UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 28,July 29, 2023
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___.
Commission File Number: 0-23246
Daktronics, Inc.
(Exact Name of Registrant as Specified in its Charter)
| | | | | | | | | | | |
South Dakota | | | 46-0306862 |
(State or Other Jurisdiction of Incorporation or Organization) | | | (I.R.S. Employer Identification No.) |
| | | |
201 Daktronics Drive | Brookings, | SD | 57006 |
(Address of Principal Executive Offices) (Zip Code) |
(605) 692-0200
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, No Par Value | DAKT | Nasdaq Global Select Market |
Preferred Stock Purchase Rights | DAKT | Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | o | | |
Accelerated filer | x | | |
Non-accelerated filer | o | | |
Smaller reporting company | o |
| |
Emerging growth company | o | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant’s common stock outstanding as of March 1,August 21, 2023 was 45,465,728.45,716,424.
DAKTRONICS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended January 28,July 29, 2023
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data) (unaudited)
| | | | | | | | | | | |
| January 28, 2023 | | April 30, 2022 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 10,022 | | | $ | 17,143 | |
Restricted cash | 708 | | | 865 | |
Marketable securities | 530 | | | 4,020 | |
Accounts receivable, net | 115,840 | | | 101,099 | |
Inventories | 164,879 | | | 134,392 | |
Contract assets | 36,098 | | | 41,687 | |
Current maturities of long-term receivables | 1,716 | | | 2,798 | |
Prepaid expenses and other current assets | 8,770 | | | 14,963 | |
Income tax receivables | 3,258 | | | 603 | |
Total current assets | 341,821 | | | 317,570 | |
| | | |
Property and equipment, net | 73,795 | | | 66,765 | |
Long-term receivables, less current maturities | 452 | | | 1,490 | |
Goodwill | 3,293 | | | 7,927 | |
Intangibles, net | 1,220 | | | 1,472 | |
Investment in affiliates and other assets | 33,071 | | | 32,321 | |
Deferred income taxes | — | | | 13,331 | |
TOTAL ASSETS | $ | 453,652 | | | $ | 440,876 | |
| | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
CURRENT LIABILITIES: | | | |
Accounts payable | $ | 70,592 | | | $ | 76,313 | |
Contract liabilities | 97,703 | | | 90,393 | |
Accrued expenses | 32,711 | | | 34,959 | |
Warranty obligations | 10,998 | | | 11,621 | |
Income taxes payable | 382 | | | 408 | |
Total current liabilities | 212,386 | | | 213,694 | |
| | | |
Long-term warranty obligations | 19,216 | | | 17,257 | |
Long-term contract liabilities | 12,674 | | | 10,998 | |
Other long-term obligations | 6,397 | | | 7,076 | |
| | | |
Line of Credit | 23,638 | | | — | |
Deferred income taxes | — | | | 287 | |
Total long-term liabilities | 61,925 | | | 35,618 | |
| | | |
SHAREHOLDERS' EQUITY: | | | |
Preferred Shares, no par value, authorized 50,000 shares; no shares issued and outstanding | — | | | — | |
Common Stock, no par value, authorized 115,000,000 shares; 47,373,959 and 46,733,544 shares issued at January 28, 2023 and April 30, 2022, respectively | 63,002 | | | 61,794 | |
Additional paid-in capital | 49,719 | | | 48,372 | |
Retained earnings | 82,011 | | | 96,608 | |
Treasury Stock, at cost, 1,907,445 shares at January 28, 2023 and April 30, 2022, respectively | (10,285) | | | (10,285) | |
Accumulated other comprehensive loss | (5,106) | | | (4,925) | |
TOTAL SHAREHOLDERS' EQUITY | 179,341 | | | 191,564 | |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 453,652 | | | $ | 440,876 | |
| | | | | | | | | | | |
| July 29, 2023 | | April 29, 2023 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 45,775 | | | $ | 23,982 | |
Restricted cash | 8,575 | | | 708 | |
Marketable securities | 539 | | | 534 | |
Accounts receivable, net | 125,613 | | | 109,979 | |
Inventories | 144,794 | | | 149,448 | |
Contract assets | 50,539 | | | 46,789 | |
Current maturities of long-term receivables | 970 | | | 1,215 | |
Prepaid expenses and other current assets | 9,848 | | | 9,676 | |
Income tax receivables | 5 | | | 326 | |
Total current assets | 386,658 | | | 342,657 | |
| | | |
Property and equipment, net | 72,080 | | | 72,147 | |
Long-term receivables, less current maturities | 153 | | | 264 | |
Goodwill | 3,332 | | | 3,239 | |
Intangibles, net | 1,090 | | | 1,136 | |
Debt issuance costs | — | | | 3,866 | |
Investment in affiliates and other assets | 27,866 | | | 27,928 | |
Deferred income taxes | 16,839 | | | 16,867 | |
TOTAL ASSETS | $ | 508,018 | | | $ | 468,104 | |
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except per share data) (unaudited)
| | | | | | | | | | | |
| July 29, 2023 | | April 29, 2023 |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
CURRENT LIABILITIES: | | | |
Current portion of long-term debt | $ | 1,500 | | | $ | — | |
Accounts payable | 62,449 | | | 67,522 | |
Contract liabilities | 89,318 | | | 91,549 | |
Accrued expenses | 31,992 | | | 36,005 | |
Warranty obligations | 13,644 | | | 12,228 | |
Income taxes payable | 5,514 | | | 2,859 | |
Total current liabilities | 204,417 | | | 210,163 | |
| | | |
Long-term warranty obligations | 20,926 | | | 20,313 | |
Long-term contract liabilities | 14,541 | | | 13,096 | |
Other long-term obligations | 5,463 | | | 5,709 | |
| | | |
Long-term debt, net | 41,422 | | | 17,750 | |
| | | |
Deferred income taxes | 202 | | | 195 | |
Total long-term liabilities | 82,554 | | | 57,063 | |
| | | |
SHAREHOLDERS' EQUITY: | | | |
Preferred Shares, no par value, authorized 50,000 shares; no shares issued and outstanding | — | | | — | |
Common Stock, no par value, authorized 115,000,000 shares; 45,644,800 and 45,488,595 shares issued at July 29, 2023 and April 29, 2023, respectively | 63,684 | | | 63,023 | |
Additional paid-in capital | 50,816 | | | 50,259 | |
Retained earnings | 122,606 | | | 103,410 | |
Treasury Stock, at cost, 1,907,445 shares at July 29, 2023 and April 29, 2023, respectively | (10,285) | | | (10,285) | |
Accumulated other comprehensive loss | (5,774) | | | (5,529) | |
TOTAL SHAREHOLDERS' EQUITY | 221,047 | | | 200,878 | |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 508,018 | | | $ | 468,104 | |
See notes to condensed consolidated financial statements.
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| January 28, 2023 | | January 29, 2022 | | January 28, 2023 | | January 29, 2022 |
Net sales | $ | 184,975 | | | $ | 139,558 | | | $ | 544,334 | | | $ | 448,767 | |
Cost of sales | 143,262 | | | 117,250 | | | 445,123 | | | 362,007 | |
Gross profit | 41,713 | | | 22,308 | | | 99,211 | | | 86,760 | |
| | | | | | | |
Operating expenses: | | | | | | | |
Selling | 12,908 | | | 12,735 | | | 41,866 | | | 37,012 | |
General and administrative | 9,861 | | | 8,328 | | | 27,989 | | | 24,100 | |
Product design and development | 7,250 | | | 6,925 | | | 21,655 | | | 21,283 | |
Goodwill impairment | 4,576 | | | — | | | 4,576 | | | — | |
| 34,595 | | | 27,988 | | | 96,086 | | | 82,395 | |
Operating income (loss) | 7,118 | | | (5,680) | | | 3,125 | | | 4,365 | |
| | | | | | | |
Nonoperating (expense) income: | | | | | | | |
Interest (expense) income, net | (398) | | | 56 | | | (721) | | | 134 | |
Other expense, net | (1,380) | | | (793) | | | (2,335) | | | (2,613) | |
| | | | | | | |
Income (loss) before income taxes | 5,340 | | | (6,417) | | | 69 | | | 1,886 | |
Income tax expense (benefit) | 1,627 | | | (2,067) | | | 14,666 | | | 177 | |
Net income (loss) | $ | 3,713 | | | $ | (4,350) | | | $ | (14,597) | | | $ | 1,709 | |
| | | | | | | |
Weighted average shares outstanding: | | | | | | | |
Basic | 45,387 | | | 45,223 | | | 45,320 | | | 45,263 | |
Diluted | 45,448 | | | 45,223 | | | 45,320 | | | 45,442 | |
| | | | | | | |
Earnings (loss) per share: | | | | | | | |
Basic | $ | 0.08 | | | $ | (0.10) | | | $ | (0.32) | | | $ | 0.04 | |
Diluted | $ | 0.08 | | | $ | (0.10) | | | $ | (0.32) | | | $ | 0.04 | |
See notes to condensed consolidated financial statements.
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| January 28, 2023 | | January 29, 2022 | | January 28, 2023 | | January 29, 2022 |
| | | | | | | |
Net income (loss) | $ | 3,713 | | | $ | (4,350) | | | $ | (14,597) | | | $ | 1,709 | |
| | | | | | | |
Other comprehensive (loss): | | | | | | | |
Cumulative translation adjustments | 1,976 | | | (714) | | | (187) | | | (1,137) | |
Unrealized gain (loss) on available-for-sale securities, net of tax | 6 | | | (10) | | | 6 | | | (10) | |
Total other comprehensive (loss), net of tax | 1,982 | | | (724) | | | (181) | | | (1,147) | |
Comprehensive income (loss) | $ | 5,695 | | | $ | (5,074) | | | $ | (14,778) | | | $ | 562 | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | | |
| July 29, 2023 | | July 30, 2022 | | | | |
Net sales | $ | 232,531 | | | $ | 171,920 | | | | | |
Cost of sales | 161,384 | | | 146,126 | | | | | |
Gross profit | 71,147 | | | 25,794 | | | | | |
| | | | | | | |
Operating expenses: | | | | | | | |
Selling | 12,929 | | | 14,433 | | | | | |
General and administrative | 9,599 | | | 9,441 | | | | | |
Product design and development | 8,403 | | | 7,439 | | | | | |
| | | | | | | |
| 30,931 | | | 31,313 | | | | | |
Operating income (loss) | 40,216 | | | (5,519) | | | | | |
| | | | | | | |
Nonoperating (expense) income: | | | | | | | |
Interest (expense) income, net | (881) | | | (60) | | | | | |
Change in fair value of convertible note | (7,260) | | | — | | | | | |
Other expense and debt issuance costs write-off, net | (3,979) | | | (747) | | | | | |
| | | | | | | |
Income (loss) before income taxes | 28,096 | | | (6,326) | | | | | |
Income tax expense (benefit) | 8,900 | | | (1,000) | | | | | |
Net income (loss) | $ | 19,196 | | | $ | (5,326) | | | | | |
| | | | | | | |
Weighted average shares outstanding: | | | | | | | |
Basic | 45,645 | | | 45,097 | | | | | |
Diluted | 46,198 | | | 45,097 | | | | | |
| | | | | | | |
Earnings (loss) per share: | | | | | | | |
Basic | $ | 0.42 | | | $ | (0.12) | | | | | |
Diluted | $ | 0.42 | | | $ | (0.12) | | | | | |
See notes to condensed consolidated financial statements.
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| July 29, 2023 | | July 30, 2022 | | | | |
| | | | | | | |
Net income (loss) | $ | 19,196 | | | $ | (5,326) | | | | | |
| | | | | | | |
Other comprehensive (loss): | | | | | | | |
Cumulative translation adjustments | (252) | | | (642) | | | | | |
Unrealized gain on available-for-sale securities, net of tax | 7 | | | 1 | | | | | |
Total other comprehensive income (loss), net of tax | (245) | | | (641) | | | | | |
Comprehensive income (loss) | $ | 18,951 | | | $ | (5,967) | | | | | |
See notes to condensed consolidated financial statements.
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total |
Balance as of April 30, 2022 | $ | 61,794 | | | $ | 48,372 | | | $ | 96,608 | | | $ | (10,285) | | | $ | (4,925) | | | $ | 191,564 | |
Net loss | — | | | — | | | (5,326) | | | — | | | — | | | (5,326) | |
Cumulative translation adjustments | — | | | — | | | — | | | — | | | (642) | | | (642) | |
Unrealized gain (loss) on available-for-sale securities, net of tax | — | | | — | | | — | | | — | | | 1 | | | 1 | |
Share-based compensation | — | | | 511 | | | — | | | — | | | — | | | 511 | |
Employee savings plan activity | 594 | | | — | | | — | | | — | | | — | | | 594 | |
| | | | | | | | | | | |
Balance as of July 30, 2022 | 62,388 | | | 48,883 | | | 91,282 | | | (10,285) | | | (5,566) | | | 186,702 | |
Net loss | — | | | — | | | (12,984) | | | — | | | — | | | (12,984) | |
Cumulative translation adjustments | — | | | — | | | — | | | — | | | (1,521) | | | (1,521) | |
Unrealized (loss) gain on available-for-sale securities, net of tax | — | | | — | | | — | | | — | | | (1) | | | (1) | |
Share-based compensation | — | | | 474 | | | — | | | — | | | — | | | 474 | |
| | | | | | | | | | | |
Tax payments related to RSU issuances | — | | | (140) | | | — | | | — | | | — | | | (140) | |
Balance as of October 29, 2022 | $ | 62,388 | | | $ | 49,217 | | | $ | 78,298 | | | $ | (10,285) | | | $ | (7,088) | | | $ | 172,530 | |
Net Income | — | | | — | | | 3,713 | | | — | | | — | | | 3,713 | |
Cumulative translation adjustments | — | | | — | | | — | | | — | | | 1,976 | | | 1,976 | |
Unrealized gain (loss) on available-for-sale securities, net of tax | — | | | — | | | — | | | — | | | 6 | | | 6 | |
Share-based compensation | — | | | 502 | | | — | | | — | | | — | | | 502 | |
| | | | | | | | | | | |
Employee savings plan activity | 614 | | | — | | | — | | | — | | | — | | | 614 | |
| | | | | | | | | | | |
Balance as of January 28, 2023 | $ | 63,002 | | | $ | 49,719 | | | $ | 82,011 | | | $ | (10,285) | | | $ | (5,106) | | | $ | 179,341 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total |
Balance as of April 29, 2023 | $ | 63,023 | | | $ | 50,259 | | | $ | 103,410 | | | $ | (10,285) | | | $ | (5,529) | | | $ | 200,878 | |
Net income | — | | | — | | | 19,196 | | | — | | | — | | | 19,196 | |
Cumulative translation adjustments | — | | | — | | | — | | | — | | | (252) | | | (252) | |
Unrealized gain on available-for-sale securities, net of tax | — | | | — | | | — | | | — | | | 7 | | | 7 | |
Share-based compensation | — | | | 557 | | | — | | | — | | | — | | | 557 | |
Exercise of stock options | 46 | | | — | | | — | | | — | | | — | | | 46 | |
Employee savings plan activity | 615 | | | — | | | — | | | — | | | — | | | 615 | |
| | | | | | | | | | | |
Balance as of July 29, 2023 | $ | 63,684 | | | $ | 50,816 | | | $ | 122,606 | | | $ | (10,285) | | | $ | (5,774) | | | $ | 221,047 | |
See notes to condensed consolidated financial statements.
