DAKTRONICS INC /SD/ 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS 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 27, 2024, to and including October 26, 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. These statements reflect our current views with respect to future events and financial performance. The words "may," "would," "could," "should," "will," "expect," "estimate," "anticipate," "believe," "intend," "plan," "forecast," "project" and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any and all forecasts and projections in this document are “forward-looking statements” and are based on management’s current expectations or beliefs. From time to time, we may also provide oral and written forward-looking statements in other materials we release to the public, such as press releases, presentations to securities analysts or investors, or other communications by us. Any or all forward-looking statements in this report and in any public statements we make could be materially different from actual results. Accordingly, we wish to caution investors that any forward-looking statements made by or on behalf of us are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Important factors that may cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, changes in economic and market conditions, management of growth, timing and magnitude of future contracts and orders, fluctuations in margins, the introduction of new products and technology, the impact of adverse weather conditions, increased regulation, 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 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 "Item 1A. Risk Factors" of Part I), as well as other publicly available information about our Company. The quarter-over-quarter comparisons in this MD&A are as of and for the fiscal quarters ended October 26, 2024 and October 28, 2023 unless otherwise stated. Non-GAAP Measures Contribution margin is a non-GAAP measure we use 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 23 Table of Contents 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. Overview 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 six months ended October 26, 2024 and October 28, 2023 contained operating results for 26 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 and beyond, we are more dependent on the timing, size, and profitability profile of the orders we win to be able to generate sales and gross profit 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 customers' timing to commit to a system. We carefully evaluate our capacity and resource levels; however, there can be periods during which sales and expenses can be misaligned and impact our profitability levels. Global investments have been made in manufacturing capacity and the 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 NPP) are being used and advanced, especially for displays installed for short viewing distances. Advancements continue in technologies related to digital displays used in professional services, including the use of artificial intelligence and other software which improve content creation, user interfaces, digital display monitoring systems, and security. We rely on a complex supply chain for raw material and component imports and the global distribution of our products. Governmental regulation changes, including recent announcements from the new US presidential administration about increased and expansive import tariffs and other geopolitical reactions could impact our costs and change the competitive landscape. We continue to monitor the evolving plans. 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 in fiscal 2025. In addition, we formed a Business Transformation Office (BTO), which has undertaken a comprehensive review of the Company’s business, strategy and operations and is developing a set of strategic initiatives, enabled in part by the Company’s previously announced digital transformation, to provide even better outcomes for customers, deeper penetration of the Company's current and adjacent market verticals, above-market growth, and more efficient delivery, fulfillment, and service. The goal of these initiatives is to grow revenue faster than the Company’s addressable market, expand operating margins, and generate returns on capital in the mid-to-high-teens and consistently above the Company’s cost of capital. 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. 