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Item 2. Management’s Discussion and Analysis

2025-03-05 compared with 2024-12-04 · 181 added, 165 removed, 254 unchanged (58% 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 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.

The MD&A provides a narrative analysis explaining the reasons for material changes in the (i) financial condition of Daktronics, Inc.

and its subsidiaries (the "Company", "Daktronics", "we", "our", or "us") during the period from the most recent fiscal year-end, April 27, 2024, to and including January 25, 2025;

and (ii) results of operations of the Company 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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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.

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, the imposition of tariffs, trade wars, 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 (the "Form 10-K") filed with the Securities and Exchange Commission ("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.

New factors emerge from time to time, and 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.

The 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 the Form 10-K (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.

The quarter-over-quarter comparisons in this MD&A are as of and for the fiscal quarters ended January 25, 2025 and January 27, 2024 unless otherwise stated.

Non-GAAP Measures

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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 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.

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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.

The nine months ended January 25, 2025 and January 27, 2024 contained operating results for 39 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.

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

We expect the expansion of use of digital display systems in the global market over the coming years, however, recent governmental regulations and orders and related geopolitical reactions and changes to or uncertainty around federal funding priorities can impact customers willingness to invest in digital display systems which can impact the timing and levels of orders.

For example, announcements from the new United States presidential administration about increased and expansive import tariffs and federal funding priorities has created near-term uncertainty about economic conditions.

In recent months, we have observed an increasing number of extended quote times, which we believe is partially attributable to these conditions.

As a result, while quoting activity is high, order volume timing in the near-term is more difficult to predict, making fiscal 2025 orders more difficult to predict than in fiscal 2024.

In addition, the announced tariff changes are expected to increase our input costs for imports of electronic components from China and the costs of aluminum and steel in the market.

Competitors importing products from China will also be impacted by the Chinese tariffs.

We are monitoring and adjusting pricing for our products and services carefully to account for these dynamics.

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

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

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

During fiscal 2025, 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.

These initiatives, overseen by the BTO, were designed and structured to support our ambitious targets to grow revenue faster than our addressable market, expand operating margins

to 10-12 percent, and generate returns on capital in the 17-20 percent range consistently above the Company's cost of capital (the "Business Transformation Plan").

To accelerate these initiatives, we are projecting to spend between $8.0 million and $10.0 million for transformation efforts in fiscal 2025.

As our business has grown and become more complex, we have come to recognize the importance of evolving our corporate governance structure.

Delaware is the legal domicile for most large, publicly traded companies, and its corporate law is well understood, clear and predictable and provides strong shareholder rights and protections.

We began the process to change our legal domicile to Delaware and enhance our governance frameworks in fiscal 2025.

On January 21, 2025, Daktronics filed a preliminary proxy with the SEC relating to a special meeting of shareholders (the "Special Meeting") to consider and vote on a proposal to change its legal domicile from South Dakota to Delaware (the "Reincorporation Proposal").

On January 31, 2025 the Holder filed a preliminary proxy statement with the SEC disclosing its intention to solicit proxies against the Reincorporation Proposal.

On February 6, 2025, one of our shareholders, Alta Fox Opportunities Fund, LP (the "Holder," and collectively with its affiliates, "Alta Fox") commenced an action in the United States District Court for the District of South Dakota, Southern Division.

For the first nine months of the quarter, $2.1 million of legal and advisor related expenses were incurred for these matters.

On March 3, 2025, the Company entered into a Cooperation Agreement with Alta Fox (the “Cooperation Agreement”).

In connection with the Cooperation Agreement, among other things, Alta Fox agreed to dismiss with prejudice all claims against the Company and its directors and/or officers, including its pending litigation against the Company with the Court.

Pursuant to the Cooperation Agreement, Alta Fox also agreed to vote all shares of the Company’s common stock that it beneficially owns in favor of the Reincorporation Proposal at the Special Meeting.

The Company has agreed to pay Alta Fox $1.2 million, which will be expensed in the fourth quarter of 2025.

To conclude these matters, including the litigation, we expect that additional costs will be incurred in future reporting periods.

For further information on the Cooperation Agreement, please refer to Item 1.01 of the Current Report on Form 8-K filed with the SEC on March 3, 2025, which is incorporated herein by reference, and “Note 13.

Subsequent Events” of this Quarterly Report on Form 10-Q.