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total |
Balance as of May 1, 2021 | $ | 60,575 | | | $ | 46,595 | | | $ | 96,016 | | | $ | (7,297) | | | $ | (2,335) | | | $ | 193,554 | |
Net income | — | | | — | | | 3,685 | | | — | | | — | | | 3,685 | |
Cumulative translation adjustments | — | | | — | | | — | | | — | | | (373) | | | (373) | |
Share-based compensation | — | | | 518 | | | — | | | — | | | — | | | 518 | |
Employee savings plan activity | 597 | | | — | | | — | | | — | | | — | | | 597 | |
Treasury stock reissued | — | | | 4 | | | — | | | 196 | | | — | | | 200 | |
Balance as of July 31, 2021 | 61,172 | | | 47,117 | | | 99,701 | | | (7,101) | | | (2,708) | | | 198,181 | |
Net income | — | | | — | | | 2,374 | | | — | | | — | | | 2,374 | |
Cumulative translation adjustments | — | | | — | | | — | | | — | | | (50) | | | (50) | |
Share-based compensation | — | | | 494 | | | — | | | — | | | — | | | 494 | |
Exercise of stock options | 3 | | | — | | | — | | | — | | | — | | | 3 | |
Tax payments related to RSU issuances | — | | | (199) | | | — | | | — | | | — | | | (199) | |
Balance as of October 30, 2021 | $ | 61,175 | | | $ | 47,412 | | | $ | 102,075 | | | $ | (7,101) | | | $ | (2,758) | | | $ | 200,803 | |
Net loss | — | | | — | | | (4,350) | | | — | | | — | | | (4,350) | |
Cumulative translation adjustments | — | | | — | | | — | | | — | | | (714) | | | (714) | |
Unrealized gain (loss) on available-for-sale securities, net of tax | — | | | — | | | — | | | — | | | (10) | | | (10) | |
Share-based compensation | — | | | 491 | | | — | | | — | | | — | | | 491 | |
Exercise of stock options | 5 | | | — | | | — | | | — | | | — | | | 5 | |
Employee savings plan activity | 614 | | | — | | | — | | | — | | | — | | | 614 | |
Treasury stock purchase | — | | | — | | | — | | | (3,000) | | | — | | | (3,000) | |
Balance as of January 29, 2022 | $ | 61,794 | | | $ | 47,903 | | | $ | 97,725 | | | $ | (10,101) | | | $ | (3,482) | | | $ | 193,839 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total |
Balance as of April 30, 2022 | $ | 61,794 | | | $ | 48,372 | | | $ | 96,608 | | | $ | (10,285) | | | $ | (4,925) | | | $ | 191,564 | |
Net loss | — | | | — | | | (5,326) | | | — | | | — | | | (5,326) | |
Cumulative translation adjustments | — | | | — | | | — | | | — | | | (642) | | | (642) | |
Unrealized gain (loss) on available-for-sale securities, net of tax | — | | | — | | | — | | | — | | | 1 | | | 1 | |
Share-based compensation | — | | | 511 | | | — | | | — | | | — | | | 511 | |
Employee savings plan activity | 594 | | | — | | | — | | | — | | | — | | | 594 | |
| | | | | | | | | | | |
Balance as of July 30, 2022 | $ | 62,388 | | | $ | 48,883 | | | $ | 91,282 | | | $ | (10,285) | | | $ | (5,566) | | | $ | 186,702 | |
See notes to condensed consolidated financial statements.
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | Nine Months Ended | | Three Months Ended |
| | January 28, 2023 | | January 29, 2022 | | July 29, 2023 | | July 30, 2022 |
CASH FLOWS FROM OPERATING ACTIVITIES: | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net (loss) income | $ | (14,597) | | | $ | 1,709 | | |
Adjustments to reconcile net (loss) income to net cash used in operating activities: | | | | |
Net income (loss) | | Net income (loss) | $ | 19,196 | | | $ | (5,326) | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | Depreciation and amortization | 12,543 | | | 11,544 | | Depreciation and amortization | 4,669 | | | 4,025 | |
Gain on sale of property, equipment and other assets | (588) | | | (737) | | |
Loss (gain) on sale of property, equipment and other assets | | Loss (gain) on sale of property, equipment and other assets | 11 | | | (361) | |
Share-based compensation | Share-based compensation | 1,487 | | | 1,503 | | Share-based compensation | 557 | | | 511 | |
Equity in loss of affiliates | Equity in loss of affiliates | 2,596 | | | 1,966 | | Equity in loss of affiliates | 690 | | | 890 | |
Provision (recovery) for doubtful accounts, net | Provision (recovery) for doubtful accounts, net | 674 | | | (600) | | Provision (recovery) for doubtful accounts, net | (65) | | | 177 | |
Deferred income taxes, net | Deferred income taxes, net | 13,028 | | | 151 | | Deferred income taxes, net | 12 | | | 12 | |
Goodwill impairment | 4,576 | | | — | | |
Non-cash impairment changes | | Non-cash impairment changes | 442 | | | — | |
Change in fair value of convertible note | | Change in fair value of convertible note | 7,260 | | | — | |
Debt issuance costs write-off | | Debt issuance costs write-off | 3,353 | | | — | |
Change in operating assets and liabilities | Change in operating assets and liabilities | (29,206) | | | (41,000) | | Change in operating assets and liabilities | (16,875) | | | (22,743) | |
Net cash used in operating activities | (9,487) | | | (25,464) | | |
Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | 19,250 | | | (22,815) | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchases of property and equipment | Purchases of property and equipment | (21,809) | | | (10,024) | | Purchases of property and equipment | (4,547) | | | (10,655) | |
Proceeds from sales of property, equipment and other assets | Proceeds from sales of property, equipment and other assets | 612 | | | 838 | | Proceeds from sales of property, equipment and other assets | 27 | | | 365 | |
Purchases of marketable securities | — | | | (4,045) | | |
| Proceeds from sales or maturities of marketable securities | Proceeds from sales or maturities of marketable securities | 3,490 | | | — | | Proceeds from sales or maturities of marketable securities | — | | | 999 | |
Purchases of equity and loans to equity investees | Purchases of equity and loans to equity investees | (3,240) | | | (6,695) | | Purchases of equity and loans to equity investees | (1,186) | | | (1,081) | |
Net cash used in investing activities | Net cash used in investing activities | (20,947) | | | (19,926) | | Net cash used in investing activities | (5,706) | | | (10,372) | |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Borrowings on notes payable | Borrowings on notes payable | 283,115 | | | — | | Borrowings on notes payable | 40,000 | | | 92,098 | |
Payments on notes payable | Payments on notes payable | (259,477) | | | — | | Payments on notes payable | (17,750) | | | (67,970) | |
Principal payments on long-term obligations | Principal payments on long-term obligations | — | | | (200) | | Principal payments on long-term obligations | (102) | | | — | |
Payments for common shares repurchased | — | | | (3,000) | | |
| Debt issuance cost | | Debt issuance cost | (5,838) | | | — | |
Proceed from exercise of stock options | Proceed from exercise of stock options | — | | | 8 | | Proceed from exercise of stock options | 46 | | | — | |
Tax payments related to RSU issuances | (140) | | | (199) | | |
Net cash provided by (used in) financing activities | 23,498 | | | (3,391) | | |
| Net cash provided by financing activities | | Net cash provided by financing activities | 16,356 | | | 24,128 | |
| | | | | | | | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | EFFECT OF EXCHANGE RATE CHANGES ON CASH | (342) | | | 98 | | EFFECT OF EXCHANGE RATE CHANGES ON CASH | (240) | | | 80 | |
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (7,278) | | | (48,683) | | |
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 29,660 | | | (8,979) | |
| | | | | | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH: | CASH, CASH EQUIVALENTS AND RESTRICTED CASH: | | | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH: | | | |
Beginning of period | Beginning of period | 18,008 | | | 80,402 | | Beginning of period | 24,690 | | | 18,008 | |
End of period | End of period | $ | 10,730 | | | $ | 31,719 | | End of period | $ | 54,350 | | | $ | 9,029 | |
| | | | | | | | |
Supplemental disclosures of cash flow information: | Supplemental disclosures of cash flow information: | | | | Supplemental disclosures of cash flow information: | | | |
Cash paid for: | Cash paid for: | | | | Cash paid for: | | | |
Interest | Interest | $ | 760 | | | $ | — | | Interest | $ | 97 | | | $ | 75 | |
Income taxes, net of refunds | Income taxes, net of refunds | 4,456 | | | 1,601 | | Income taxes, net of refunds | 5,771 | | | 685 | |
| | | | | | | | |
Supplemental schedule of non-cash investing and financing activities: | Supplemental schedule of non-cash investing and financing activities: | | | | Supplemental schedule of non-cash investing and financing activities: | | | |
Demonstration equipment transferred to inventory | $ | — | | | $ | 53 | | |
| Purchases of property and equipment included in accounts payable | Purchases of property and equipment included in accounts payable | 1,538 | | | 1,795 | | Purchases of property and equipment included in accounts payable | 839 | | | 3,326 | |
Contributions of common stock under the ESPP | Contributions of common stock under the ESPP | 1,207 | | | 1,211 | | Contributions of common stock under the ESPP | 614 | | | 594 | |
See notes to condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share data)
(unaudited)
Note 1. Basis of Presentation
Daktronics, Inc. and its subsidiaries (the “Company”, “Daktronics”, “we”, “our”, or “us”) are an industry leaderleaders in designing and manufacturing electronic scoreboards, programmable display systems and large screen video displays for sporting, commercial and transportation applications.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present our financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions affecting the reported amounts therein.of assets and liabilities, revenues and expenses, and the disclosure of contingent liabilities. Estimates used in the preparation of the unaudited consolidated financial statements include, among others, revenue recognition, future warranty expenses, the fair value of long-term debt, the fair value of investments in affiliates, income tax expenses, and stock-based compensation. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.
Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The balance sheet at April 30, 202229, 2023 has been derived from the audited financial statements at that date, but it does not include all the information and disclosures required by GAAP for complete financial statements. These financial statements should be read in conjunction with our financial statements and notes thereto for the fiscal year ended April 30, 2022,29, 2023, which are contained in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission ("SEC"). The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.
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 ninethree months ended January 28,July 29, 2023 and January 29,July 30, 2022 contained operating results for 3913 weeks.
Cash and cash equivalents and restricted cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the totals of the same amounts shown in the condensed consolidated statements of cash flows. Restricted cash consists of cash and cash equivalents held in bank deposit accounts to secure issuances of foreign bank guarantees.guarantees and letters of credit outstanding under a previous credit agreement.
| | | January 28, 2023 | | January 29, 2022 | | July 29, 2023 | | July 30, 2022 |
Cash and cash equivalents | Cash and cash equivalents | $ | 10,022 | | | $ | 30,883 | | Cash and cash equivalents | $ | 45,775 | | | $ | 8,279 | |
Restricted cash | Restricted cash | 708 | | | 836 | | Restricted cash | 8,575 | | | 750 | |
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | 10,730 | | | $ | 31,719 | | Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | 54,350 | | | $ | 9,029 | |
The increase in the restricted cash balance is due to bank guarantees or other financial instruments for display installations issued by other banks and secured by restricted cash deposits.
We have foreign currency cash accounts to operate our global business. These accounts are impacted by changes in foreign currency rates. Of our $10,022$45,775 in cash and cash equivalentsequivalent balances at January 28,as of July 29, 2023, $3,257$36,426 were denominated in U.S.United States dollars, of which $498$941 were held by our foreign subsidiaries. As of January 28,July 29, 2023, we had an additional $6,765$9,349 in cash balances denominated in foreign currencies, of which $5,421$8,513 were maintained in accounts of our foreign subsidiaries.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
During much of the past calendar year, we have experienced negative impacts in our business driven by global economic conditions and supply chain disruptions. These conditions have caused volatility in our cash flow, pricing, order volumes, lead-times, competitiveness, revenue cycles, and production costs. To adapt, we used cash and line of credit borrowings to increase our investment in inventory to add stability to our production processes to fulfill backlog and used cash to invest in property and equipment to expand our capacity and add automation. To improve operations and cash flows, we have increased prices of our goods and services. In addition, we instituted a liquidity enhancement plan program focusing our teams on improving our cash flow and enhancing our liquidity. Our ability to fund inventory levels, operations, and capital expenditures in the future will be dependent on our ability to generate cash flow from operations in these conditions, to maintain or improve margins, and to use funds from our credit facility. $35,000 of our credit facility expires in April 2025 and $10,000 expires in May 2023, and it requires us to comply with certain covenants.
Although supply chain disruptions have started to ease and we expect our inventory levels and working capital levels to decline, we cannot be certain we will not experience future disruptions or need additional liquidity to fund inventory levels, operations, and capital expenditures. Therefore, we plan to obtain additional liquidity to meet our obligations as they come due in the 12 months following the date of this Report, and we cannot be assured that such liquidity will be available or the form of such liquidity, such as equity raises or debt financing. These conditions raise substantial doubt about our ability to continue as a going concern.
