are not measures defined by GAAP, and our methodology for determining orders may vary from the methodology used by other companies in determining their orders and amounts.

For the first nine months of fiscal 2024, net sales were $602.2 million, an increase of $57.9 million from the prior year's first nine-month period.

This increase was primarily due to higher throughput from our past investments in capacity and the more stable operating environment.

During the nine-month period ended January 28, 2023, we faced material supply and labor shortages which extended lead times and delayed the conversion of orders into sales.

Order volume increased in the first nine months of fiscal 2024 from the prior year's nine-month period.

Higher orders from customers in the Live Events, High School Park and Recreation, and Transportation business units offset decreases in the Spectacular and Out-of-Home markets in our Commercial business unit.

The change in the Commercial business unit was caused by volatility in bookings of larger sized Spectacular LED video displays projects and a contraction in advertising spend.

Orders in the International business unit in the first nine months of fiscal 2024 were lower due to a weakening economic outlook relating to inflationary pressures, geopolitical events, and currency headwinds.

Gross Profit and Contribution Margin

Nine Months Ended

January 27, 2024 January 28, 2023

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

Income before income taxes 220 0.1 28,096 12.1 (27,876) (99.2)

Income tax expense 5,166 2.3 8,900 3.8 (3,734) (42.0)

Net (loss) income $ (4,946) (2.2) % $ 19,196 8.3 % $ (24,142) (125.8) %

Diluted (loss) earnings per share $ (0.11) $ 0.42 $ (0.53) (126.2) %

Diluted weighted average shares outstanding 46,311 46,198 113 0.2 %

Orders $ 176,170 $ 158,630 $ 17,540 11.1 %

(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 sales decrease was the result of comparatively lower volumes in the Commercial, High School Park and Recreation, and International business units, partially offset by order fulfillments in the Live Events and Transportation business units.

During the first quarter of fiscal 2024, the operating environment and supply chain stabilized, and we were able to capitalize on our capacity investments to fulfill the overbuilt backlog and return to more normalized lead times, which led to a record net sales level.

These more normalized conditions have continued since and through the fiscal first

quarter 2025.

The amount of revenue recognized associated with performance obligations satisfied in prior years during the three months ended July 27, 2024 and July 29, 2023 was immaterial.

Order volume growth was driven by rebounding demand in the On-Premise, Spectacular and Out‐of‐Home markets in our Commercial business unit, and solid growth in the High School Parks and Recreation and Transportation business units.

These higher orders offset an order decrease in the Live Events and International business units.

Variability in orders comparatively is natural in these large project business areas.

Gross profit percentage decrease is partially attributable to the comparative period gross profit was generated in a unique period of record sales levels over the fixed manufacturing cost structure.

Total warranty costs as a percent of sales the first quarter of fiscal 2025 remained similar compared to the same period one year ago of 2.1 percent.

Selling expenses increased because of personnel related wages and benefits expense, investments in staffing to support future growth;

travel and entertainment;

and marketing, conventions and advertising.

General and administrative increased because of personnel related wages and benefits for increased staffing levels, increased professional fees, and increased expenses for technology resources for our digital transformation strategies.

Product design and development increased primarily due to personnel-related expenses and for 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 decrease was the result of higher cash levels invested in interest-bearing investment accounts offsetting interest expense on similar debt levels.

Change in fair value of Convertible Note results from accounting for the convertible note (the "Convertible Note") we issued to Alta Fox Opportunities Fund, LP 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 Convertible Note, as our stock price has increased since April 27, 2024.

Other expense and debt issuance costs write-off, net:

During fiscal 2024, we expensed $3.4 million of debt issuance costs related to the Convertible Note issuance.

Income tax expense:

Our effective tax rate for the first quarter of fiscal 2025 was skewed due to the impact of the fair value adjustment to the Convertible Note in proportion to the period's small pre-tax income.

The effective tax rate was 31.7 percent for the first quarter of fiscal 2024.

Both periods' income before taxes included the impacts of the change in the Convertible Note fair value adjustment.

These changes are not deductible or taxable, which impacts the effective tax rate.