We carefully evaluate our capacity and resource levels to the conditions noted;

however, there can be periods during which sales and expenses can be misaligned and periods we invest more in transformational and corporate governance activities, all impacting our profitability levels in the near-term.

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

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED OCTOBER 26, 2024 AND OCTOBER 28, 2023

COMPARISON OF THE THREE MONTHS ENDED JANUARY 25, 2025 AND JANUARY 27, 2024

Product Order Backlog

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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 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.

Our product order backlog as of January 25, 2025 was $273.2 million as compared to $328.3 million as of January 27, 2024 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 faster, more normalized pace as supply chain conditions have stabilized, production lead times have improved, and we have been utilizing our increased capacity.

We expect to fulfill the backlog as of January 25, 2025 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 October 26, 2024 and October 28, 2023:

October 26, 2024 % of Net sales (1)

October 28, 2023 % of Net sales (1)

The following is an analysis of changes in key items included in the statements of operations for the three months ended January 25, 2025 and January 27, 2024:

January 25, 2025 % of Net sales (1)

January 27, 2024 % of Net sales (1)

Dollar Change (1)

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Total operating expenses 40,409 27.0 33,682 19.8 6,727 20.0

Operating income 15,770 7.6 19,436 9.7 (3,666) (18.9)

Operating (loss) income (3,628) (2.4) 8,036 4.7 (11,664) (145.1)

Nonoperating (expense) income:

Interest (expense) income, net 273 0.1 (1,326) (0.7) 1,599 (120.6)

Interest income (expense), net 508 0.3 (745) (0.4) 1,253 (168.2)

Change in fair value of convertible note (14,083) (9.4) 6,340 3.7 (20,423) (322.1)

Other expense and debt issuance costs write-off, net (613) (0.4) (1,000) (0.6) 387 (38.7)

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 %

(Loss) income before income taxes (17,816) (11.9) 12,631 7.4 (30,447) (241.0)

Income tax (benefit) expense (660) (0.4) 1,889 1.1 (2,549) (134.9)

Net (loss) income $ (17,156) (11.5) % $ 10,742 6.3 % $ (27,898) (259.7) %

Diluted earnings per share $ (0.36) $ 0.09 $ (0.45) (500.0) %

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

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

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.

The sales decrease in the third quarter of fiscal 2025 compared to the same period in fiscal 2024 was the result primarily of lower volumes in the Live Events business unit, partially offset by increased sales in the Commercial and International business units.

Sales in our High School Park and Recreation and Transportation business units were

relatively flat.

The amount of recognized revenue associated with performance obligations satisfied in prior years during the three months ended January 25, 2025 and January 27, 2024 was immaterial.

Order volume decline in the third quarter of fiscal 2025 compared to the same period in fiscal 2024 was primarily due to an order decrease in the Live Events, High School Park and Recreation, and Transportation business units.

Variability in orders comparatively is typical 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 International and Commercial business units.

Gross profit as a percentage of net sales increased slightly to 24.6 percent for the third quarter of fiscal 2025 as compared to 24.5 percent for the same period a year ago.

Total warranty expense as a percentage of sales decreased to 0.9 percent for the third quarter of fiscal 2025 as compared to 1.9 percent for the same period from a year ago.

Selling expenses in the third quarter of fiscal 2025 remained relatively flat compared to the same period last year.

General and administrative expenses increased in the third quarter of fiscal 2025 compared to the same period in fiscal 2024 because of higher personnel related wages and benefits for increased staffing levels primarily for our digital transformation strategies and increased professional fees.

During the third quarter of fiscal 2025, additional professional fees included consultant, legal, and advisory related expenses associated with business transformation initiatives and corporate governance matters, which totaled $4.8 million.

Product design and development expenses increased in the third 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.

Interest income (expense), net expenses increased in the third quarter of fiscal 2025 primarily due to higher cash levels invested in interest-bearing accounts offsetting interest expense.

Change in fair value of Convertible Note results from accounting for the senior secured convertible note dated May 11, 2023 we issued to Alta Fox Opportunities Fund, LP during fiscal 2024 (the "Convertible Note") under the fair value option.

The fair value changed of the note increased due primarily due to the stock price increase and its effect on the valuation of the embedded features of the Convertible Note.

Other expense and debt issuance costs write-off, net was 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.

For the three months ended January 25, 2025, our effective tax rate was 3.7 percent compared to an effective tax rate of 15.0 percent for the three months ended January 27, 2024.