In response to these conditions, the Board of Directors formed an independent Strategy and Financing Review Committee in December 2022, to address the Company's near-term credit needs and to examine alternatives for strengthening the Company's longer-term financial structure and liquidity profile. The Committee retained financial and legal advisors to explore additional ways to improve our long-term liquidity profile. We are pursuing additional liquidity through various means from potential financing sources, including but not limited to obtaining financing secured by a mortgage on our facilities, a sales-leaseback transaction, leasing property and equipment, longer-term asset-based lending structures, and junior capital. We have continued focusing on reducing working capital and improving profitability through activities in our liquidity enhancement plan. Because these plans are not finalized and are subject to market conditions and restrictions from our existing financing agreements that are not within our control, they cannot be deemed probable. As a result, we have concluded that our plans do not alleviate substantial doubt about our ability to continue as a going concern.
Refer to "Note 7. Financing Agreements" for additional considerations related to our financing agreements.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Variable Interest Entities
We consolidate entities in which we have a controlling financial interest by first considering if an entity meets the definition of a variable interest entity ("VIE") for which we are deemed to be the primary beneficiary, or if we have the power to control an entity through a majority of voting interest or through other arrangements.
Variable Interest Entities: A VIE is an entity (i) that lacks sufficient equity to finance its activities without additional subordinated financial support from other parties; (ii) whose equity holders lack the characteristics of a controlling financial interest; and/or (iii) that is established with non-substantive voting rights. A VIE is consolidated by its primary beneficiary, which is defined as the party who has a controlling financial interest in the VIE through (a) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance, and (b) the obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. This assessment may involve subjectivity in the determination of which activities most significantly affect the VIE’s performance and making estimates about current and future fair value of the assets held by the VIE and financial performance of the VIE. In assessing the Company's interests in the VIE, we also consider interests held by its related parties, including de facto agents. Additionally, we assess whether it is a member of a related party group that collectively meets the power and benefits criteria and, if so, whether we are most closely associated with the VIE. In performing the related party analysis, we consider both qualitative and
quantitative factors including, but not limited to: the characteristics and size of its investment relative to the related party; our and the related party's ability to control or significantly influence key decisions of the VIE, including consideration of involvement by de facto agents; the obligation or likelihood for us or the related party to fund operating losses of the VIE; and the similarity and significance of the VIE’s business activities to those of us and the related party. The determination of whether an entity is a VIE, and whether we are the primary beneficiary, may involve significant judgment, and depends upon facts and circumstances specific to an entity at the time of the assessment.
At the end of each reporting period, we reassess whether changes in facts and circumstances cause a change in the status of an entity as a VIE or voting interest entity, and/or a change in our consolidation assessment. Changes in consolidation status are applied prospectively. An entity may be consolidated as a result of this reassessment, in which case, the assets, liabilities and noncontrolling interest in the entity are recorded at fair value upon initial consolidation. Any existing equity interest held by us in the entity prior to us obtaining control will be remeasured at fair value, which may result in a gain or loss recognized upon initial consolidation. However, if the consolidation represents an asset acquisition of a voting interest entity, our existing interest in the acquired assets, if any, is not remeasured to fair value but continues to be carried at historical cost. We may also deconsolidate a subsidiary as a result of this reassessment, which may result in a gain or loss recognized upon deconsolidation depending on the carrying values of deconsolidated assets and liabilities compared to the fair value of any interests retained.
See "Note 2. Investment in Affiliates" of the Notes to our Condensed Consolidated Financial Statements included in this Report.
Recent Accounting Pronouncements
There have been no material changes to our significant accounting policies and estimates as described in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022.29, 2023.
Accounting Standards Adopted
There wereIn July 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock” (“ASU 2023-03”). This ASU amends various paragraphs in the accounting codification pursuant to the issuance of Commission Staff Bulletin ("SAB") number 120. ASU 2023-03 does not provide any new guidance, so there is no standardstransition or effective date. ASU 2023-03 did not have a material impact on our condensed consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplified the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplified the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that required entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revised the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revised the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share ("EPS") for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. For SEC filers, excluding smaller reporting companies, ASU 2020-06 was effective for fiscal years beginning after December 15, 2021 including interim periods within those fiscal years. Early adoption was permitted, but no earlier than fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-06 was effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. In the first quarter of fiscal 2024, we adopted sinceASU 2020-06. Upon adoption, we prospectively utilized the if-converted method to calculate the dilutive impact of our last Quarterly Reportconvertible note issued on May 11, 2023 (the "Convertible Note"). See "Note 7. Financing Agreements" of the Notes to our Condensed Consolidated Financial Statements included in this Form 10-Q.10-Q for further information on the Convertible Note.
Accounting Standards Not Yet Adopted
There are no significant new Accounting Standards UpdatesASU's issued that the Company has not yet adopted as of January 28, 2023.July 29, 2023
Note 2. Investments in Affiliates
We evaluated the nature of our investment in affiliates of XdisplayTM company,XdisplayTM, which is developing micro-LED mass transfer expertise and technologies, and Miortech (dba Etulipa), which is developing low power outdoor electrowetting technology. We determined that Miortech is a VIE,variable interest entity (VIE), and based on management's analysis, we determined that Daktronics is not the primary beneficiary; therefore, the investment in Miortech is accounted for under the equity method.
The aggregate amount of our investments accounted for under the equity method was $17,145$10,804 and $16,916$11,934 as of January 28,July 29, 2023 and April 30, 2022,29, 2023, respectively. Our proportional share of the respective affiliates' earnings or losses is included in the "Other expense and debt issuance costs write-off, net" line item in our condensed consolidated statements of operations. For the three and nine months ended January 28,July 29, 2023, our share of the losses of our affiliates was $895 and $2,596$690 as compared to $401 and $1,966$890 for the three and nine months ended January 29,July 30, 2022.
We purchased services for research and development activities from our equity method investees. The total of these related party transactions for the ninethree months ended January 28,July 29, 2023 and January 29,July 30, 2022 was $672$78 and $1,520,$0, respectively, which is included in the "Product design and development" line item in our condensed consolidated statements of operations, and
for the ninethree months ended January 28,July 29, 2023, $52$2 remains unpaid and is included in the "Accounts payable" line item in our condensed consolidated balance sheets.
During the ninethree months ended January 28,July 29, 2023, we invested $2,250 evidenced by$750 in convertible notes and $990 evidenced by$436 in promissory notes ("Notes"(collectively, "Notes") inof our affiliates, which is included in the "Investment in affiliates and other assets" line item in our condensed consolidated balance sheets. During the ninethree months ended January 28,July 29, 2023, we converted $2,823 evidenced by thedid not convert any Notes to stock ownership. After this conversion of Notes to stock ownership, our ownership increased to
54.5 percent in Miortech. Our ownership in XdisplayTM company isMiortech was 55.9 percent and in XdisplayTM was 16.4 percent as of January 28,July 29, 2023. The total amount of Notes as of July 29, 2023 was $9,993 and is included in the "Investments in affiliates and other assets" line item in our condensed consolidated balance sheetssheets. The Notes balance combined with the investment in affiliates balance totaled $20,797 and $24,414 as of January 28,July 29, 2023 was $7,693.and July 30, 2022, respectively.
Note 3. Earnings Per Share ("EPS")
In the first quarter of fiscal 2024, we adopted ASU 2020-06. Upon adoption, we prospectively utilized the if-converted method to calculate the dilutive impact of our convertible note issued on May 11, 2023 (the "Convertible Note"). See "Note 7. Financing Agreements" of the Notes to our Condensed Consolidated Financial Statements included in this Form 10-Q for further information on the Convertible Note. Under the if-converted method, the Convertible Note is assumed to be converted into common stock at the beginning of the reporting period, and the resulting shares are included in the denominator of the calculation. In addition, interest charges, net of any income tax effects, are added back to the numerator of the calculation. The following is a reconciliation of the net income (loss) and common share amounts used in the calculation of basic and diluted EPS for the three and nine months ended January 28,July 29, 2023 and January 29,July 30, 2022:
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | Shares | | Per share (loss) income |
For the three months ended January 28, 2023 | | | | | |
Basic earnings per share | $ | 3,713 | | | 45,387 | | | $ | 0.08 | |
Dilution associated with stock compensation plans | — | | | 61 | | | — | |
Diluted earnings per share | $ | 3,713 | | | 45,448 | | | $ | 0.08 | |
For the three months ended January 29, 2022 | | | | | |
Basic and diluted (loss) earnings per share | $ | (4,350) | | | 45,223 | | | $ | (0.10) | |
| | | | | |
Diluted (loss) earnings per share | $ | (4,350) | | | 45,223 | | | $ | (0.10) | |
For the nine months ended January 28, 2023 | | | | | |
Basic and diluted (loss) earnings per share | $ | (14,597) | | | 45,320 | | | $ | (0.32) | |
| | | | | |
Diluted (loss) earnings per share | $ | (14,597) | | | 45,320 | | | $ | (0.32) | |
For the nine months ended January 29, 2022 | | | | | |
Basic earnings per share | $ | 1,709 | | | 45,263 | | | $ | 0.04 | |
Dilution associated with stock compensation plans | — | | | 179 | | | — | |
Diluted earnings per share | $ | 1,709 | | | 45,442 | | | $ | 0.04 | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| July 29, 2023 | | July 30, 2022 | | | | |
Earnings per share - basic | | | | | | | |
Net income (loss) | $ | 19,196 | | | $ | (5,326) | | | | | |
Weighted average shares outstanding | 45,645 | | | 45,097 | | | | | |
Basic earnings (loss) per share | $ | 0.42 | | | $ | (0.12) | | | | | |
| | | | | | | |
Earnings per share - diluted | | | | | | | |
Net income (loss) | $ | 19,196 | | | $ | (5,326) | | | | | |
| | | | | | | |
Diluted net income (loss) | $ | 19,196 | | | $ | (5,326) | | | | | |
| | | | | | | |
Weighted average common shares outstanding | 45,645 | | | 45,097 | | | | | |
Dilution associated with stock compensation plans | 553 | | | — | | | | | |
| | | | | | | |
Weighted average common shares outstanding, assuming dilution | 46,198 | | | 45,097 | | | | | |
| | | | | | | |
Diluted earnings (loss) per share | $ | 0.42 | | | $ | (0.12) | | | | | |
Options outstanding to purchase 1,326 shares of common stock with a weighted average exercise price of $8.97 for the three months ended July 29, 2023 and 2,102 shares of common stock with a weighted average exercise price of $7.13$8.12 for the three months ended January 28, 2023 and 2,216 shares of common stock with a weighted average exercise price of $8.17 for the three months ended January 29,July 30, 2022 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
Options outstanding to purchase 2,089 shares of common stock with a weighted average exercise price of $7.59 for the nine months ended January 28, 2023 and 1,857 shares of common stock with a weighted average exercise price of $9.26 for the nine months ended January 29, 2022 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
Note 4. Revenue Recognition
Disaggregation of revenue
In accordance with Accounting Standards Codification ("ASC") 606-10-50, we disaggregate revenue from contracts with customers by the type of performance obligation and the timing of revenue recognition. We determine that disaggregating revenue in these categories achieves the disclosure objective to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors and to enable users of financial statements to understand the relationship to each reportable segment.