24 Table of Contents RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED OCTOBER 26, 2024 AND OCTOBER 28, 2023 Product Order Backlog Backlog represents the dollar value of orders for integrated electronic display systems and related products and services which are expected to be recognized in net sales in the future. Orders are contractually binding purchase commitments from customers. Orders are included in backlog when we are in receipt of an executed contract and any required deposits or security and have not yet been recognized into net sales. 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 metrics defined by generally accepted accounting principles 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. Management uses orders to evaluate market share and performance in the competitive environment. Management uses backlog information for capacity and resource planning. Order fulfillment timing is dependent on customer schedules, supply chain conditions, and our capacity availability. 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 October 26, 2024 was $236.0 million as compared to $306.9 million as of October 28, 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 have stabilized and production lead times have improved, we have been utilizing our increased capacity, and our order pace has returned to more normalized rates. We expect to fulfill the backlog as of October 26, 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. 25 Table of Contents Consolidated Performance Summary The following is an analysis of changes in key items included in the statements of operations for the three months ended October 26, 2024 and October 28, 2023: October 26, 2024 % of Net sales (1) October 28, 2023 % of Net sales (1) Dollar Change (1) Percent Change (1) Net sales $ 208,331 100.0 % $ 199,369 100.0 % $ 8,962 4.5 % Cost of sales 152,468 73.2 145,170 72.8 7,298 5.0 Gross profit 55,863 26.8 54,199 27.2 1,664 3.1 Operating expenses: Selling 14,704 7.1 14,653 7.3 51 0.3 General and administrative 15,550 7.5 10,889 5.5 4,661 42.8 Product design and development 9,839 4.7 9,221 4.6 618 6.7 Total operating expenses 40,093 19.2 34,763 17.4 5,330 15.3 Operating income 15,770 7.6 19,436 9.7 (3,666) (18.9) Nonoperating (expense) income: Interest (expense) income, net 273 0.1 (1,326) (0.7) 1,599 (120.6) Change in fair value of convertible note 10,304 4.9 (10,650) (5.3) 20,954 (196.8) Other expense and debt issuance costs write-off, net (1,164) (0.6) (1,303) (0.7) 139 (10.7) Income before income taxes 25,183 12.1 6,157 3.1 19,026 309.0 Income tax expense 3,777 1.8 3,992 2.0 (215) (5.4) Net income $ 21,406 10.3 % $ 2,165 1.1 % $ 19,241 888.7 % Diluted earnings per share $ 0.22 $ 0.05 $ 0.17 340.0 % Diluted weighted average shares outstanding 51,715 46,705 5,010 10.7 % Orders $ 177,590 $ 183,693 $ (6,103) (3.3) % (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. Net Sales: The sales increase in the second quarter of fiscal 2025 compared to the same period in fiscal 2024 was the result of comparatively higher volumes in the Live Events and Transportation business units offset by lower sales levels in the International business unit. Sales in our Commercial and High School Park Recreation business units were relatively flat. This sales mix difference is the result of variability of orders described below and because during fiscal 2024, the operating environment and supply chain stabilized. We were able to capitalize on our capacity investments to fulfill the overbuilt 26 Table of Contents backlog and return to more normalized lead times, especially in the High School Park and Recreation market. These more normalized conditions have continued since and through the fiscal second quarter of 2025. The amount of revenue recognized associated with performance obligations satisfied in prior years during the three months ended October 26, 2024 and October 28, 2023 was immaterial. Order volume decline in the second quarter of fiscal 2025 compared to the same period in fiscal 2024 was primarily due to an order decrease in the Live Events, Transportation, and International business units. Variability in orders comparatively is natural in these large project business areas and during the time of year for sports projects. These declines were offset by large project bookings in the Spectacular niche and increases in the Out-of-Home niche and High School Parks and Recreation business unit. Digital billboard orders increased as a result of marketing efforts to independent billboard operators and the timing of a bulk order from a national Out-of-Home advertising company. The increase in order bookings in the High School Parks and Recreation business unit is attributable to sales of more higher selling priced video products versus