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 three months ended July 27, 2024 and July 29, 2023:

Three Months Ended July 27, 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 $ 34,199 $ 108,608 $ 48,006 $ 22,490 $ 12,785 $ 226,088

Cost of sales 26,604 77.8 % 82,580 76.0 % 30,690 63.9 % 14,741 65.5 % 11,775 92.1 % 166,390 73.6 %

Gross profit 7,595 22.2 26,028 24.0 17,316 36.1 7,749 34.5 1,010 7.9 59,698 26.4

Commercial $ 25,546 20.8 % $ 21,565 17.0 %

Live Events 68,276 29.2 26,174 13.5

High School Park and Recreation 45,274 33.8 29,343 27.6

Transportation 20,049 32.8 15,456 28.7

International 7,919 15.6 6,673 10.4

$ 167,064 27.7 % $ 99,211 18.2 %

The increase in gross profit percentage in the nine months ended January 27, 2024 as compared to the same nine-month period in fiscal 2023 is attributable to the record sales volume over our fixed manufacturing cost structure, past strategic pricing actions, stabilization of input costs, and fewer supply chain and operational disruptions during the first nine months of fiscal 2024 as compared to a year earlier.

The effect of employee benefit programs activation in fiscal year 2024 reduced gross profit by $2.8 million in the nine months ended January 27, 2024 .

Total warranty costs as a percent of sales for the nine months ended January 27, 2024 compared to the same period one year ago increased to 2.1 percent from 2.0 percent.

Nine Months Ended

January 27, 2024 January 28, 2023

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

Selling 4,384 12.8 2,888 2.7 4,086 8.5 1,399 6.2 2,879 22.5 15,636 6.9

Contribution margin 3,211 9.4 23,140 21.3 13,230 27.6 6,350 28.2 (1,869) (14.6) 44,062 19.5

Commercial $ 12,598 10.3 % $ 3,795 43.1 % $ 8,803 6.9 %

Live Events 59,974 25.7 41,677 227.8 18,297 9.5

High School Park and Recreation 34,724 25.9 15,332 79.1 19,392 18.3

Transportation 17,144 28.0 4,732 38.1 12,412 23.1

International 784 1.5 2,343 150.3 (1,559) (2.4)

$ 125,224 20.8 % $ 67,879 118.4 % $ 57,345 10.5 %

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

Contribution margin for the first nine months of fiscal 2024 was positively impacted by the previously discussed sales levels and impacts on gross profit.

Employee benefit programs activation reduced contribution margin by $1.0 million in the nine months ended January 27, 2024 .

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

Nine Months Ended

January 27, 2024 January 28, 2023

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

General and administrative — — — — — — — — — — 11,723 5.2

Product design and development — — — — — — — — — — 9,623 4.3

Operating income (loss) $ 3,211 9.4 % $ 23,140 21.3 % $ 13,230 27.6 % $ 6,350 28.2 % $ (1,869) (14.6) % $ 22,716 10.0 %

Orders $ 42,122 $ 50,899 $ 46,447 $ 22,759 $ 13,943 $ 176,170

Three Months Ended July 29, 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 $ 46,883 $ 91,999 $ 56,234 $ 21,369 $ 16,046 $ 232,531

Cost of sales 34,114 72.8 % 64,059 69.6 % 35,409 63.0 % 14,280 66.8 % 13,522 84.3 % 161,384 69.4 %

Gross profit 12,769 27.2 27,940 30.4 20,825 37.0 7,089 33.2 2,524 15.7 71,147 30.6

Selling 4,048 8.6 2,525 2.7 3,362 6.0 899 4.2 2,095 13.1 12,929 5.6

Contribution margin 8,721 18.6 25,415 27.6 17,463 31.1 6,190 29.0 429 2.7 58,218 25.0

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Product design and development — — — — — — — — — — 8,403 3.6

Goodwill impairment — — (4,576) (100.0) 4,576 0.8

Operating income (loss) $ 8,721 18.6 % $ 25,415 27.6 % $ 17,463 31.1 % $ 6,190 29.0 % $ 429 2.7 % $ 40,216 17.3 %

General and administrative expenses in the first nine months of fiscal 2024 increased primarily due to an increase in personnel-related expenses.