The following table presents our disaggregation of revenue by segments:
| | | Three Months Ended January 28, 2023 | | Three Months Ended July 29, 2023 |
Commercial | | Live Events | | High School Park and Recreation | | Transportation | | International | | Total | Commercial | | Live Events | | High School Park and Recreation | | Transportation | | International | | Total |
Type of performance obligation | Type of performance obligation | | | | | | | | | | | | Type of performance obligation | | | | | | | | | | | |
Unique configuration | Unique configuration | $ | 9,929 | | | $ | 53,437 | | | $ | 3,380 | | | $ | 11,446 | | | $ | 8,138 | | | $ | 86,330 | | Unique configuration | $ | 12,918 | | | $ | 76,547 | | | $ | 15,119 | | | $ | 12,584 | | | $ | 8,790 | | | $ | 125,958 | |
Limited configuration | Limited configuration | 35,864 | | | 7,858 | | | 23,865 | | | 5,328 | | | 11,040 | | | 83,955 | | Limited configuration | 29,913 | | | 9,961 | | | 40,337 | | | 8,067 | | | 5,239 | | | 93,517 | |
Service and other | Service and other | 4,174 | | | 6,453 | | | 1,067 | | | 804 | | | 2,192 | | | 14,690 | | Service and other | 4,052 | | | 5,491 | | | 778 | | | 718 | | | 2,017 | | | 13,056 | |
| | $ | 49,967 | | | $ | 67,748 | | | $ | 28,312 | | | $ | 17,578 | | | $ | 21,370 | | | $ | 184,975 | | | $ | 46,883 | | | $ | 91,999 | | | $ | 56,234 | | | $ | 21,369 | | | $ | 16,046 | | | $ | 232,531 | |
Timing of revenue recognition | Timing of revenue recognition | | | | | | | | | | | | Timing of revenue recognition | | | | | | | | | | | |
Goods/services transferred at a point in time | Goods/services transferred at a point in time | $ | 36,746 | | | $ | 10,125 | | | $ | 22,716 | | | $ | 5,571 | | | $ | 11,861 | | | $ | 87,019 | | Goods/services transferred at a point in time | $ | 31,018 | | | $ | 10,777 | | | $ | 39,081 | | | $ | 8,267 | | | $ | 5,843 | | | $ | 94,986 | |
Goods/services transferred over time | Goods/services transferred over time | 13,221 | | | 57,623 | | | 5,596 | | | 12,007 | | | 9,509 | | | 97,956 | | Goods/services transferred over time | 15,865 | | | 81,222 | | | 17,153 | | | 13,102 | | | 10,203 | | | 137,545 | |
| | $ | 49,967 | | | $ | 67,748 | | | $ | 28,312 | | | $ | 17,578 | | | $ | 21,370 | | | $ | 184,975 | | | $ | 46,883 | | | $ | 91,999 | | | $ | 56,234 | | | $ | 21,369 | | | $ | 16,046 | | | $ | 232,531 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended January 28, 2023 |
Commercial | | Live Events | | High School Park and Recreation | | Transportation | | International | | Total |
Type of performance obligation | | | | | | | | | | | |
Unique configuration | $ | 20,198 | | | $ | 148,467 | | | $ | 17,828 | | | $ | 35,330 | | | $ | 20,762 | | | $ | 242,585 | |
Limited configuration | 94,408 | | | 26,013 | | | 85,123 | | | 15,969 | | | 36,826 | | | 258,339 | |
Service and other | 12,526 | | | 18,890 | | | 3,176 | | | 2,498 | | | 6,320 | | | 43,410 | |
| $ | 127,132 | | | $ | 193,370 | | | $ | 106,127 | | | $ | 53,797 | | | $ | 63,908 | | | $ | 544,334 | |
Timing of revenue recognition | | | | | | | | | | | |
Goods/services transferred at a point in time | $ | 97,381 | | | $ | 31,029 | | | $ | 80,935 | | | $ | 16,702 | | | $ | 38,756 | | | $ | 264,803 | |
Goods/services transferred over time | 29,751 | | | 162,341 | | | 25,192 | | | 37,095 | | | 25,152 | | | 279,531 | |
| $ | 127,132 | | | $ | 193,370 | | | $ | 106,127 | | | $ | 53,797 | | | $ | 63,908 | | | $ | 544,334 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended January 29, 2022 |
Commercial | | Live Events | | High School Park and Recreation | | Transportation | | International | | Total |
Type of performance obligation | | | | | | | | | | | |
Unique configuration | $ | 4,112 | | | $ | 25,950 | | | $ | 4,167 | | | $ | 9,803 | | | $ | 8,606 | | | $ | 52,638 | |
Limited configuration | 32,081 | | | 6,843 | | | 18,717 | | | 5,269 | | | 10,453 | | | 73,363 | |
Service and other | 3,902 | | | 6,264 | | | 837 | | | 751 | | | 1,803 | | | 13,557 | |
| $ | 40,095 | | | $ | 39,057 | | | $ | 23,721 | | | $ | 15,823 | | | $ | 20,862 | | | $ | 139,558 | |
Timing of revenue recognition | | | | | | | | | | | |
Goods/services transferred at a point in time | $ | 32,829 | | | $ | 8,540 | | | $ | 17,351 | | | $ | 5,576 | | | $ | 10,967 | | | $ | 75,263 | |
Goods/services transferred over time | 7,266 | | | 30,517 | | | 6,370 | | | 10,247 | | | 9,895 | | | 64,295 | |
| $ | 40,095 | | | $ | 39,057 | | | $ | 23,721 | | | $ | 15,823 | | | $ | 20,862 | | | $ | 139,558 | |
| | | Nine Months Ended January 29, 2022 | | Three Months Ended July 30, 2022 |
Commercial | | Live Events | | High School Park and Recreation | | Transportation | | International | | Total | Commercial | | Live Events | | High School Park and Recreation | | Transportation | | International | | Total |
Type of performance obligation | Type of performance obligation | | | | | | | | | | | | Type of performance obligation | | | | | | | | | | | |
Unique configuration | Unique configuration | $ | 12,258 | | | $ | 110,986 | | | $ | 15,241 | | | $ | 25,320 | | | $ | 26,051 | | | $ | 189,856 | | Unique configuration | $ | 4,687 | | | $ | 42,168 | | | $ | 6,592 | | | $ | 12,486 | | | $ | 6,501 | | | $ | 72,434 | |
Limited configuration | Limited configuration | 83,965 | | | 21,510 | | | 66,590 | | | 15,173 | | | 32,464 | | | 219,702 | | Limited configuration | 31,776 | | | 8,480 | | | 28,283 | | | 6,099 | | | 11,501 | | | 86,139 | |
Service and other | Service and other | 11,116 | | | 18,344 | | | 2,531 | | | 1,941 | | | 5,277 | | | 39,209 | | Service and other | 3,655 | | | 5,735 | | | 934 | | | 955 | | | 2,068 | | | 13,347 | |
| | $ | 107,339 | | | $ | 150,840 | | | $ | 84,362 | | | $ | 42,434 | | | $ | 63,792 | | | $ | 448,767 | | | $ | 40,118 | | | $ | 56,383 | | | $ | 35,809 | | | $ | 19,540 | | | $ | 20,070 | | | $ | 171,920 | |
Timing of revenue recognition | Timing of revenue recognition | | | | | | | | | | | | Timing of revenue recognition | | | | | | | | | | | |
Goods/services transferred at a point in time | Goods/services transferred at a point in time | $ | 85,570 | | | $ | 26,877 | | | $ | 62,407 | | | $ | 15,781 | | | $ | 33,801 | | | $ | 224,436 | | Goods/services transferred at a point in time | $ | 32,557 | | | $ | 9,222 | | | $ | 27,090 | | | $ | 6,382 | | | $ | 11,876 | | | $ | 87,127 | |
Goods/services transferred over time | Goods/services transferred over time | 21,769 | | | 123,963 | | | 21,955 | | | 26,653 | | | 29,991 | | | 224,331 | | Goods/services transferred over time | 7,561 | | | 47,161 | | | 8,719 | | | 13,158 | | | 8,194 | | | 84,793 | |
| | $ | 107,339 | | | $ | 150,840 | | | $ | 84,362 | | | $ | 42,434 | | | $ | 63,792 | | | $ | 448,767 | | | $ | 40,118 | | | $ | 56,383 | | | $ | 35,809 | | | $ | 19,540 | | | $ | 20,070 | | | $ | 171,920 | |
See "Note 5. Segment Reporting" for a disaggregation of revenue by geography.
Contract balances
Contract assets represent revenue recognized in excess of amounts billed and include unbilled receivables. Unbilled receivables, which represent an unconditional right to payment subject only to the passage of time, are reclassified to
accounts receivable when they are billed according to the contract terms. Contract liabilities represent amounts billed to the customers in excess of revenue recognized to date.
The following table reflects the changes in our contract assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | | |
| January 28, 2023 | | April 30, 2022 | | Dollar Change | | Percent Change |
Contract assets | $ | 36,098 | | | $ | 41,687 | | | $ | (5,589) | | | (13.4) | % |
Contract liabilities - current | 97,703 | | | 90,393 | | | 7,310 | | | 8.1 | |
Contract liabilities - noncurrent | 12,674 | | | 10,998 | | | 1,676 | | | 15.2 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| July 29, 2023 | | April 29, 2023 | | Dollar Change | | Percent Change |
Contract assets | $ | 50,539 | | | $ | 46,789 | | | $ | 3,750 | | | 8.0 | % |
Contract liabilities - current | 89,318 | | | 91,549 | | | (2,231) | | | (2.4) | |
Contract liabilities - noncurrent | 14,541 | | | 13,096 | | | 1,445 | | | 11.0 | |
The changes in our contract assets and contract liabilities from April 30, 202229, 2023 to January 28,July 29, 2023 were due to the timing of billing schedules and revenue recognition, which can vary significantly depending on the contractual payment terms and the seasonality of the sports markets. We had no impairments of contract assets for the ninethree months ended January 28,July 29, 2023.
For service-type warranty contracts, we allocate revenue to this performance obligation, recognize the revenue over time, and recognize costs as incurred. Earned and unearned revenues for these contracts are included in the "Contract assets" and "Contract liabilities". Changes in unearned service-type warranty contracts, net were as follows:
| | | | | |
| January 28,July 29, 2023 |
Balance as of April 30, 202229, 2023 | $ | 26,34628,338 | |
New contracts sold | 35,31913,218 | |
Less: reductions for revenue recognized | (32,406)(9,785) | |
Foreign currency translation and other | (128)(1,044) | |
Balance as of January 28,July 29, 2023 | $ | 29,13130,727 | |
Contracts in progress identified as loss contracts as of January 28,July 29, 2023 and as of April 30, 202229, 2023 were immaterial. Loss provisions are recorded in the "Accrued expenses" line item in our condensed consolidated balance sheets.
During the ninethree months ended January 28,July 29, 2023, we recognized revenue of $81,966$59,506 related to our contract liabilities as of April 30, 2022.29, 2023.
Remaining performance obligations
As of January 28,July 29, 2023, the aggregate amount of the transaction price allocated to the remaining performance obligations was $491,345.$386,622. Remaining performance obligations related to product and service agreements at January 28,as of July 29, 2023 were $429,097$323,725 and $62,248,$62,897, respectively. We expect approximately $430,602$320,898 of our remaining performance obligations to be recognized over the next 12 months, with the remainder recognized thereafter. Although remaining performance obligations reflect business that is considered to be legally binding, cancellations, deferrals or scope adjustments may occur. Any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations, and project deferrals are reflected or excluded in the remaining performance obligation balance, as appropriate. The amount of revenue recognized associated with performance obligations satisfied in prior years during the three months ended July 29, 2023 and July 30, 2022 was immaterial.
Note 5. Segment Reporting
The following table sets forth certain financial information for each of our five reporting segments for the periods indicated:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
January 28, 2023 | | January 29, 2022 | | January 28, 2023 | | January 29, 2022 | July 29, 2023 | | July 30, 2022 | |
Net sales: | Net sales: | | | | | | | | Net sales: | | | | |
Commercial | Commercial | $ | 49,967 | | | $ | 40,095 | | | $ | 127,132 | | | $ | 107,339 | | Commercial | $ | 46,883 | | | $ | 40,118 | | |
Live Events | Live Events | 67,748 | | | 39,057 | | | 193,370 | | | 150,840 | | Live Events | 91,999 | | | 56,383 | | |
High School Park and Recreation | High School Park and Recreation | 28,312 | | | 23,721 | | | 106,127 | | | 84,362 | | High School Park and Recreation | 56,234 | | | 35,809 | | |
Transportation | Transportation | 17,578 | | | 15,823 | | | 53,797 | | | 42,434 | | Transportation | 21,369 | | | 19,540 | | |
International | International | 21,370 | | | 20,862 | | | 63,908 | | | 63,792 | | International | 16,046 | | | 20,070 | | |
| | 184,975 | | | 139,558 | | | 544,334 | | | 448,767 | | | 232,531 | | | 171,920 | | |
| Gross profit: | Gross profit: | | Gross profit: | | |
Commercial | Commercial | 10,547 | | | 8,239 | | | 21,565 | | | 22,862 | | Commercial | 12,769 | | | 4,821 | | |
Live Events | Live Events | 14,405 | | | 3,094 | | | 26,174 | | | 17,261 | | Live Events | 27,940 | | | 3,786 | | |
High School Park and Recreation | High School Park and Recreation | 7,555 | | | 6,958 | | | 29,343 | | | 27,216 | | High School Park and Recreation | 20,825 | | | 9,977 | | |
Transportation | Transportation | 5,534 | | | 4,108 | | | 15,456 | | | 12,263 | | Transportation | 7,089 | | | 5,838 | | |
International | International | 3,672 | | | (91) | | | 6,673 | | | 7,158 | | International | 2,524 | | | 1,372 | | |
| | 41,713 | | | 22,308 | | | 99,211 | | | 86,760 | | | 71,147 | | | 25,794 | | |
| Operating expenses: | Operating expenses: | | Operating expenses: | | |
Selling | Selling | 12,908 | | | 12,735 | | | 41,866 | | | 37,012 | | Selling | 12,929 | | | 14,433 | | |
General and administrative | General and administrative | 9,861 | | | 8,328 | | | 27,989 | | | 24,100 | | General and administrative | 9,599 | | | 9,441 | | |
Product design and development | Product design and development | 7,250 | | | 6,925 | | | 21,655 | | | 21,283 | | Product design and development | 8,403 | | | 7,439 | | |
Goodwill impairment | 4,576 | | | — | | | 4,576 | | | — | | |
| | | 34,595 | | | 27,988 | | | 96,086 | | | 82,395 | | | 30,931 | | | 31,313 | | |
Operating income (loss) | Operating income (loss) | 7,118 | | | (5,680) | | | 3,125 | | | 4,365 | | Operating income (loss) | 40,216 | | | (5,519) | | |
| Nonoperating (expense) income: | Nonoperating (expense) income: | | Nonoperating (expense) income: | | |
Interest (expense) income, net | Interest (expense) income, net | (398) | | | 56 | | | (721) | | | 134 | | Interest (expense) income, net | (881) | | | (60) | | |
Other expense, net | (1,380) | | | (793) | | | (2,335) | | | (2,613) | | |
Change in fair value of convertible note | | Change in fair value of convertible note | (7,260) | | | — | | |
Other expense and debt issuance costs write-off, net | | Other expense and debt issuance costs write-off, net | (3,979) | | | (747) | | |
Income (loss) before income taxes | Income (loss) before income taxes | $ | 5,340 | | | $ | (6,417) | | | $ | 69 | | | $ | 1,886 | | Income (loss) before income taxes | $ | 28,096 | | | $ | (6,326) | | |
| Depreciation and amortization: | Depreciation and amortization: | | Depreciation and amortization: | | |
Commercial | Commercial | $ | 927 | | | $ | 646 | | | $ | 2,564 | | | $ | 1,949 | | Commercial | $ | 1,042 | | | $ | 803 | | |
Live Events | Live Events | 1,534 | | | 1,275 | | | 4,727 | | | 3,860 | | Live Events | 1,613 | | | 1,566 | | |
High School Park and Recreation | High School Park and Recreation | 452 | | | 318 | | | 1,174 | | | 1,096 | | High School Park and Recreation | 462 | | | 339 | | |
Transportation | Transportation | 163 | | | 136 | | | 416 | | | 402 | | Transportation | 168 | | | 125 | | |
International | International | 608 | | | 703 | | | 1,719 | | | 2,181 | | International | 566 | | | 545 | | |
Unallocated corporate depreciation | 634 | | | 677 | | | 1,943 | | | 2,056 | | |
Unallocated corporate depreciation and amortization | | Unallocated corporate depreciation and amortization | 818 | | | 647 | | |
| | $ | 4,318 | | | $ | 3,755 | | | $ | 12,543 | | | $ | 11,544 | | | $ | 4,669 | | | $ | 4,025 | | |
No single geographic area comprises a material amount of our net sales or property and equipment, net of accumulated depreciation, other than the United States. The following table presents information about net sales and property and equipment, net of accumulated depreciation, in the United States and elsewhere:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
January 28, 2023 | | January 29, 2022 | | January 28, 2023 | | January 29, 2022 | July 29, 2023 | | July 30, 2022 | |
Net sales: | Net sales: | | | | | | | | Net sales: | | | | |
United States | United States | $ | 161,467 | | | $ | 112,389 | | | $ | 474,048 | | | $ | 374,692 | | United States | $ | 214,593 | | | $ | 149,438 | | |
Outside United States | Outside United States | 23,508 | | | 27,169 | | | 70,286 | | | 74,075 | | Outside United States | 17,938 | | | 22,482 | | |
| | $ | 184,975 | | | $ | 139,558 | | | $ | 544,334 | | | $ | 448,767 | | | $ | 232,531 | | | $ | 171,920 | | |
| | | January 28, 2023 | | April 30, 2022 | | July 29, 2023 | | April 29, 2023 |
Property and equipment, net of accumulated depreciation: | Property and equipment, net of accumulated depreciation: | | | | Property and equipment, net of accumulated depreciation: | | | |
United States | United States | $ | 65,073 | | | $ | 58,643 | | United States | $ | 64,251 | | | $ | 63,786 | |
Outside United States | Outside United States | 8,722 | | | 8,122 | | Outside United States | 7,829 | | | 8,361 | |
| | $ | 73,795 | | | $ | 66,765 | | | $ | 72,080 | | | $ | 72,147 | |
We have numerous customers worldwide for sales of our products and services, and no customer accounted for 10 percent or more of net sales for the three and nine months ended January 28, 2023 and January 29, 2022;sales; therefore, we are not economically dependent on a limited number of customers for the sale of our products and services.