fixed digit scoreboards. Gross profit as a percentage of net sales decreased slightly to 26.8 percent for the second quarter of fiscal 2025 as compared to 27.2 percent for the same period a year ago. Total warranty expense as a percentage of sales decreased to 1.7 percent for the second quarter of fiscal 2025 as compared to 2.2 percent for same period from a year ago. Selling expenses in the second quarter of fiscal 2025 remained relatively flat compared to the same period last year. General and administrative expenses increased in the second quarter of fiscal 2025 compared to the same period in fiscal 2024 because of higher personnel related wages and benefits for increased staffing levels, increased professional fees, and increased expenses for technology resources related to digital transformation strategies. In addition, during the second quarter of fiscal 2025, the Company incurred $3.3 million of consultant related expenses associated with the previously announced strategic and digital transformation initiatives. Product design and development expenses increased in the second quarter of fiscal 2025 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 micro-LED products and new control capabilities. Interest (expense) income, net expenses increased in the second quarter of fiscal 2025 primarily due to interest income earned on cash balances. Change in fair value of Convertible Note results from accounting for the convertible note (the "Convertible Note") dated May 11, 2023 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 decrease in value of the embedded features of the Convertible Note, as our stock price has decreased since July 27, 2024. Other expense and debt issuance costs write-off, net were relatively flat compared to the same period last year. Income tax expense: For the three months ended October 26, 2024, our effective tax rate was 15.0 percent compared to an effective tax rate of 64.8 percent for the three months ended October 28, 2023. The lower tax rate is due to the reduction of the Convertible Note fair value adjustment to expense in proportion to the period's increase in pre-tax income, whereas the tax rate was higher in the prior period due to an increase in the fair value adjustment in proportion to the pre-tax income during the quarter. 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 October 26, 2024 and October 28, 2023: 27 Table of Contents Three Months Ended October 26, 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 $ 43,439 $ 77,207 $ 48,071 $ 21,478 $ 18,136 $ 208,331 Cost of sales 32,301 74.4 % 62,237 80.6 % 30,267 63.0 % 12,806 59.6 % 14,857 81.9 % 152,468 73.2 % Gross profit 11,138 25.6 14,970 19.4 17,804 37.0 8,672 40.4 3,279 18.1 55,863 26.8 Selling 4,554 10.5 2,293 3.0 4,001 8.3 1,402 6.5 2,454 13.5 14,704 7.1 Contribution margin 6,584 15.2 12,677 16.4 13,803 28.7 7,270 33.8 825 4.5 41,159 19.8 General and administrative — — — — — — — — — — 15,550 7.5 Product design and development — — — — — — — — — — 9,839 4.7 Operating income $ 6,584 15.2 % $ 12,677 16.4 % $ 13,803 28.7 % $ 7,270 33.8 % $ 825 4.5 % $ 15,770 7.6 % Orders $ 44,548 $ 70,524 $ 35,838 $ 12,222 $ 14,458 $ 177,590 Three Months Ended October 28, 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 $ 42,453 $ 68,210 $ 48,942 $ 20,243 $ 19,521 $ 199,369 Cost of sales 35,222 83.0 % 48,976 71.8 % 32,522 66.5 % 13,463 66.5 % 14,987 76.8 % 145,170 72.8 % Gross profit 7,231 17.0 19,234 28.2 16,420 33.5 6,780 33.5 4,534 23.2 54,199 27.2 Selling 4,828 11.4 2,662 3.9 3,674 7.5 1,028 5.1 2,461 12.6 14,653 7.3 Contribution margin 2,403 5.7 16,572 24.3 12,746 26.0 5,752 28.4 2,073 10.6 39,546 19.8 General and administrative — — — — — — — — — — 10,889 5.5 Product design and development — — — — — — — — — — 9,221 4.6 Operating income $ 2,403 5.7 % $ 16,572 24.3 % $ 12,746 26.0 % $ 5,752 28.4 % $ 2,073 10.6 % $ 19,436 9.7 % Orders $ 34,209 $ 79,016 $ 32,800 $ 21,500 $ 16,168 $ 183,693 Three Months Ended 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 $ 986 2.3 % $ 8,997 13.2 % $ (871) (1.8) % $ 1,235 6.1 % $ (1,385) (7.1) % $ 8,962 4.5 % Cost of sales (2,921) (8.3) 13,261 27.1 (2,255) (6.9) (657) (4.9) (130) (0.9) 7,298 5.0 Gross profit 3,907 54.0 (4,264) (22.2) 1,384 8.4 1,892 27.9 (1,255) (27.7) 1,664 3.1 Selling (274) (5.7) (369) (13.9) 327 8.9 374 36.4 (7) (0.3) 51 0.3 Contribution 4,181 174.0 (3,895) (23.5) 1,057 8.3 1,518 26.4 (1,248) (60.2) 1,613 4.1 General and administrative — — — — — — — — — — 4,661 42.8 Product design and development — — — — — — — — — — 618 6.7 Operating income $ 4,181 174.0 % $ (3,895) (23.5) % $ 1,057 8.3 % $ 1,518 26.4 % $ (1,248) (60.2) % $ (3,666) (18.9) % Orders $ 10,339 30.2 % $ (8,492) (10.7) % $ 3,038 9.3 % $ (9,278) (43.2) % $ (1,710) (10.6) % $ (6,103) (3.3) % (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 second quarter of fiscal 2025, sales increased and gross profit percentage declined slightly due to the following: Commercial: Sales were relatively flat during second quarter of fiscal 2025 compared to the same period one year ago. The slight increase was driven by fulfilling orders in our digital billboards niche. Spectacular LED video display projects and 28 Table of Contents On-Premise digital signage sales were similar to last year. Gross profit as a percentage of sales increased due to a shift in mix to products with higher margins. Selling expenses remained relatively flat in dollars but decreased as percent of sales primarily because of leveraging flat selling capacity over increased revenue. The increase in order bookings in our Spectacular niche was attributable to LED video display project orders with governmental and multi-use commercial and retail facilities during the second quarter of fiscal 2025. Digital billboard order bookings during the quarter increased as a result of marketing efforts to independent billboard operators and the timing of a bulk order from a national Out-of-Home advertising company. Live Events: The increase in net sales in the second quarter of fiscal 2025 was driven by fulfilling order backlog for upgrades in sports-related facilities, primarily in colleges and universities. The decline in gross profit as a percentage of sales in the quarter is partially attributable to sales mix differences between periods. Selling expenses decreased as a percent of sales and decreased in dollar amounts primarily because of a reduction in bad debt expense. Order bookings vary because of large project booking timing. High School Park and Recreation: Sales were relatively flat during second quarter of fiscal 2025 compared to the same period one year ago. Gross profit as a percentage of sales increased due to the market shift to more video projects, in addition to a more cost-effective video offering. Selling expenses increased primarily because of personnel related wages and benefit costs for investments in staffing to support future growth. Order bookings increase is attributable to more sales of video scoreboards versus fixed digit scoreboards. Transportation: Sales were relatively flat during the second quarter of fiscal 2025 compared to the same period one year ago. Gross profit as a percentage of sales increased as a result of a change in product mix and the recognition of a $1.0 million project related insurance reimbursement. 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 the timing of large project bookings which have inherent volatility. International: The decrease in net sales in the second quarter of fiscal 2025 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. Order bookings vary because of large project booking timing and have been impacted by general economic conditions. RESULTS OF OPERATIONS COMPARISON OF THE SIX MONTHS ENDED OCTOBER 26, 2024 AND OCTOBER 28, 2023 Consolidated Performance Summary The following is an analysis of changes in key items included in the statements of operations for the six months ended October 26, 2024 and October 28, 2023: 29 Table of Contents October 26, 2024 % of Net sales (1) October 28, 2023 % of Net sales (1) Dollar Change (1) Percent Change (1) Net sales $ 434,419 100.0 % $ 431,900 100.0 % $ 2,519 0.6 % Cost of sales 318,858 153.1 306,554 153.8 12,304 4.0 Gross profit 115,561 55.5 125,346 62.9 (9,785) (7.8) Operating expenses: Selling 30,340 14.6 27,582 13.8 2,758 10.0 General and administrative 27,273 13.1 20,488 10.3 6,785 33.1 Product design and development 19,462 9.3 17,624 8.8 1,838 10.4 Total operating expenses 77,075 17.7 65,694 15.2 11,381 17.3 Operating income 38,486 18.5 59,652 29.9 (21,166) (35.5) Nonoperating (expense) income: Interest (expense) income, net 202 0.1 (2,207) (1.1) 2,409 (109.2) Change in fair value of convertible note (11,286) (5.4) (17,910) (9.0) 6,624 (37.0) Other expense and debt issuance costs write-off, net (1,999) (1.0) (5,282) (2.6) 3,283 (62.2) Income before income taxes 25,403 12.2 34,253 17.2 (8,850) (25.8) Income tax expense 8,943 4.3 12,892 6.5 (3,949) (30.6) Net income $ 16,460 7.9 % $ 21,361 10.7 % $ (4,901) (22.9) % Diluted earnings per share $ 0.35 $ 0.46 $ (0.11) (23.9) % Diluted weighted average shares outstanding 47,507 46,454 1,053 2.3 % Orders $ 353,760 $ 342,323 $ 11,437 3.3 % (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. Net Sales: The net sales increase in the first six months of fiscal 2025 was the result of comparatively higher volumes in the Live Events and Transportation business units offset by lower sales levels in the Commercial, High School Park and Recreation, and International business units. The amount of revenue recognized associated with performance obligations satisfied in prior years during the six months ended October 26, 2024 and October 28, 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 business unit. These higher orders offset an order decrease in the Live Events, Transportation, and International business units. Variability in orders comparatively is natural in these large project business areas. 30 Table of Contents Gross profit as a percentage of sales decreased in the first six months of fiscal 2025 partially because of sales mix differences between periods. Total warranty expense as a percent of sales decreased to 1.9 percent for the first six months of fiscal 2025 as compared to 2.2 percent for same period from a year ago. Selling expenses increased because of increases in personnel related wages and benefits expenses for increased staffing levels to support future growth; travel and entertainment; and marketing, conventions and advertising. General and administrative expenses increased in the first six months of fiscal 2025 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. In addition, during the first six months of fiscal 2025, the Company incurred $4.3 million of consultant related expenses associated with the previously announced strategic and digital transformation initiatives. Product design and development expenses increased in the first six months of fiscal 2025 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 micro-LED products and new control capabilities. Interest (expense) income, net increased primarily due to interest income earned on cash balances. Change in fair value of Convertible Note results from accounting for 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: The change in Other expense and debt issuance costs write-off, net for the first six months of fiscal 2025 as compared to the same period one year ago was primarily due to losses recorded for our equity method affiliates and foreign currency volatility. In addition, during fiscal 2024, we expensed $3.4 million of debt issuance costs related to the Convertible Note issuance. Income tax expense: For the six months ended October 26, 2024, we recorded an effective tax rate of 35.2 percent, as compared to 37.6 percent for the six months ended October 28, 2023. Both periods' income before taxes included the impacts of the change in Convertible Note fair value adjustment to expense which is not deductible and is the primary driver of the effective tax rate for both periods. Reportable Segment Performance Summary The following table shows information regarding our contribution margin reconciled to GAAP operating income of our reportable segments for the six months ended October 26, 2024 and October 28, 2023: 31 Table of Contents Six Months Ended October 26, 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 $ 77,638 $ 185,815 $ 96,077 $ 43,968 $ 30,921 $ 434,419 Cost of sales 58,905 75.9 % 144,817 77.9 % 60,957 63.4 % 27,547 62.7 % 26,632 86.1 % 318,858 73.4 % Gross profit 18,733 24.1 40,998 22.1 35,120 36.6 16,421 37.3 4,289 13.9 115,561 26.6 Selling 8,938 11.5 5,181 2.8 8,087 8.4 2,801 6.4 5,333 17.2 30,340 7.0 Contribution margin 9,795 12.6 35,817 19.3 27,033 28.1 13,620 31.0 (1,044) (3.4) 85,221 19.6 General and administrative — — — — — — — — — — 27,273 6.3 Product design and development — — — — — — — — — — 19,462 4.5 Operating income (loss) $ 9,795 12.6 % $ 35,817 19.3 % $ 27,033 28.1 % $ 13,620 31.0 % $ (1,044) (3.4) % $ 38,486 8.9 % Orders $ 86,670 $ 121,423 $ 82,285 $ 34,981 $ 28,401 $ 353,760 Six Months Ended October 28, 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 $ 89,336 $ 160,209 $ 105,176 $ 41,612 $ 35,567 $ 431,900 Cost of sales 69,336 77.6 % 113,035 70.6 % 67,931 64.6 % 27,743 66.7 % 28,509 80.2 % 306,554 71.0 % Gross profit 20,000 22.4 47,174 29.4 37,245 35.4 13,869 33.3 7,058 19.8 125,346 29.0 Selling 8,876 9.9 5,187 3.2 7,036 6.7 1,927 4.6 4,556 12.8 27,582 6.4 Contribution margin 11,124 12.5 41,987 26.2 30,209 28.7 11,942 28.7 2,502 7.0 97,764 22.6 General and administrative — — — — — — — — — — 20,488 4.7 Product design and development — — — — — — — — — — 17,624 4.1 Operating income $ 11,124 12.5 % $ 41,987 26.2 % $ 30,209 28.7 % $ 11,942 28.7 % $ 2,502 7.0 % $ 59,652 13.8 % Orders $ 66,643 $ 131,219 $ 68,539 $ 40,485 $ 35,437 $ 342,323 Six Months Ended 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 $ (11,698) (13.1) % $ 25,606 16.0 % $ (9,099) (8.7) % $ 2,356 5.7 % $ (4,646) (13.1) % $ 2,519 0.6 % Cost of sales (10,431) (15.0) 31,782 28.1 (6,974) (10.3) (196) (0.7) (1,877) (6.6) 12,304 4.0 Gross profit (1,267) (6.3) (6,176) (13.1) (2,125) (5.7) 2,552 18.4 (2,769) (39.2) (9,785) (7.8) Selling 62 0.7 (6) (0.1) 1,051 14.9 874 45.4 777 17.1 2,758 10.0 Contribution (1,329) (11.9) (6,170) (14.7) (3,176) (10.5) 1,678 14.1 (3,546) (141.7) (12,543) (12.8) General and administrative — — — — — — — — — — 6,785 33.1 Product design and development — — — — — — — — — — 1,838 10.4 Operating income (loss) $ (1,329) (11.9) % $ (6,170) (14.7) % $ (3,176) (10.5) % $ 1,678 14.1 % $ (3,546) (141.7) % $ (21,166) (35.5) % Orders $ 20,027 30.1 % $ (9,796) (7.5) % $ 13,746 20.1 % $ (5,504) (13.6) % $ (7,036) (19.9) % $ 11,437 3.3 % (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 six months of fiscal 2025, sales were relatively flat, and gross profit levels declined because of the change in operating environments over the two periods. 32 Table of Contents Commercial: On-Premise digital signage sales and digital billboards for the first six months of fiscal 2025 were similar to the same period last year; however, we fulfilled fewer larger sized Spectacular LED video display projects in the first six months of fiscal 2025, causing a decline in sales. In the first six months of fiscal 2025, there were fewer large sized projects in the market as compared to prior years. Gross profit as a percentage of sales increased due to the market shift to more surface mount technology message centers and Spectaculars. Selling expenses remained relatively flat in dollars; however, they increased as percent of sales. Order bookings increased in our Spectacular LED video display projects. Digital billboard order bookings increased as a result in our marketing efforts to independent billboard operators. Live Events: The increase in net sales for the first six months of fiscal 2025 was driven by fulfilling the order backlog for upgrades in sports-related facilities, primarily in colleges and universities. The decline in gross profit as a percentage of sales is partially attributable to the sales mix differences between periods. Selling expenses remained relatively flat in dollar amounts and decreased as a percent of sales. Order bookings decreased due to the variability of large project booking timing. High School Park and Recreation: During fiscal 2024, we returned to normalized lead times, which led to higher sales in the first six months of fiscal 2024 as compared to fiscal 2025's more normalized levels. Gross profit as a percentage of sales increased due to the market shift to more video projects in addition to a more cost-effective video offering. 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 increasingly using video solutions which are larger dollar-sized transactions than traditional scoreboard projects. Transportation: The increase in net sales during the first six months of fiscal 2025 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 and the recognition of $1.0 million project related insurance reimbursement. Selling expenses increased primarily because of personnel related wages and benefit costs for investments in staffing to support future growth. The timing of large projects is uncertain which causes variability in large project order bookings. International: The decrease in net sales in the first six months of fiscal 2025 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 $1.0 million contribution margin. Order bookings vary because of large project booking timing and have been impacted by general economic conditions. LIQUIDITY AND CAPITAL RESOURCES Six Months Ended (in thousands) October 26, 2024 October 28, 2023 Dollar Change Net cash provided by (used in): Operating activities $ 62,820 $ 44,311 $ 18,509 Investing activities (12,383) (12,073) (310) Financing activities 2,033 15,919 (13,886) Effect of exchange rate changes on cash 204 139 65 Net increase in cash, cash equivalents and restricted cash $ 52,674 $ 48,296 $ 4,378 Net cash provided by operating activities: The $62.8 million of cash provided by operating activities during the first six months of fiscal 2025 was the result of changes in net operating asset and liabilities. During the first six months of fiscal 2025, cash increased due to accounts receivable collection, reduction in inventory, and decreases in contract assets. 