Product design and development expenses in the first nine months of fiscal 2024 increased as compared to the first nine months of fiscal 2023 primarily due to an increase in personnel-related expenses.

We recorded a $4.6 million non-cash goodwill impairment charge during the third quarter of fiscal 2023 that was not repeated in the third quarter of fiscal 2024.

Other Income and Expenses

Nine Months Ended

January 27, 2024 January 28, 2023

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

Interest (expense) income, net $ (2,952) (0.5) % $ (2,231) 309.4 % $ (721) (0.1) %

Change in fair value of convertible note $ (11,570) (1.9) % $ (11,570) — % $ — — %

Other expense and debt issuance costs write-off, net $ (6,282) (1.0) % $ (3,947) 169.0 % $ (2,335) (0.4) %

Interest (expense) income, net:

The increase in interest income and expense, net in the first nine months of fiscal 2024 compared to the same period one year ago was primarily due to closing in May 2023 on the Convertible Note and asset-based and mortgage financings at higher values and interest rates than the utilization of our previous line of credit during the first nine months of fiscal 2023.

Change in fair value of Convertible Note:

For the nine months ended January 27, 2024, we recorded an expense of $11.6 million related to the change in fair value of the Convertible Note payable which is accounted for under the fair value option.

The fair value change was primarily caused by the increase in our stock price over the conversion price and the decline in market interest rates making the value of potentially converted shares higher than at the debt issuance.

Other expense, net:

The change in other expense, net for the first nine months of fiscal 2024 as compared to the same period one year ago was primarily due to losses recorded for equity method affiliates and foreign currency volatility and expensing of $3.4 million of debt issuance costs related to the Convertible Note carried at fair value.

We have recorded an effective tax rate of 31.5 percent for the nine months ended January 27, 2024.

The tax rate for the first nine months of fiscal 2024 is caused by the fair value adjustment to expense that is not deductible for tax purposes.

The effective tax rate for the first nine months of fiscal 2023 was skewed due a full valuation allowance placed on deferred

Absent any major tax changes, we expect our full year effective tax rate to be in the mid-twenties, before the impacts of fair value accounting for the Convertible Note.

Orders $ 32,434 $ 52,203 $ 35,739 $ 18,985 $ 19,269 $ 158,630

Net Dollar and % Change

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 $ (12,684) (27.1) % $ 16,609 18.1 % $ (8,228) (14.6) % $ 1,121 5.2 % $ (3,261) (20.3) % $ (6,443) (2.8) %

Cost of sales (7,510) (22.0) 18,521 28.9 (4,719) (13.3) 461 3.2 (1,747) (12.9) 5,006 3.1

Gross profit (5,174) (40.5) (1,912) (6.8) (3,509) (16.8) 660 9.3 (1,514) (60.0) (11,449) (16.1)

Selling 336 8.3 363 14.4 724 21.5 500 55.6 784 37.4 2,707 20.9

Contribution (5,510) (63.2) (2,275) (9.0) (4,233) (24.2) 160 2.6 (2,298) (535.7) (14,156) (24.3)

General and administrative — — — — — — — — — — 2,124 22.1

Product design and development — — — — — — — — — — 1,220 14.5

Operating income (loss) $ (5,510) (63.2) % $ (2,275) (9.0) % $ (4,233) (24.2) % $ 160 2.6 % $ (2,298) (535.7) % $ (17,500) (43.5) %

Orders $ 9,688 29.9 % $ (1,304) (2.5) % $ 10,708 30.0 % $ 3,774 19.9 % $ (5,326) (27.6) % $ 17,540 11.1 %

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

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

In the first quarter, both sales and gross profit levels declined comparatively because of the change in operating environments over the two periods.

During the first quarter of fiscal 2024, there were fewer supply chain and operational disruptions paired with our investments to increase capacity allowed for improved operational efficiency and fulfillment of the built-up backlog.

We returned to delivering at normalized lead times resulting in record sales and gross profit levels for

the first quarter of fiscal 2024.

These more normalized conditions have continued since and through the fiscal first quarter of 2025.

On-Premise digital signage sales were similar to last year, however, we fulfilled fewer larger sized Spectacular LED video display projects and digital billboards, causing a decline in sales.