We have numerous raw material and component suppliers, and no supplier accounts for 10 percent or more of our cost of sales; however, we have a complex global supply chain subject to geopolitical and transportation risks and a number of single-source suppliers that could limit our supply or cause delays in obtaining raw materials and components needed in manufacturing.
Note 6. Goodwill
The changes in the carrying amount of goodwill related to each reportable segment for the ninethree months ended January 28,July 29, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Live Events | | Commercial | | Transportation | | International | | Total |
Balance as of April 30, 2022 | $ | 2,296 | | | $ | 3,349 | | | $ | 68 | | | $ | 2,214 | | | $ | 7,927 | |
Foreign currency translation | (15) | | | (109) | | | (15) | | | 81 | | | (58) | |
Goodwill impairment | (2,281) | | | — | | | — | | | (2,295) | | | (4,576) | |
Balance as of January 28, 2023 | $ | — | | | $ | 3,240 | | | $ | 53 | | | $ | — | | | $ | 3,293 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Commercial | | Transportation | | | | Total |
Balance as of April 29, 2023 | | | $ | 3,198 | | | $ | 41 | | | | | $ | 3,239 | |
Foreign currency translation | | | 72 | | | 21 | | | | | 93 | |
| | | | | | | | | |
Balance as of July 29, 2023 | | | $ | 3,270 | | | $ | 62 | | | | | $ | 3,332 | |
We perform an analysis of goodwill on an annual basis and test for impairment more frequently if events or changes in circumstances indicate that an asset might be impaired. Our annual analysis is performed during our third quarter of each fiscal year based on the goodwill amount as of the first business day of our third fiscal quarter.
We performed our annual impairment test on October 30, 2022 and concluded that the carrying value of the Live Events and International reporting units exceeded their respective fair values and consequently recorded an impairment charge as noted in the above table. We determined the fair value of the reporting units based on an income approach, using the present value of future discounted cash flows. Significant estimates used to determine fair value include the weighted average cost of capital and financial forecasts. The recognized impairment was primarily a result of our weighted average cost of capital being notably higher, which was driven by strains on our liquidity caused by disrupted supply chains and geopolitical conditions that have given ongoing logistics challenges to certain large projects. As a result the present value of our future cash flows was lower, which caused the $4,576 impairment charge. Based on our annual impairment test, we concluded that the fair value of the Commercial and Transportation reporting units exceeded their respective carrying values and concluded no goodwill impairment existed for those reporting units.
Note 7. Financing Agreements
We haveLong-term debt consists of the following:
| | | | | | | | | | | |
| July 29, 2023 | | April 29, 2023 |
ABL credit facility | $ | — | | | $ | — | |
Prior line of credit | — | | | 17,750 | |
Mortgage | 15,000 | | | — | |
Convertible note | 25,000 | | | — | |
Long-term debt, gross | 40,000 | | | 17,750 | |
Debt issuance costs | (4,338) | | | — | |
Change in fair value of convertible note | 7,260 | | | — | |
Current portion | (1,500) | | | — | |
Long-term debt, net | $ | 41,422 | | | $ | 17,750 | |
Credit Agreements
On May 11, 2023, we closed on a $35,000 line$75,000 senior credit facility (the "Credit Facility"). The Credit Facility consists of a $60,000 asset-based revolving credit facility (the "ABL") maturing on May 11. 2026, secured by first priority lien on the Company's assets and which is subject to certain factors which can impact our borrowing capacity, and a $15,000 delayed draw loan (the "Delayed Draw Loan") secured by a first priority mortgage on our Brookings, South Dakota real estate (the "Mortgage"). The ABL and Delayed Draw Loan are evidenced by a Credit Agreement dated as of May 11, 2023 (the "Credit Agreement") between the Company and JPMorgan Chase Bank, N.A., as the lender. On May 11, 2023 the Company paid all amounts outstanding on the prior credit agreement and this prior credit agreement was terminated as of this date. No gain or loss was recognized upon termination and the Company incurred no early termination penalties in connection with such termination.
Under the ABL, certain factors can impact our borrowing capacity. As of July 29, 2023, our borrowing capacity was $47,596, and there were no borrowings outstanding and $1,460 used to secure letters of credit which expiresoutstanding.
The interest rate on the ABL is set on a sliding scale based on the trailing 12 month fixed charge coverage and ranges from 2.5 percent to 3.5 percent over the standard overnight financing rate (SOFR). The ABL is secured by a first priority lien on the Company's assets described in April 2025. the Credit Agreement and the Pledge and Security Agreement dated as of May 11, 2023 by and among the Company, Daktronics Installation, Inc. and JPMorgan Chase Bank, N.A.
The $15,000 Delayed Draw Loan was funded on July 7, 2023 and is secured the Mortgage on the Company's Brookings, South Dakota real estate. It amortizes over 10 years and has monthly payments of $125. The Delayed Draw Loan is subject to the terms of the Credit Agreement and matures on May 11, 2026. The interest rate on the Delayed Draw Loan is set on a sliding scale based on the trailing 12 month fixed charge coverage ratio and ranges between 1.0 percent and 2.0 percent over the Commercial Bank Floating Rate (CBFR).
Convertible Note
On January 23,May 11, 2023, we enteredissued $25,000 in aggregate principal amount evidenced by the secured Convertible Note due May 11, 2027. The Convertible Note holder has a second priority lien on assets securing the ABL facility and a first priority lien on substantially all of the other assets of the Company, excluding all real property, subject to the Intercreditor Agreement dated as of May 11, 2023 by and among the Company, JPMorgan Chase Bank N.A., and the holder of the Convertible Note.
Conversion Features
•The Convertible Note allows the Investor and any of the Investor’s permitted transferees, donees, pledgees, assignees or successors-in-interest (collectively, the “Selling Shareholders”) to convert all or any portion of the principal amount of the Convertible Note, together with any accrued and unpaid interest and any other unpaid amounts, including late charges, if any (together, the “Conversion Amount”), into shares of the Company’s common stock at an agreementinitial conversion price of $6.31 per share, subject to temporarily expandadjustment in accordance with the lineterms of credit by $10,000 through May 1, 2023. As of January 28, 2023, $23,638 had been advancedthe Convertible Note (the “Conversion Price”).
•The Company also has a forced conversion right, which is exercisable on the occurrence of certain conditions set forth in the Convertible Note, pursuant to which it can cause all or any portion of the outstanding and unpaid Conversion Amount to be converted into shares of common stock at the Conversion Price.
Additionally, if the Company fails other than by reason of a failure by the Holder to comply with its obligations, the Holder is permitted to cash payments from the Company until the Conversion Failure is cured.
Redemption Features
•If the Company were to have an Event of Default, as defined by the Convertible Note, then the Holder may require the Company to redeem all or any portion of the Note.
•If the Company has a Change of Control, as defined by the Convertible Note, then the Holder is entitled to the outstanding amount of the Note at the Change in Control Redemption Price as defined in the Note.
Interest
Interest is payable in either (i) cash or (ii) in a combination of cash interest and capitalized interest at the option of the Company; provided, however, that at least fifty percent (50%) of the interest paid on each interest date must be paid as cash interest. The Convertible Note accrues interest quarterly at an annual rate of 9.0 percent when interest is paid in cash or an annual rate of 10.0 percent if interest is paid in kind. Upon an event of default under the loan portionConvertible Note, the annual interest rate will increase to 12.0 percent. The annual rate of 9.0 percent was used to calculate the interest accrued as of July 29, 2023.
We elected the fair value option to account for the Convertible Note as described in "Note 10. Fair Value Measurement" of the Notes to our line of credit,Condensed Consolidated Financial Statements included in this Form 10-Q for further information. The financial liability was initially measured at its issue-date fair value and is subsequently remeasured at fair value on a recurring basis at each reporting period date. We have elected to present the fair value and the balanceaccrued interest component separately in the income statement. Therefore, interest will be recognized and accrued separately in interest expense, with changes in fair value of lettersthe Note presented in the "Change in fair value of credit outstandingconvertible note" line item in our condensed consolidated statements of operations.
The changes in fair value of the Convertible Note during the quarter ended July 29, 2023 is as follows:
| | | | | |
| Liability Component |
| (in thousands) |
As of May 11, 2023 | $ | 25,000 | |
Redemption of convertible promissory note | — | |
Fair Value Change Recognized | 7,260 | |
As of July 29, 2023 | $ | 32,260 | |
The estimated fair value of the Convertible Note upon issuance date May 11, 2023 and as of July 29, 2023 was approximately $7,516.computed using a Binomial Lattice Model which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement.
We determined the fair value by using the following key assumptions in the Binomial Lattice Model:
| | | | | |
Risk-Free Rate (Annual) | 4.34 | % |
Implied Yield | 18.54 | % |
Volatility (Annual) | 55.00 | % |
Dividend Yield (Annual) | — | % |
The Credit Agreement and the Convertible Note require a fixed charge coverage ratio of greater than 1.1 and include other customary non-financial covenants. As of January 28,July 29, 2023, we were in compliance with our financial covenants.covenants under the Credit Agreement and the Convertible Note.
Debt Issuance Costs
Debt issuance costs incurred and capitalized are amortized on a straight-line basis over the term of the associated debt agreement. If early principal payments or conversions occur, a proportional amount of unamortized debt issuance costs is expensed. As part of these financings, we capitalized $8,019 in debt issuance costs. During the first quarter, due to the Convertible Note being accounted for at fair value, we expensed $3,353 of the related debt issuance costs which is included in the "Other expense and debt issuance costs write-off, net" line item in our condensed consolidated statements of operations. During the first quarter, we have amortized $328 of debt issuance costs. The remaining debt issuance costs of $4,338 is being amortized over the four-year term of the Credit Facility agreement.
Fair Value and Future Maturities
As of January 28,July 29, 2023 and April 29, 2023, the fair value of long-term debt, gross was $47,260 and $17,750, respectively. The fair value of the Convertible Notes was $32,260 as of July 29, 2023.
Aggregate contractual maturities of debt in future fiscal years are as follows:
| | | | | |
Fiscal years ending | Amount |
Remainder of 2024 | $ | 1,125 | |
2025 | 1,500 | |
2026 | 1,500 | |
2027 | 10,875 | |
2028 | 25,000 | |
2029 and beyond | — | |
Total senior secured notes and convertible notes | $ | 40,000 | |
As of July 29, 2023, we had $616$6,114 of bank guarantees or other financial instruments for display installations issued by another bankother banks and secured by a restricted cash deposit.deposits. If we are unable to meet the terms of the arrangement, the bank would subrogate its loss by drawing on the secured cash deposit.
Note 8. Commitments and Contingencies
Litigation: We are a party to legal proceedings and claims which arise during the ordinary course of business. We review our legal proceedings and claims, regulatory reviews and inspections, and other legal matters on an ongoing basis and follow appropriate accounting guidance when making accrual and disclosure decisions. We establish accruals for those contingencies when the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued if such disclosure is necessary for our financial statements to not be misleading. We do not record an accrual when the likelihood of loss being incurred is probable, but the amount cannot be reasonably estimated, or when the loss is believed to be only reasonably possible or remote, although disclosures will be made for material matters as required by ASC 450-20, Contingencies - Loss Contingencies. Our assessment of whether a loss is reasonably possible or probable is based on our assessment and consultation with legal counsel regarding the ultimate outcome of the matter following all appeals.
For other unresolved legal proceedings or claims, we do not believe there is a reasonable probability that any material loss willwould be incurred. Accordingly, no material accrual or disclosure of a potential range of loss has been made related to these matters. We do not expect the ultimate liability of these unresolved legal proceedings or claims to have a material effect on our financial position, liquidity, or capital resources.
On December 21, 2022, a putative class action lawsuit captioned Settles, et al. v. Daktronics, Inc., et al., Case No. 22-cv-10793 (“Securities Action”) was filed against the Company and two of its officers in the U.S. District Court for the Southern District of New York. The Securities Action asserts claims under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 alleging, among other things, the Company made materially false and misleading statements and failed to disclose material adverse facts which allegedly resulted in harm to a putative class of purchasers of our securities from March 10, 2022 through December 6, 2022. We are still evaluating the complaint, which is subject to amendment, but based on current knowledge we believe that the claims are without merit. We believe the likelihood of loss is remote. Accordingly, no accrual has been made.
Warranties: Changes in our warranty obligation for the ninethree months ended January 28,July 29, 2023 consisted of the following:
| | | | | |
| January 28,July 29, 2023 |
Beginning accrued warranty obligations | $ | 28,87832,541 | |
Warranties issued during the period | 9,4234,375 | |
Settlements made during the period | (8,251)(2,744) | |
Changes in accrued warranty obligations for pre-existing warranties during the period, including expirations | 164398 | |
Ending accrued warranty obligations | $ | 30,21434,570 | |
Performance guarantees: We have entered into standby letters of credit, bank guarantees and surety bonds with financial institutions relating to the guarantee of our future performance on contracts, primarily construction-type contracts. As of January 28,July 29, 2023, we had outstanding letters of credit, bank guarantees and surety bonds in the amount of $7,516, $616$1,460, $6,114 and $63,312,$40,394, respectively. Performance guarantees are issued to certain customers to guarantee the operation and installation of the equipment and our ability to complete a contract. These performance guarantees have various terms but are generally have a term of one year. We enter into written agreements with our customers, and those agreements often contain indemnification provisions that require us to make the customer whole if certain acts or omissions by us cause the customer financial loss. We make efforts to negotiate reasonable caps and limitations on the recovery of such damages. As of January 28,July 29, 2023, we were not aware of any material indemnification claim from a customer.claims.