33 Table of Contents The changes in net operating assets and liabilities for the six months ended October 26, 2024 and October 28, 2023 consisted of the following: Six Months Ended October 26, 2024 October 28, 2023 (Increase) decrease: Accounts receivable $ 6,123 $ (5,713) Long-term receivables (2,909) 553 Inventories 16,617 7,056 Contract assets 10,901 1,116 Prepaid expenses and other current assets (632) (570) Income tax receivables 306 326 Investment in affiliates and other assets (876) 256 Increase (decrease): Accounts payable (3,853) (14,734) Contract liabilities (1,106) (10,849) Accrued expenses 1,659 7,480 Warranty obligations (1,207) 1,151 Long-term warranty obligations 1,666 1,123 Income taxes payable (4,285) 649 Long-term marketing obligations and other payables 173 782 $ 22,577 $ (11,374) Net cash used in investing activities: During the first six months of fiscal 2025 and fiscal 2024, purchases of property and equipment totaled $10.5 million and $9.2 million, respectively, and investments in affiliates were $2.0 million and $2.9 million, respectively. Net cash provided by financing activities: During the first six months of fiscal 2025, financing cash inflow included the $4.2 million received for the exercise of stock options, partially offset by payments on notes payable. Cash inflow from the first six months of fiscal 2024 resulted from closing on the $25.0 million Convertible Note financing and the $15.0 million mortgage financing to add liquidity to the Company in the first quarter of fiscal 2024. These inflows were offset by the payoff of our previous credit line of $18.1 million, expending $6.5 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 October 26, 2024, we had no borrowings against the ABL and $5.4 million used to secure letters of credit outstanding. We also have a loan of $13.1 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. On November 11, 2024, the Company issued notice to the holder ("Holder") to force the conversion of $7.0 million of the principal balance on December 3, 2024 of the Convertible Note at the conversion price of $6.31 per share into 1.1 million common shares. We will issue the shares upon the Holder’s indicating the ability to take delivery of the shares under the maximum ownership provisions of the Convertible Note. In addition, on November 25, 2024, the Company received from the Holder a written notice to increase the Percentage Cap to 14.99 percent. This increase from the in-effect 3.00 percent maximum ownership takes effect 61 days after receipt of notice. The Company intends to convert the remainder of the Convertible Note over the next several months in tranches of up to $7.0 million in face value every 30 days, as practical and as provided for in the Convertible Note. 34 Table of Contents As of October 26, 2024, we had $134.4 million in cash and cash equivalents and $40.8 million in borrowing capacity under our ABL. We believe cash flow from operations, existing line 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. Our cash and cash equivalent balances consist of high-quality, short-term money market instruments. Working Capital Working capital was $242.7 million and $209.7 million as of October 26, 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 $8.7 million of retainage on long-term contracts included in receivables and contract assets as of October 26, 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, 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 to spend between $8 and $10 million for these transformation efforts and for 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; 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 October 26, 2024, we had $17.6 million of bonded work outstanding. Contractual Obligations and Commercial Commitments During the first six months of fiscal 2025, there have been no material changes in our contractual obligations. 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. Significant Accounting Policies and Estimates We describe our significant accounting policies in "Note 1. Nature of Business and Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal 35 Table of Contents year ended April 27, 2024. We discuss our critical accounting estimates in "Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended April 27, 2024. New Accounting Pronouncements For a summary of recently issued accounting pronouncements and the effects of those pronouncements on our financial results, refer to "Note 1. Basis of Presentation" of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Item 3. 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 six months of fiscal 2025.