There were fewer large sized projects in the market as compared to prior years.

Gross profit as a percentage of sales declined because of the factors noted above.

Selling expenses remained relatively flat in dollars;

however, increased as percent of sales primarily because of personnel related wages and benefit costs for investments in staffing to support future growth.

Order bookings remained strong in On-Premise digital signage.

Digital billboard order bookings increased as a result in our marketing efforts to independent billboard operators.

The increase in net sales was driven by fulfilling order backlog for upgrades in sports-related facilities, primarily in colleges and universities.

Gross profit as a percentage of sales decline is partially attributable to the comparative period gross profit was generated in a unique period of record sales levels over the fixed manufacturing cost structure.

Selling expenses remained relatively flat as a percent of sales and increased in dollar amounts primarily because of increases in personnel related wages and benefits.

Order bookings remained relatively flat.

High School Park and Recreation:

During fiscal 2024, we returned to normalized lead times which led to higher sales in that period as compared to fiscal 2025's more normalized levels.

Gross profit as a percentage of sales declined because of the factors noted above.

Selling expenses increased primarily because of personnel related wages and benefit costs for investments in staffing to support future growth.

Order bookings increased as a result of the trends for schools to use video solutions which are larger dollar-sized transactions than traditional scoreboard projects.

Transportation:

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

Gross profit as a percentage of sales increased as a result of a change in product mix.

Selling expenses increased primarily because of personnel related wages and benefit costs for investments in staffing to support future growth.

Order bookings vary because of large project booking timing.

During the first quarter of fiscal 2025, we booked a large transit agency project.

International:

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

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

Gross margin decreased primarily because of underutilized factory capacity.

Even with efforts to decrease selling and other operational costs, our International business unit operated at a negative $1.9 million contribution margin.

Order bookings vary because of large project booking timing and have been impacted by general economic conditions.

LIQUIDITY AND CAPITAL RESOURCES

Nine Months Ended

(in thousands) January 27,

2024 January 28,

Three Months Ended

(in thousands) July 27,

2024 July 29,

2023 Dollar Change

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Effect of exchange rate changes on cash (64) (240) 176

Net increase (decrease) in cash, cash equivalents and restricted cash $ 52,503 $ (7,278) $ 59,781

Net cash provided by (used in) operating activities:

Net cash provided by operating activities was $53.8 million for the first nine months of fiscal 2024 compared to net cash used in operating activities of $9.5 million in the first nine months of fiscal 2023.

The $63.3 million change in cash provided by (used in) operating activities was primarily the result of an increase in net income of $46.7 million in the first nine months of fiscal 2024 compared to the same period in fiscal 2023 as strategic pricing actions and operating conditions improved, the $11.6 million of non-cash fair value change of our Convertible Note impacting net income, and improved working capital positions.

We also had strategically invested in inventory through the first nine months of fiscal 2023 as a reaction to supply chain constraints and historic backlog, which consumed cash.

Since January 28, 2023, we have reduced inventory and related payables for inventory as we reduced backlog and generated cash from inventory reduction.

Increases in contract asset levels have used some cash for working capital because of business increases.

Net increase in cash, cash equivalents and restricted cash $ 15,510 $ 29,660 $ (14,150)

Net cash provided by operating activities:

The generation of $19.5 million of cash provided by operating activities was the result of positive operating income offset by the use of cash for the net growth in operating assets and liabilities.

During the quarter, cash was consumed as accounts receivable grew related to seasonally higher demand, the payment of income taxes, and payments of fiscal 2024's profit sharing and variable compensation earned.

These cash uses were offset by our continued focus on lowering inventory levels through purchasing management and enhancing parts planning and by managing supplier payment terms through accounts payable.

The changes in net operating assets and liabilities consisted of the following:

Nine Months Ended

2024 January 28,

Three Months Ended

2024 July 29,

(Increase) decrease:

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Net cash used in investing activities:

Net cash used in investing activities totaled $17.1 million in the first nine months of fiscal 2024 compared to net cash used in investing activities of $20.9 million in the first nine months of fiscal 2023.

Purchases of property and equipment totaled $13.6 million in the first nine months of fiscal 2024 compared to $21.8 million in the first nine months of fiscal 2023.