Note 9. Income Taxes
The provision for income taxes during interim reporting periods is calculated by applying an estimate of the annual effective tax rate. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income (or loss) for the year, projections of the proportion of income (or loss) earned and taxed in foreign jurisdictions, and permanent and temporary differences and the likelihood of recovering deferred tax assets, then adjusted for any discrete items. The accounting estimates used to compute the provision for income taxes may change as new events occur, assumptions change, or additional information is obtained.
Under GAAP, we are required to evaluate the recoverability of our deferred tax assets and establish a valuation allowance if necessary to reduce our deferred tax assets to an amount that is more likely than not to be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as in determining the amount of such allowances. We establish or adjust valuation allowances for deferred tax assets when we estimate that it is more likely than not that we will be able to realize the value of the deferred tax assets. We evaluate all significant available positive and negative evidence as part of our analysis, including our past operating results, tax planning strategies, current and cumulative losses, and forecasts of future taxable income. The underlying assumptions we use in forecasting future taxable income requires significant judgment and takes into account our recent performance. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences are deductible or creditable. If actual experience differs from these estimates and assumptions, the recognized deferred tax asset value may not be fully realized, resulting in an increase to income tax expense in our results of operations. Due to various factors, including our estimate of annual income, our effective tax rate is subject to fluctuation.
Our effective tax rate for the three months ended January 28,July 29, 2023 was a tax rate of 30.531.7 percent, as compared to an effective tax rate of 32.215.8 percent for the three months ended January 29,July 30, 2022. For the nine months ended January 28, 2023, our effectiveThe higher tax rate was significantly impactedis caused by the recording of a full valuation allowance on deferred tax assets during the second quarter of fiscal 2023 relatedfair value adjustment to GAAP accounting for income taxes and related information. For the nine months ended January 29, 2022, our effective tax was 9.4 percent. See "Note 1. Basis of Presentation - Liquidity and Going Concern" of the Notes to our Condensed Consolidated Financial Statements included in this Report.
If, in the future, we determine we can support the recoverability of all or a portion of the deferred tax assets under the guidance, the tax benefits relating to any reversal of the valuation allowance on net deferred tax assets will be accounted for as a reduction of income tax expense. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future.that is not taxable.
We operate both domestically and internationally and, as of January 28,July 29, 2023, undistributed earnings of our foreign subsidiaries were considered to be reinvested indefinitely. Additionally, as of January 28,July 29, 2023, we had $361$521 of unrecognized tax benefits which would reduce our effective tax rate if recognized.
Note 10. Fair Value Measurement
The following table sets forth by Levellevel within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at January 28,as of July 29, 2023 and April 30, 202229, 2023 according to the valuation techniques we used to determine their fair values. There have been no transfers of assets or liabilities among the fair value hierarchies presented.
| | | Fair Value Measurements | | Fair Value Measurements |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Balance as of January 28, 2023 | | | | | | | | |
Balance as of July 29, 2023 | | Balance as of July 29, 2023 | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 10,022 | | | $ | — | | | $ | — | | | $ | 10,022 | | Cash and cash equivalents | $ | 45,775 | | | $ | — | | | $ | — | | | $ | 45,775 | |
Restricted cash | Restricted cash | 708 | | | — | | | — | | | 708 | | Restricted cash | 8,575 | | | — | | | — | | | 8,575 | |
Convertible Note Payable | | Convertible Note Payable | — | | | — | | | 32,260 | | | 32,260 | |
Available-for-sale securities: | Available-for-sale securities: | | Available-for-sale securities: | | — | |
| US Government sponsored entities | US Government sponsored entities | — | | | 530 | | | — | | | 530 | | US Government sponsored entities | — | | | 539 | | | — | | | 539 | |
| Derivatives - liability position | Derivatives - liability position | $ | — | | | $ | (6) | | | $ | — | | | $ | (6) | | Derivatives - liability position | — | | | (542) | | | — | | | (542) | |
| | | $ | 10,730 | | | $ | 524 | | | $ | — | | | $ | 11,254 | | | $ | 54,350 | | | $ | (3) | | | $ | 32,260 | | | $ | 86,607 | |
Balance as of April 30, 2022 | | | | | | | | |
Balance as of April 29, 2023 | | Balance as of April 29, 2023 | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 17,143 | | | $ | — | | | $ | — | | | $ | 17,143 | | Cash and cash equivalents | $ | 23,982 | | | $ | — | | | $ | — | | | $ | 23,982 | |
Restricted cash | Restricted cash | 865 | | | — | | | — | | | 865 | | Restricted cash | 708 | | | — | | | — | | | 708 | |
Available-for-sale securities: | Available-for-sale securities: | | Available-for-sale securities: | |
US Government securities | 3,486 | | | — | | | — | | | 3,486 | | |
| US Government sponsored entities | US Government sponsored entities | — | | | 534 | | | — | | | 534 | | US Government sponsored entities | — | | | 534 | | | — | | | 534 | |
| Derivatives - asset position | — | | | 934 | | | — | | | 934 | | |
| Derivatives - liability position | Derivatives - liability position | — | | | (311) | | | — | | | (311) | | Derivatives - liability position | — | | | (579) | | | — | | | (579) | |
| | | $ | 21,494 | | | $ | 1,157 | | | $ | — | | | $ | 22,651 | | | $ | 24,690 | | | $ | (45) | | | $ | — | | | $ | 24,645 | |
We elected to value the Convertible Note at fair value in accordance with ASC 825-10-15-4(a) because of the embedded derivatives contained in the note. The fair value of the Convertible Note was estimated using a binomial lattice model. Binomial lattice allows for the examination of the value to a holder and understanding the investment decision that would occur at each node.
The fair value of the Convertible Note entered into during the first quarter of fiscal 2024 was classified as Level 3 because it does not have readily determinable or observable inputs for the valuation. There have been no other changes in the valuation techniques used by us to value our financial instruments since the end of fiscal 2022.2023. For additional information, see our Annual Report on Form 10-K for the fiscal year ended April 30, 202229, 2023 for the methods and assumptions used to estimate the fair value of each class of financial instrument.
Note 11. Related Party Transactions
The Board has adopted a written policy and procedures with respect to related party transactions, which the Audit Committee oversees. Under the policy, a "related party transaction" is generally defined as a transaction, arrangement, or relationship in which the Company was, is or will be a participant; the amount involved exceeds $120; and in which any "related person" had, has or will have a direct or indirect material interest. The policy generally defines a "related person" as a Director, executive officer or beneficial owner of more than five percent of any class of our voting securities and any immediate family member of any of the foregoing persons.
The Audit Committee reviews and, if appropriate, approves related party transactions, including certain transactions which are deemed to be pre-approved under the policy. On an annual basis, the Audit Committee reviews any previously approved related party transaction that is ongoing.
As reported in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the section entitled “Liquidity and Capital Resources” of Form 10-K, effective on May 11, 2023, the Company entered into the Securities Purchase Agreement with Alta Fox Opportunities Fund, LP (the “Investor”). Under the Securities Purchase Agreement, the Company sold and issued to the Investor the Convertible Note in exchange for the payment by the Investor to the Company of $25,000. As of May 11, 2023, and based on Amendment No. 3 to the Schedule 13D filed
by the Investor and its affiliates named therein on May 15, 2023 with the SEC, the Investor and its affiliates beneficially owned 4,768 shares of common stock of the Company, representing 9.99 percent of the Company’s common stock, causing the Investor to be a “related party” of the Company under the Company’s written policy and procedures and the applicable definitions under the Securities Act of 1933. The Securities Purchase Agreement, the Convertible Note, the Pledge and Security Agreement dated as of May 11, 2023 by and between the Investor and the Company, and the Registration Rights Agreement were approved in advance of their execution by the Company’s Strategy and Financing Review Committee, the members of which include all members of the Company’s Audit Committee.
Since May 11, 2023 the largest aggregate amount outstanding under the Convertible Note was $25,475, consisting of $25,000 of principal and $475 of interest; a total of $25,475 outstanding; and, since May 11, 2023; no payments of principal or interest had been made on the amounts due under the Convertible Note.
The description of the Securities Purchase Agreement, the Convertible Note, the Pledge and Security Agreement dated as of May 11, 2023 by and between the Investor and the Company, the Registration Rights Agreement, and their respective terms set forth in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the section entitled “Liquidity and Capital Resources” was hereby incorporated by reference into this Item 13 of the form 10-K. In addition, the Company is a party to the Standstill and Voting Agreement dated as of March 19, 2023 with Alta Fox Management, LLC and Connor Haley (the “Standstill Agreement”). The Standstill Agreement is filed as Exhibit 10.13 to Form 10-K.
As described in Amendment No. 3 (“Amendment No. 3”) to the Schedule 13D filed by the Investor and its affiliates named therein on June 9, 2023 with the SEC and based on other information provided by the Investor, the following persons may be deemed to be beneficial owners of the shares of the Company’s common stock owned by the Investor: Alta Fox GenPar, LP, as the general partner of Alta Fox Opportunities Fund, LP; Alta Fox Equity, LLC, as the general partner of Alta Fox GenPar, LP; Alta Fox Capital Management, LLC, as the investment manager of Alta Fox Opportunities Fund, LP; and P. Connor Haley, as the sole owner, member and manager of each of Alta Fox Capital Management, LLC and Alta Fox Equity LLC.
On June 7, 2023, the Company received from the Investor written notice of a decrease in the “Percentage Cap” (as such term is defined in the Convertible Note) from 9.99 percent to 4.99 percent which decrease became effective immediately upon the Company’s receipt of such written notice. The Percentage Cap generally represents the maximum percentage of shares of the Company’s common stock the Investor may own. Based on Amendment No. 3, the Investor and its affiliates identified in Amendment No. 3 owned 2,293 shares of common stock on June 9, 2023, representing 4.99 percent of the common stock of the Company, meaning the Investor and its affiliates are no longer “related parties” of the Company under the Company’s written policy and procedures and the applicable definitions under the Securities Act of 1933.
During the first quarter of fiscal 2024, the Company and South Dakota Board of Regents entered into a contract for video display systems for Dakota State University. The amount of the contract was $150. A member of the Company's Board of Directors is the President of Dakota State University.
See Note 2 for further details of related party transactions with our Investments in affiliates.
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 30, 2022,29, 2023, to and including January 28,July 29, 2023 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“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, the uncertainties related to market conditions and entry into a financing transaction; the Company’s potential need to seek additional strategic alternatives, including seeking additional debt or equity capital or other strategic transactions and/or measures; the Company’s ability to finalize or fully execute actions and steps that would be probable of mitigating the existence of “substantial doubt” regarding the Company’s ability to continue as a going concern; the Company’s ability to increase cash flow to support the Company’s operating activities and fund its obligations and working capital needs; our ability to obtain additional financing on terms favorable to us, or at all; any future goodwill impairment charges; and the other risk factors described more fully in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2022 and the Company’s Quarterly Reports on Form 10-Q for the quarters ended July 30, 2022 and October 29, 20222023 filed with the Securities and Exchange Commission, as well as other publicly available information about the Company.
We also wish to caution investors that other factors might in the future prove to be important in affecting our results of operations. New factors emerge from time to time; it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
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 30, 202229, 2023 (including the information presented therein under Risk Factors), as well as other publicly available information about our Company.
OVERVIEW
We are engaged principally in the design, marketing, and manufacture of a wide range of integrated electronic display systems and related products which are sold in a variety of markets throughout the world and the rendering of related maintenance and professional services. We focus our sales and marketing efforts on markets, geographical regions and products. Our five business segments consist of four domestic business units and the International business unit. The four domestic business units consist of Commercial, Live Events, High School Park and Recreation, and Transportation, all of which include the geographic territories of the United States and Canada.
The following selected financial data should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended April 30, 202229, 2023 and the consolidated financial statements set forth in that Annual Report on Form 10-K, including the notes to consolidated financial statements included therein.
CURRENT CONDITIONS
Over muchOur past investments in people and plant capacity and the continued stable supply chain environment have allowed for efficient production and fulfillment of orders. Although the past calendar year,post-pandemic geopolitical situation and global trade patterns continue to evolve, we believe that the levels of uncertainty and volatility in supply chain and demand will not be as great in the coming months as it was through the pandemic and will continue to stabilize during this fiscal year.
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 productscompany. Orders and services increased significantly while at the same time our capacity was constrained duerevenue levels are expected tosignificant and unusual part shortages, a challenging labor environment, and operating disruptions from COVID-19 related absences and the shutdown of our facilities in Shanghai, China due to a government mandated COVID-19 zero tolerance policy. Through this time, we also experienced increased input costs for materials, commodities, personnel, freight, and tariffs. We were specifically be impacted by the global shortagetiming of semiconductors and related electronic components. Although supply chain disruptions have started to ease, supply chain disruptions continue as a result of several factors, including the pandemic lockdowns, shipping container shortages, labor shortages, war and other conflicts, and changes in global demand.
In addition, there continues to be certain risk related to the movement of materials globally. Geopolitical events and pandemic related risks remain high and could cause disruptions in our globally dispersed supplier base. Also, the movement of materials is impacted throughout the United States because of a number of factors including: the expiration of the International Longshore and Warehouse Union (ILWU) contract with the Pacific Maritime Association on July 1, 2022. While negotiations are in process, a strike or work slow-down mandate is possible. This would have a negative impact on the movement of material through west coast ports. We continue to monitor the dispute between the country’s Class 1 railroads and twelve rail unions. The U.S. administration signed a tentative agreement into law on Dec 2, 2022, effectively forcing the unions back to work. Rank and file workers are threatening an illegal, but not unprecedented wildcat strike. And finally, the UPS contract with its driver’s union expires in July 2023. While a strike is not expected at this time, the driver’s union did strike for two weeks in 1997. UPS is our largest small package carrier. To alleviate risks, we are actively working to move business to other small package carriers, to hopefully minimize any negative impact if a UPS driver's union strike occurs.