The lower tax rate is due to the tax effect of the increase of the Convertible Note fair value adjustment to expense that is not deductible for tax purposes reduced by the tax effect of the period's decrease in pre-tax income, whereas the tax rate was higher in the prior period due to a decrease in the fair value adjustment in proportion to the increase in 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:

Three Months Ended October 26, 2024

Three Months Ended January 25, 2025

Commercial Percent of net sales (1)

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Orders $ 40,983 $ 78,132 $ 34,549 $ 13,838 $ 19,402 $ 186,904

Three Months Ended October 28, 2023

Three Months Ended January 27, 2024

Commercial Percent of net sales (1)

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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:

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

In the third quarter of fiscal 2025, total net sales and gross profit percentage declined due to the cumulative effects of the following:

The increase in net sales in the third quarter of fiscal 2025 compared to the same period one year ago was driven by fulfilling orders in our digital billboards niche and Spectacular LED video display projects.

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.

Gross profit as a percentage of sales increased due to a shift in mix to products with higher margins and higher sales volume over relatively fixed cost structure.

Selling expense decreased as a percentage of sales primarily because of the increase in sales volume during the quarter.

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.

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.

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.

The decrease in net sales in the third quarter of fiscal 2025 was due to the absence of the fulfillment of a large project, which we had in the same quarter a year ago and because of order volume declines and the differences in expected timing to fulfill current backlog compared to last year's scheduling.

The decline in gross profit as a percentage of sales in the quarter is attributable to lower sales volume over relatively fixed cost structure.

Selling expense decreased quarter over quarter;

however, selling expense as a percentage of sales increased due to the lower sales volume.

Order bookings vary because of large project booking impacts and seasonal sports impacts.

During the third quarter of fiscal 2025, we booked a large NFL stadium project but had lower orders for baseball facilities.

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.

Sales were relatively flat during third quarter of fiscal 2025 compared to the same period one year ago.

Gross profit as a percentage of sales increased due to a more cost-effective video offering in addition to efficient use of manufacturing expenses.

Selling expenses increased primarily because of personnel related wages.

Order bookings were down slightly to the prior year.

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.

Sales decreased slightly during the third quarter of fiscal 2025 compared to the same period one year ago due to lower order bookings which reduced the level of backlog available to build.

Gross profit as a percentage of sales increased due to a change in product mix and a warranty estimate reduction.

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

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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.

The increase in net sales in the third quarter of fiscal 2025 was driven by higher backlog and higher orders.

Gross profit as a percentage of sales increased as a result of a higher sales volume.

Selling expense remained relatively flat in the third quarter of fiscal 2025 compared to the same period in the prior year.

The increase in order bookings is primarily driven by successful bookings in Europe and Middle East to out of home niche customers.

RESULTS OF OPERATIONS

COMPARISON OF THE SIX MONTHS ENDED OCTOBER 26, 2024 AND OCTOBER 28, 2023

COMPARISON OF THE NINE MONTHS ENDED JANUARY 25, 2025 AND JANUARY 27, 2024

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:

October 26, 2024 % of Net sales (1)

October 28, 2023 % of Net sales (1)

The following is an analysis of changes in key items included in the statements of operations for the nine months ended January 25, 2025 and January 27, 2024:

January 25, 2025 % of Net sales (1)

January 27, 2024 % of Net sales (1)

Dollar Change (1)

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Total operating expenses 117,484 20.1 99,376 16.5 18,108 18.2

Operating income 38,486 18.5 59,652 29.9 (21,166) (35.5)

Operating (loss) income 34,858 6.0 67,688 11.2 (32,830) (48.5)

Nonoperating (expense) income:

Interest (expense) income, net 202 0.1 (2,207) (1.1) 2,409 (109.2)

Interest income (expense), net 710 0.1 (2,952) (0.5) 3,662 (124.1)

Change in fair value of convertible note (25,369) (4.3) (11,570) (1.9) (13,799) 119.3

Other expense and debt issuance costs write-off, net (2,612) (0.4) (6,282) (1.0) 3,670 (58.4)

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) %

(Loss) income before income taxes 7,587 1.3 46,884 7.8 (39,297) (83.8)

Income tax (benefit) expense 8,283 1.4 14,781 2.5 (6,498) (44.0)

Net (loss) income $ (696) (0.1) % $ 32,103 5.3 % $ (32,799) (102.2) %

Diluted earnings per share $ (0.01) $ 0.69 $ (0.70) (101.4) %

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

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.