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

During the first quarter of fiscal 2025 and fiscal 2024, purchase of property and equipment totaled $5.1 million and $4.5 million, respectively, and investments in affiliates were $0.9 million and $1.2 million, respectively.

Net cash provided by financing activities:

Net cash provided by financing activities was $15.7 million for the nine months ended January 27, 2024 due to cash provided by the closing of a $25.0 million Convertible Note financing and the $15.0 million mortgage financing offset by the payoff of our previous credit line of $17.8 million, expending $6.8 million of debt issuance costs, and principal payments on the mortgage, as compared to $23.5 million of cash provided by financing due to draws on our line of credit in the first nine months of fiscal 2023.

During the fiscal 2025 first quarter, financing cash included the $3.1 million received for the exercise of stock options, partially offset by payments on notes payable.

Fiscal 2024 first quarter cash inflow resulted from closing on the $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 $5.8 million of debt issuance costs, and principal payments made on the mortgage loan described below.

Debt and cash

We maintain a $60.0 million asset-based revolving credit facility ("ABL") with a maturity date of May 11, 2026 subject to customary covenants and conditions.

As of January 27, 2024, we had no borrowings against the ABL and $5.4 million used to secure letters of credit outstanding.

We also have a mortgage of $14.3 million secured by a first priority lien on our Brookings, South Dakota real estate and $25.0 million evidenced by the Convertible Note 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.

As of January 27, 2024, we had $76.8 million in cash and cash equivalents and $32.9 million in borrowing capacity under our ABL.

As of July 27, 2024, we had no borrowings against the ABL and $5.3 million used to secure letters of credit outstanding.

We also have a loan of $13.5 million secured by a first priority mortgage lien on our Brookings, South Dakota real estate and $25.0 million evidenced by the Convertible Note secured by a second priority lien on the assets securing the ABL facility and a first priority lien on substantially all the other assets of the Company, excluding all real property.

As of July 27, 2024, we had $96.8 million in cash and cash equivalents and $38.6 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.

1 unchanged sentence

Working Capital

Working capital was $205.3 million and $132.5 million as of January 27, 2024 and April 29, 2023, respectively.

We had $10.4 million of retainage on long-term contracts included in receivables and contract assets as of January 27, 2024 which we expect to collect within one year and which are included in the short-term asset portion of working capital.

Working capital was $230.5 million and $209.7 million as of July 27, 2024 and April 27, 2024, 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 $12.3 million of retainage on long-term contracts included in receivables and contract assets as of July 27, 2024 which we expect to collect within one year.

Other Liquidity and Capital Uses

We are sometimes required to obtain performance bonds for display installations;

we have a bonding line available through surety companies for an aggregate of $190.0 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 January 27, 2024, we had $45.7 million of bonded work outstanding.

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, as allowed under any restrictive debt covenants, return excess cash over time to shareholders through dividends and share repurchases.

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

We are projecting total fiscal 2024 capital expenditures to be approximately $19 million, of which we have incurred $13.6 million for the first nine months of the fiscal 2024.

We are projecting to spend between $8 and $10 million for these transformation efforts and our 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;

1 unchanged sentence

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 $0.8 million for the remainder of fiscal 2024 in our current affiliates.

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 July 27, 2024, we had $15.7 million of bonded work outstanding.

Contractual Obligations and Commercial Commitments

During the first nine months of fiscal 2024, we entered into a new credit facility and mortgage and the Convertible Note as disclosed herein.

There have been no other material changes in our contractual obligations since the end of fiscal 2023.

There have been no material changes in our contractual obligations since the end of fiscal 2024.

See our Annual Report on Form 10-K for the fiscal year ended April 27, 2024 for additional information regarding our contractual obligations and commercial commitments.

7 unchanged sentences

Basis of Presentation" of the Notes to the Condensed Consolidated Financial Statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain interest rate, foreign currency, and commodity risks as disclosed in our Annual Report on Form 10-K for the fiscal year ended April 27, 2024.

There have been no other material changes in our exposure to these risks during the first three months of fiscal 2025.

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-Q

Item 2. Management’s Discussion and Analysis