Macroeconomic events, including the possibility of sustained high inflation, tightening financial conditions,multi-million dollar projects and the potential for higher interest rates, could increase the likelihoodimpacts of deteriorating global economic conditions. We also expect impacts to global economic conditions, in reaction to the evolving war in Ukraine and the current geopolitical environment. These conditions could impact the growth ratesituations, or other factors outside of our business and availability of our parts supply. Conditions and disruptions have and will likely continue to cause volatility in our cash flow, pricing, order volumes, lead-times, competitiveness, revenue cycles, and production costs, and it is likely these conditions will have a negative impact in the remainder of fiscal 2023 and into fiscal 2024.
We cannot predict the length or severity of these conditions.
Due to this volatility and risks, we have taken a number of actions. To support our high backlog and expectation of continued order demand and manage through the uncertainties in the supply chain, we increased our inventory planning horizons and have purchased and carried higher quantities of inventory. While we have added more inventory for fulfillment, our production and schedules have been disrupted over the past year, creating changes in the timing of payments from our customers. These conditions created an increased consumption of cash.
As supply chain conditions ease, we expect our inventory levels to continue to decline to more normalized levels through production and reductions in purchases; however, we cannot be certain we will not experience future disruptions or need additional liquidity to fund inventory levels, operations, and capital expenditures.
We have responded to input cost increases by increasing pricing through the last half of fiscal 2022 and implementing additional increases at the beginning of fiscal 2023. We also use pricing policies and opportunity evaluations across markets to manage price levels. We will continue to monitor our supply chains and our marketplaces and adapt our pricing methodologies as we see appropriate to remain profitable and competitive. We have also allocated resources to redesigns of certain products to provide the ability to source available components which increases the robustness of our fulfillment.
Our teams are focused on improving our cash flow and liquidity enhancement program, which includes: cash management focus through working capital reductions, including reductions in inventory and accounts receivables; productivity improvements from factory capacity expansion and investments in capital equipment and hiring critical manufacturing and service employees to increase output; operating margin improvement through pricing actions, product mix adjustments, and prudent management of operating expenses; selective reduction in future capital asset spending; and obtaining additional sources of liquidity, which requires the consent of our current lender.
The Board of Directors formed an independent Strategy and Financing Review Committee in December 2022 to address the Company's near-term credit needs and to examine alternatives for strengthening the Company's longer-term financial structure and liquidity profile. The Committee retained financial and legal advisors to assist it with its activities. We are pursuing additional liquidity through various means from potential financing sources, including but not limited to obtaining financing secured by a mortgage on our facilities, a sales-leaseback transaction, leasing property and equipment, longer term asset based lending structures, and junior capital. Because these plans are not finalized and are subject to market conditions and restrictions from our existing financing agreements that are not within our control, they cannot be deemed probable. As a result, we have concluded that our plans do not alleviate substantial doubt about our ability to continue as a going concern.
We are monitoring these situations, but it is difficult and uncertain to predict the level of impact they may have on our supply chain, our costs, our liquidity, and our financial condition and results of operations.
For additional information, refer to the COVID-19 and raw material and component related risk factors disclosed in Item 1A of Part I in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022.control.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JANUARY 28,JULY 29, 2023 AND JANUARY 29,JULY 30, 2022
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 measures defined by accounting principles generally accepted in the United States of America ("GAAP"), and our methodology for determining orders and backlog may vary from the methodology used by other companies in determining their orders and backlog amounts.
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 our large project business.multimillion dollar projects. Management uses orders to evaluate market share and performance in the competitive environment. Management uses backlog information for capacity and resource planning. We believe order information is useful to investors because it provides an indication of our market share and future revenues.
Our product order backlog as of January 28,July 29, 2023 was $429.1$323.7 million as compared to $353.3$469.1 million as of January 29,July 30, 2022 and $471.6$400.7 million at April 30, 2022.29, 2023. The increase of $75.8 million between January 28, 2023 and January 29, 2022 wasdecrease in backlog is driven by recordfulfilling orders at a greater pace as supply chain conditions stabilized, we utilized our increased capacity, and the order volume and softer conversionspace returned to sales due to supply challenges.more normalized rates.
We expect to fulfill the backlog as of January 28,July 29, 2023 within the next 24 months. The timing of backlog fulfillment may be impacted by project delays resulting from parts availability and other constraints stemming from the supply chain disruptions.disruptions or by customer site conditions which are outside our control.
Net Sales
The following table shows information regarding net sales for the three months ended January 28,July 29, 2023 and January 29,July 30, 2022:
| | | Three Months Ended | | Three Months Ended |
(in thousands) | (in thousands) | January 28, 2023 | | January 29, 2022 | | Dollar Change | | Percent Change | (in thousands) | July 29, 2023 | | July 30, 2022 | | Dollar Change | | Percent Change |
Net Sales: | Net Sales: | | | | | | | | Net Sales: | | | | | | | |
Commercial | Commercial | $ | 49,967 | | | $ | 40,095 | | | $ | 9,872 | | | 24.6 | % | Commercial | $ | 46,883 | | | $ | 40,118 | | | $ | 6,765 | | | 16.9 | % |
Live Events | Live Events | 67,748 | | | 39,057 | | | 28,691 | | | 73.5 | | Live Events | 91,999 | | | 56,383 | | | 35,616 | | | 63.2 | |
High School Park and Recreation | High School Park and Recreation | 28,312 | | | 23,721 | | | 4,591 | | | 19.4 | | High School Park and Recreation | 56,234 | | | 35,809 | | | 20,425 | | | 57.0 | |
Transportation | Transportation | 17,578 | | | 15,823 | | | 1,755 | | | 11.1 | | Transportation | 21,369 | | | 19,540 | | | 1,829 | | | 9.4 | |
International | International | 21,370 | | | 20,862 | | | 508 | | | 2.4 | | International | 16,046 | | | 20,070 | | | (4,024) | | | (20.0) | |
| | $ | 184,975 | | | $ | 139,558 | | | $ | 45,417 | | | 32.5 | % | | $ | 232,531 | | | $ | 171,920 | | | $ | 60,611 | | | 35.3 | % |
Orders: (1) | Orders: (1) | | | | | | | | Orders: (1) | | | | | | | |
Commercial | Commercial | $ | 28,737 | | | $ | 47,012 | | | $ | (18,275) | | | (38.9) | % | Commercial | $ | 32,434 | | | $ | 47,678 | | | $ | (15,244) | | | (32.0) | % |
Live Events | Live Events | 61,011 | | | 79,478 | | | (18,467) | | | (23.2) | | Live Events | 52,203 | | | 51,753 | | | 450 | | | 0.9 | |
High School Park and Recreation | High School Park and Recreation | 28,097 | | | 35,884 | | | (7,787) | | | (21.7) | | High School Park and Recreation | 35,739 | | | 37,579 | | | (1,840) | | | (4.9) | |
Transportation | Transportation | 13,525 | | | 20,810 | | | (7,285) | | | (35.0) | | Transportation | 18,985 | | | 15,704 | | | 3,281 | | | 20.9 | |
International | International | 17,005 | | | 31,605 | | | (14,600) | | | (46.2) | | International | 19,269 | | | 17,509 | | | 1,760 | | | 10.1 | |
| | $ | 148,375 | | | $ | 214,789 | | | $ | (66,414) | | | (30.9) | % | | $ | 158,630 | | | $ | 170,223 | | | $ | (11,593) | | | (6.8) | % |
(1) Orders are not measures defined by GAAP, and our methodology for determining orders may vary from the methodology used by other companies in determining their orders and amounts.
For the fiscal 2023 third2024 first quarter, net sales were $185.0$232.5 million, an increase of $45.4$60.6 million from net sales in the prior year's third quarter. Sales growthfirst quarter and a quarterly record. This increase was driven by strong market demand, increasedprimarily due to higher throughput from our past investments in capacity and realization of price increases implemented in late fiscalthe more stable operating environment. Last year 2022during the first quarter, we faced material supply shortages which extended lead times and beginning of fiscal year 2023. We have seen stabilizing and improving supply chain conditions and have invested in automated machinery and equipment and in labor capacity to increasedelayed the rate of conversion of orders into sales, creating more throughput in our factories.sales.
Order volume decreased in the thirdfirst quarter of fiscal 20232024 from the prior year's third quarter as ordersfirst quarter. The change is primarily related to a decrease in the year-earlier were drivenCommercial business unit caused by pent-up demand after COVID, which was unusual and was not expected to be repeatedvolatility in fiscal 2023. Orders decreased in International in the third quarterbookings of fiscal 2023 compared to the third quarter of fiscal 2022 due to a weakening economic outlook relating to inflationary pressures, geopolitical events, and currency headwinds.larger sized Spectacular LED video displays projects.
Gross Profit and Contribution Margin
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| January 28, 2023 | | January 29, 2022 |
(in thousands) | Amount | | As a Percent of Net Sales | | Amount | | As a Percent of Net Sales |
Gross Profit: | | | | | | | |
Commercial | $ | 10,547 | | | 21.1 | % | | $ | 8,239 | | | 20.5 | % |
Live Events | 14,405 | | | 21.3 | | | 3,094 | | | 7.9 | |
High School Park and Recreation | 7,555 | | | 26.7 | | | 6,958 | | | 29.3 | |
Transportation | 5,534 | | | 31.5 | | | 4,108 | | | 26.0 | |
International | 3,672 | | | 17.2 | | | (91) | | | (0.4) | |
| $ | 41,713 | | | 22.6 | % | | $ | 22,308 | | | 16.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| July 29, 2023 | | July 30, 2022 |
(in thousands) | Amount | | As a Percent of Net Sales | | Amount | | As a Percent of Net Sales |
Gross Profit: | | | | | | | |
Commercial | $ | 12,769 | | | 27.2 | % | | $ | 4,821 | | | 12.0 | % |
Live Events | 27,940 | | | 30.4 | | | 3,786 | | | 6.7 | |
High School Park and Recreation | 20,825 | | | 37.0 | | | 9,977 | | | 27.9 | |
Transportation | 7,089 | | | 33.2 | | | 5,838 | | | 29.9 | |
International | 2,524 | | | 15.7 | | | 1,372 | | | 6.8 | |
| $ | 71,147 | | | 30.6 | % | | $ | 25,794 | | | 15.0 | % |
The increase in gross profit percentage for the thirdfirst quarter of fiscal 2023 was primarily due2024 is attributable to the record sales volume over our fixed manufacturing cost structure, past strategic pricing changes made in the 2022 calendar yearactions, stabilization of input costs, and continuing throughout fiscal year 2023, and because of fewer supply chain and operational disruptions during the thirdfirst quarter of fiscal 2023. These price changes are just beginning2024 as compared to be realized through sales during the third quarter a year earlier.
Total warranty costs as a percent of sales for the three months ended January 28,July 29, 2023 compared to the same period one year ago decreasedincreased to 1.72.1 percent from 2.41.6 percent.
| | | Three Months Ended | | Three Months Ended |
| | January 28, 2023 | | January 29, 2022 | | July 29, 2023 | | July 30, 2022 |
(in thousands) | (in thousands) | Amount | | As a Percent of Net Sales | | Dollar Change | | Percent Change | | Amount | | As a Percent of Net Sales | (in thousands) | Amount | | As a Percent of Net Sales | | Dollar Change | | Percent Change | | Amount | | As a Percent of Net Sales |
Contribution Margin: | Contribution Margin: | | | | | | | | | | | | Contribution Margin: | | | | | | | | | | | |
Commercial | Commercial | $ | 6,684 | | | 13.4 | % | | $ | 2,363 | | | 54.7 | % | | $ | 4,321 | | | 10.8 | % | Commercial | $ | 8,721 | | | 18.6 | % | | $ | 8,521 | | | 4260.5 | % | | $ | 200 | | | 0.5 | % |
Live Events | Live Events | 12,109 | | | 17.9 | | | 11,562 | | | 2113.7 | | | 547 | | | 1.4 | | Live Events | 25,415 | | | 27.6 | | | 24,441 | | | 2509.3 | | | 974 | | | 1.7 | |
High School Park and Recreation | High School Park and Recreation | 4,373 | | | 15.4 | | | 435 | | | 11.0 | | | 3,938 | | | 16.6 | | High School Park and Recreation | 17,463 | | | 31.1 | | | 10,882 | | | 165.4 | | | 6,581 | | | 18.4 | |
Transportation | Transportation | 4,443 | | | 25.3 | | | 1,206 | | | 37.3 | | | 3,237 | | | 20.5 | | Transportation | 6,190 | | | 29.0 | | | 1,247 | | | 25.2 | | | 4,943 | | | 25.3 | |
International | International | 1,196 | | | 5.6 | | | 3,666 | | | 148.4 | | | (2,470) | | | (11.8) | | International | 429 | | | 2.7 | | | 1,766 | | | 132.1 | | | (1,337) | | | (6.7) | |
| | $ | 28,805 | | | 15.6 | % | | $ | 19,232 | | | 200.9 | % | | $ | 9,573 | | | 6.9 | % | | $ | 58,218 | | | 25.0 | % | | $ | 46,857 | | | 412.4 | % | | $ | 11,361 | | | 6.6 | % |
Contribution margin is a non-GAAP measure and consists of gross profit less selling expenses. Selling expenses consist primarily of personnel relatedpersonnel-related costs, travel and entertainment expenses, marketing related expenses (show rooms, product demonstration, depreciation and maintenance, conventions and trade show expenses), the cost of customer relationship management/marketing systems, bad debt expenses, third-party commissions, and other expenses.
Contribution margin for the fiscal quarter ended January 28,July 29, 2023 was positively impacted by the previously discussed sales levels and impacts on gross profit. We have adjusted our sales and marketing activities and staffing levels to achieve current and expected future sales levels. Our order volume is directly associated with our marketing and sales expenses.