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.

The net sales decrease in the first nine months of fiscal 2025 was the result of lower volumes in the Commercial, High School Parks and Recreation, and International business units offset by higher sales levels in the Transportation business unit.

The net sales for the Live Events business unit remained relatively flat in the first nine months of fiscal 2025

compared to the same period a year prior.

The amount of revenue recognized associated with performance obligations satisfied in prior years during the nine months ended January 25, 2025 and January 27, 2024 was immaterial.

Order volume growth was driven by 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 International business units.

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

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

Gross profit as a percentage of sales decreased in the first nine months of fiscal 2025 compared to the first nine months of fiscal 2024 partially because of sales mix differences between periods.

Total warranty expense as a percent of sales decreased slightly to 1.6 percent for the first nine months of fiscal 2025 as compared to 2.1 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;

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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.

General and administrative expenses increased in the first nine months of fiscal 2025 because of personnel related wages and benefits for increased staffing levels primarily for our digital transformation strategies and increased professional fees.

During the first nine months of fiscal 2025, additional professional fees included consultant, legal, and advisory related expenses associated with business transformation initiatives and corporate governance matters, which totaled $9.0 million.

Product design and development expenses increased in the first nine months of fiscal 2025 compared to the same period a year ago 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.

Interest income (expense), net increased primarily due to higher cash levels invested in interest-bearing accounts offsetting interest expense.

Change in fair value of Convertible Note results from accounting for the Convertible Note, under the fair value option.

The fair value change was primarily caused by the two principal tranches that were force converted during the third quarter as well as an increase in value of the embedded features of the remaining portion 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.

The change in Other expense and debt issuance costs write-off, net for the first nine months of fiscal 2025 as compared to the same period one year ago was primarily due to expensing $3.4 million of debt issuance costs related to the Convertible Note issuance in fiscal 2024.

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.

For the nine months ended January 25, 2025, we recorded an effective tax rate of 109.2 percent, as compared to 31.5 percent for the nine months ended January 27, 2024.

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:

Six Months Ended October 26, 2024

The following table shows information regarding our contribution margin reconciled to GAAP operating income of our reportable segments for the nine months ended January 25, 2025 and January 27, 2024:

Nine Months Ended January 25, 2025

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)

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Orders $ 127,653 $ 199,555 $ 116,834 $ 48,819 $ 47,803 $ 540,664

Six Months Ended October 28, 2023

Nine Months Ended January 27, 2024

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Orders $ 101,167 $ 226,436 $ 103,924 $ 59,409 $ 43,450 $ 534,386

Six Months Ended Net Dollar and % Change

Nine 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)

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Selling (140) (1.1) (130) (1.6) 1,382 13.1 1,175 40.4 684 9.6 2,971 7.1

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)

Contribution margin 2,413 19.2 (18,354) (30.6) (2,244) (6.5) 2,123 12.4 (1,631) (208.0) (17,693) (14.1)

General and administrative — — — — — — — — — — 12,694 40.8

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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.

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.

In the first nine months of fiscal 2025, sales were slightly lower and gross profit levels declined because of the change in operating environments over the two periods.

Sales were down in the first nine months of fiscal 2025 primarily because we fulfilled fewer larger sized video display projects offset by increases in sales in the out of home segment.

Larger projects cause inherent volatility in comparison and sales and orders because of the unique nature of each customer's timing and project needs.

There were fewer large sized projects in the market and ordered early this year as compared to prior years, causing the change in sales volumes.

Sales increases related to the out of home area follows the reasons for the increase in orders.

Gross profit as a percentage of sales increased due to improved fulfillment costs and pricing strategies.

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.

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.

Order bookings increased in the out of home areas as result in our marketing efforts to independent billboard operators and increased demand and availability of large sized video display projects.

The decrease in net sales for the first nine months of fiscal 2025 was driven by timing of large projects and customer delivery schedules for these orders in the third quarter of fiscal 2025.

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.

The change in orders was impacted by the timing of large contract orders which cause inherent lumpiness and volatility in comparisons.

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.

The decrease in net sales for the first nine months of fiscal 2025 was driven by converting the high level of backlog related to supply chain disruptions from the first quarter of fiscal 2024 compared to the more normal level backlog at the beginning of fiscal 2025.

Gross profit as a percentage of sales increased due to the market shift to more video projects and better utilization of manufacturing department expenses.

Selling expenses increased primarily because of personnel related wages and benefits 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.

The increase in net sales during the first nine 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, the recognition of a $1.0 million project related insurance reimbursement, and a reduction in warranty reserves.

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.

Available orders in the market are smaller this year and uncertainty around federal funding has caused orders to decline.

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.

The decrease in net sales in the first nine months of fiscal 2025 was driven by timing of conversion of orders due to lower backlog in the prior period.

Gross profit decreased primarily because of lower sales volume over relatively fixed cost structure.

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

We are seeing higher demand in International markets that were previously impacted by inflationary environment and geopolitical events which has driven the increase in orders.

LIQUIDITY AND CAPITAL RESOURCES

Six Months Ended

(in thousands) October 26,

2024 October 28,

Nine Months Ended

(in thousands) January 25,

2025 January 27,

2024 Dollar Change

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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.

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

2024 October 28,

The $74.8 million of cash provided by operating activities during the first nine months of fiscal 2025 was the result of business profitability (adjusting operating loss for non-cash expenses, primarily depreciation and amortization and loan fair value charges) and net positive changes in operating asset and liabilities

primarily due the receivable and contract asset collections and our initiatives to lower inventory offset by payments of accounts payable and income taxes.

The changes in net operating assets and liabilities for the nine months ended January 25, 2025 and January 27, 2024 consisted of the following:

Nine Months Ended

2025 January 27,

(Increase) decrease:

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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.

During the first nine months of fiscal 2025 and fiscal 2024, purchases of property and equipment totaled $14.7 million and $13.6 million, respectively, and investments in affiliates were $3.3 million and $4.1 million, respectively.

Net cash (used in) provided by financing activities:

During the first nine months of fiscal 2025, financing cash outflow included $9.0 million for payments for shares repurchased and $1.7 million for payments on notes payable, partially offset by cash inflow of $5.1 million received for the exercise of stock options.

Cash inflow from the first nine months of fiscal 2024 resulted from closing on the $25.0 million Convertible Note financing, which had an outstanding balance of $11.1 million as of January 25, 2025, and the $15.0 million mortgage financing in the first quarter of fiscal 2024.

These inflows were partially offset by the payoff of our previous credit line of $18.5 million, expending $6.8 million of debt issuance costs, and principal payments made on the mortgage financing.

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

As of January 25, 2025, we had $33.4 million borrowing capacity on the ABL after $3.5 million used to secure letters of credit outstanding.

We had no borrowings against the ABL.

As of January 25, 2025, the outstanding principal balance of $12.8 million on a loan which is secured by a first priority mortgage on our Brookings, South Dakota real estate.

The outstanding principal balance under the Convertible Note was $11.1 million.

The Convertible Note is 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.

The Company continued to execute on its intentions to convert the remainder of the Convertible Note during the third quarter and subsequent to the end of the quarter.

The details of these transactions include:

On January 10, 2025, the Company issued notice to the Holder, to force the conversion of the third tranche of $7.0 million of the principal and interest balance on February 3, 2025 of the Convertible Note at the conversion price of $6.31 per share into 1.1 million shares of the Company's common stock.

On February 10, 2025, the Company issued notice to the Holder to force the

conversion of the fourth and final tranche of $4.3 million on March 4, 2025, the remaining principal and interest balance of the Convertible Note.

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.

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.

As of January 25, 2025, we had $132.2 million in cash and cash equivalents.

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.

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.

Working capital was $232.0 million and $209.7 million as of January 25, 2025 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.

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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.

We had $8.9 million of retainage on long-term contracts included in receivables and contract assets as of January 25, 2025, which we expect to collect within one year.

Other Liquidity and Capital Uses

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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.

We are projecting to spend between $8.0 million to $10.0 million for transformation efforts during fiscal 2025.

Our total capital expenditures are expected to be approximately $20.7 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;

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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.

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

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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.

As of January 25, 2025, we had $20.4 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.

During the first nine months of fiscal 2025, there were no material changes in our contractual obligations.

See the Form 10-K 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

year ended April 27, 2024.

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 year ended April 27, 2024.

We discuss our critical accounting estimates in "Part II, Item 7.

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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.

We are exposed to certain interest rate, foreign currency, and commodity risks as disclosed in the Form 10-K.

There have been no material changes in our exposure to the market risks identified in the Form 10-K during the first nine 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