The following table reconcilesReconciliation from non-GAAP contribution margin to GAAPthe operating income (loss):GAAP measure is as follows:
| | | Three Months Ended | | Three Months Ended |
| | January 28, 2023 | | January 29, 2022 | | July 29, 2023 | | July 30, 2022 |
(in thousands) | (in thousands) | Amount | | As a Percent of Net Sales | | Dollar Change | | Percent Change | | Amount | | As a Percent of Net Sales | (in thousands) | Amount | | As a Percent of Net Sales | | Dollar Change | | Percent Change | | Amount | | As a Percent of Net Sales |
Contribution margin | Contribution margin | $ | 28,805 | | | 15.6 | % | | $ | 19,232 | | | 200.9 | % | | $ | 9,573 | | | 6.9 | % | Contribution margin | $ | 58,218 | | | 25.0 | % | | $ | 46,857 | | | 412.4 | % | | $ | 11,361 | | | 6.6 | % |
General and administrative | General and administrative | 9,861 | | | 5.3 | | | 1,533 | | | 18.4 | | | 8,328 | | | 6.0 | | General and administrative | 9,599 | | | 4.1 | | | 158 | | | 1.7 | | | 9,441 | | | 5.5 | |
Product design and development | Product design and development | 7,250 | | | 3.9 | | | 325 | | | 4.7 | | | 6,925 | | | 5.0 | | Product design and development | 8,403 | | | 3.6 | | | 964 | | | 13.0 | | | 7,439 | | | 4.3 | |
Goodwill impairment | 4,576 | | | 2.5 | | | 4,576 | | | — | | | — | | | — | | |
| Operating income (loss) | Operating income (loss) | $ | 7,118 | | | 3.8 | % | | $ | 12,798 | | | 225.3 | % | | $ | (5,680) | | | (4.1) | % | Operating income (loss) | $ | 40,216 | | | 17.3 | % | | $ | 45,735 | | | 828.7 | % | | $ | (5,519) | | | (3.2) | % |
General and administrative expenses in the thirdfirst quarter of fiscal 2023 increased as compared to the same period one year ago primarily due to increases in professional fees related to legal fees and accounting and auditing services.
Product design and development expensesin the third quarter of fiscal 20232024 remained relatively flat as compared to the same period one year ago.
Product design and development expensesin the first quarter of fiscal 2024 increased as compared to the first quarter of fiscal 2023 primarily due to an increase in personnel-related expenses.
As described within "Note 6. Goodwill" to the Condensed Consolidated Financial Statements included in this Report, we performed our annual goodwill impairment test and concluded that the carrying value of the International and Live Events reporting units exceeded their respective fair values. Consequently, we recorded a $4.6 million non-cash goodwill impairment charge, which contributed to the increase in operating expenses.
Other Income and Expenses
| | | Three Months Ended | | Three Months Ended |
| | January 28, 2023 | | January 29, 2022 | | July 29, 2023 | | July 30, 2022 |
(in thousands) | (in thousands) | Amount | | As a Percent of Net Sales | | Dollar Change | | Percent Change | | Amount | | As a Percent of Net Sales | (in thousands) | Amount | | As a Percent of Net Sales | | Dollar Change | | Percent Change | | Amount | | As a Percent of Net Sales |
Interest (expense) income, net | Interest (expense) income, net | $ | (398) | | | (0.2) | % | | $ | (454) | | | (810.7) | % | | $ | 56 | | | — | % | Interest (expense) income, net | $ | (881) | | | (0.4) | % | | $ | (821) | | | 1368.3 | % | | $ | (60) | | | — | % |
Other expense, net | $ | (1,380) | | | (0.7) | % | | $ | (587) | | | 74.0 | % | | $ | (793) | | | (0.6) | % | |
Change in fair value of convertible note | | Change in fair value of convertible note | $ | (7,260) | | | (3.1) | % | | $ | (7,260) | | | — | % | | $ | — | | | — | % |
Other expense and debt issuance costs write-off, net | | Other expense and debt issuance costs write-off, net | $ | (3,979) | | | (1.7) | % | | $ | (3,232) | | | 432.7 | % | | $ | (747) | | | (0.4) | % |
Interest (expense) income, net:net: The changeincrease in interest income and expense, net for the thirdfirst quarter of fiscal 20232024 compared to the same period one year ago was primarily due to utilizingclosing in May 2023 on the convertible debt, asset-based and mortgage financings at higher values and interest rates than the utilization of our previous line of credit during the 2023 thirdfirst quarter.
Change in fair value of convertible note: For the three months ended July 29, 2023, we recorded an expense of $7.3 million related to the change in fair value of the convertible note payable which is accounted for under the fair value option. The fair value change was primarily caused by the increase in our stock price over the conversion price and decline in market interest rates making the value of potentially converted shares higher than at the debt issuance.
Other expense, net: The change in other expense, net for the thirdfirst quarter of fiscal 20232024 as compared to the same period one year ago was primarily due to losses recorded for equity method affiliates and foreign currency volatility.volatility and write-off of $3.4 million debt issuance costs related to convertible debt carried at fair value. .
Income Taxes
Our effective tax rate for the thirdfirst quarter of fiscal 20232024 was 30.531.7 percent as compared to an effective tax rate of 32.215.8 percent for the third quarter of fiscal 2022.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED JANUARY 28, 2023 AND JANUARY 29, 2022
Net Sales
The following table shows information regarding net sales for the nine months ended January 28, 2023 and January 29, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
(in thousands) | January 28, 2023 | | January 29, 2022 | | Dollar Change | | Percent Change |
Net Sales: | | | | | | | |
Commercial | $ | 127,132 | | | $ | 107,339 | | | $ | 19,793 | | | 18.4 | % |
Live Events | 193,370 | | | 150,840 | | | 42,530 | | | 28.2 | |
High School Park and Recreation | 106,127 | | | 84,362 | | | 21,765 | | | 25.8 | |
Transportation | 53,797 | | | 42,434 | | | 11,363 | | | 26.8 | |
International | 63,908 | | | 63,792 | | | 116 | | | 0.2 | |
| $ | 544,334 | | | $ | 448,767 | | | $ | 95,567 | | | 21.3 | % |
Orders: (1) | | | | | | | |
Commercial | $ | 119,126 | | | $ | 143,699 | | | $ | (24,573) | | | (17.1) | % |
Live Events | 193,763 | | | 169,665 | | | 24,098 | | | 14.2 | |
High School Park and Recreation | 97,574 | | | 107,246 | | | (9,672) | | | (9.0) | |
Transportation | 45,812 | | | 56,854 | | | (11,042) | | | (19.4) | |
International | 45,130 | | | 82,778 | | | (37,648) | | | (45.5) | |
| $ | 501,405 | | | $ | 560,242 | | | $ | (58,837) | | | (10.5) | % |
| | | | | | | |
(1) Orders are not measures defined by GAAP, and our methodology for determining orders may vary from the methodology used by other companies in determining their orders and amounts.
For the first nine months of fiscal 2023, net sales were $544.3 million, an increase of $95.6 million from the prior year's first nine-month period. The year-over-year growth was driven by fulfilling orders in backlog and continued order bookings. Sales growth was driven by strong market demand, increased capacity, and realization of price increases implemented in late fiscal year 2022 and beginning of fiscal year 2023. We have seen stabilizing and improving supply chain conditions and have invested in automated machinery and equipment and in labor capacity to increase the rate of conversion of orders into sales, creating more throughput in our factories.
Order volume decreased in the first nine months of fiscal 2023 from the prior year's nine-month period. Fiscal 2022 saw a record number of orders from pent-up demand after COVID, and orders for fiscal 2023 continue to be strong. Order bookings in the first nine months of fiscal 2023 were strong in multiple sports venues in the Live Events unit. International markets have seen some softening in demand through the first nine months of fiscal 2023 due to the inflationary environment and geopolitical events.
Gross Profit and Contribution Margin
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| January 28, 2023 | | January 29, 2022 |
(in thousands) | Amount | | As a Percent of Net Sales | | Amount | | As a Percent of Net Sales |
Gross Profit: | | | | | | | |
Commercial | $ | 21,565 | | | 17.0 | % | | $ | 22,862 | | | 21.3 | % |
Live Events | 26,174 | | | 13.5 | | | 17,261 | | | 11.4 | |
High School Park and Recreation | 29,343 | | | 27.6 | | | 27,216 | | | 32.3 | |
Transportation | 15,456 | | | 28.7 | | | 12,263 | | | 28.9 | |
International | 6,673 | | | 10.4 | | | 7,158 | | | 11.2 | |
| $ | 99,211 | | | 18.2 | % | | $ | 86,760 | | | 19.3 | % |
The decline in overall gross profit percentage in the nine months ended January 28, 2023 was primarily impacted by inflationary challenges in materials, freight, and personnel related costs, partially offset by the realization of pricing increases beginning in the third quarter of fiscal 2023. In addition, extraordinary supply chain disruptionsThe higher tax rate is caused by the fair value adjustment to income that is not taxable. Absent any major tax changes, we expect our full year effective tax rate to be in the first halfmid-twenties, before the impacts of the year, including the mandated Shanghai factory closure, created intermittent work stoppages and factory inefficiencies, adding additional costs to meet customer commitments, especially in the Live Events business unit. We also recorded a $0.3 million provision for estimated losses on contracts in progress during the nine months ended January 28, 2023.
Total warranty costs as a percent of salesfair value accounting for the nine months ended January 28, 2023 compared to the same period one year ago increased to 2.0 percent from 1.6 percent. We recognized warranty expense of $1.0 million in the second quarter of fiscal 2023 for probable and reasonable estimated costs to remediate a component and manufacturing quality issue discovered during the nine months ended January 28, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| January 28, 2023 | | | | | | January 29, 2022 |
(in thousands) | Amount | | As a Percent of Net Sales | | Dollar Change | | Percent Change | | Amount | | As a Percent of Net Sales |
Contribution Margin: | | | | | | | | | | | |
Commercial | $ | 8,803 | | | 6.9 | % | | $ | (2,444) | | | (21.7) | % | | $ | 11,247 | | | 10.5 | % |
Live Events | 18,297 | | | 9.5 | | | 8,098 | | | 79.4 | | | 10,199 | | | 6.8 | |
High School Park and Recreation | 19,392 | | | 18.3 | | | 853 | | | 4.6 | | | 18,539 | | | 22.0 | |
Transportation | 12,412 | | | 23.1 | | | 2,811 | | | 29.3 | | | 9,601 | | | 22.6 | |
International | (1,559) | | | (2.4) | | | (1,721) | | | (1062.3) | | | 162 | | | 0.3 | |
| $ | 57,345 | | | 10.5 | % | | $ | 7,597 | | | 15.3 | % | | $ | 49,748 | | | 11.1 | % |
Contribution margin in the nine months ended January 28, 2023 was impacted negatively primarily by the previously discussed increases in input costs and labor costs and supply chain disruptions on productivity as noted in the impacts on gross profit. Selling expenses have increased as we have adjusted our sales and marketing activities and staffing levels to achieve current and expected future sales levels.convertible debt.
The following table reconciles non-GAAP contribution margin to GAAP operating loss:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| January 28, 2023 | | | | | | January 29, 2022 |
(in thousands) | Amount | | As a Percent of Net Sales | | Dollar Change | | Percent Change | | Amount | | As a Percent of Net Sales |
Contribution margin | $ | 57,345 | | | 10.5 | % | | $ | 7,597 | | | 15.3 | % | | $ | 49,748 | | | 11.1 | % |
General and administrative | 27,989 | | | 5.1 | | | 3,889 | | | 16.1 | | | 24,100 | | | 5.4 | |
Product design and development | 21,655 | | | 4.0 | | | 372 | | | 1.7 | | | 21,283 | | | 4.7 | |
Goodwill impairment | 4,576 | | | 0.8 | | | 4,576 | | | — | | | — | | | — | |
Operating income | $ | 3,125 | | | 0.6 | % | | $ | (1,240) | | | (28.4) | % | | $ | 4,365 | | | 1.0 | % |
General and administrative expenses in the first nine months of fiscal 2023 increased as compared to the same period one year ago primarily due to $2.1 million professional fees relating to legal, accounting and auditing services, and for other personnel related expenses.
Product design and development expensesin the first nine months of fiscal 2023 remained relatively flat as compared to the same period one year ago.
Increased revenue offset by lower margins led to higher operating income for the first nine months of fiscal 2023 compared to the prior year nine-month period.
We performed our annual goodwill impairment test and concluded that the carrying value of the International and Live Events reporting units exceeded their respective fair values. Consequently, we recorded a $4.6 million non-cash goodwill impairment charge, which contributed to the increase in operating expenses.
Other Income and Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| January 28, 2023 | | | | | | January 29, 2022 |
(in thousands) | Amount | | As a Percent of Net Sales | | Dollar Change | | Percent Change | | Amount | | As a Percent of Net Sales |
Interest (expense) income, net | $ | (721) | | | (0.1) | % | | $ | (855) | | | (638.1) | % | | $ | 134 | | | — | % |
Other expense, net | $ | (2,335) | | | (0.4) | % | | $ | 278 | | | (10.6) | % | | $ | (2,613) | | | (0.6) | % |
Interest (expense) income, net: The change in interest income and expense, net for the first nine months of fiscal 2023 compared to the same period one year ago was primarily due to utilizing our line of credit during the 2023 first nine months for our strategic investments in inventory.
Other expense, net: The change in other expense, net for the first nine months quarter of fiscal 2023 as compared to the same period one year ago was primarily due to losses recorded for equity method affiliates and foreign currency volatility.
Income Taxes
For the nine months ended January 28, 2023, our effective tax rate was significantly impacted by the recording of a full valuation allowance on deferred tax assets during the second quarter of fiscal 2023 related to GAAP accounting for income taxes and related information. For the nine months ended January 29, 2022, our effective tax was 9.4 percent. See "Note 1. Basis of Presentation - Liquidity and Going Concern" of the Notes to our Condensed Consolidated Financial Statements included in this Report.
LIQUIDITY AND CAPITAL RESOURCES
| | | | | | | | | | | | | | | | | |
| Nine Months Ended |
(in thousands) | January 28, 2023 | | January 29, 2022 | | Dollar Change |
Net cash (used in) provided by: | | | | | |
Operating activities | $ | (9,487) | | | $ | (25,464) | | | $ | 15,977 | |
Investing activities | (20,947) | | | (19,926) | | | (1,021) | |
Financing activities | 23,498 | | | (3,391) | | | 26,889 | |
Effect of exchange rate changes on cash | (342) | | | 98 | | | (440) | |
Net decrease in cash, cash equivalents and restricted cash | $ | (7,278) | | | $ | (48,683) | | | $ | 41,405 | |
Cash decreased by $7.3 million for the first nine months of fiscal 2023 compared to a decrease of $48.7 million in the first nine months of fiscal 2022. The use of cash in the first nine months of fiscal 2023 is primarily due to investments in inventory required to support the conversion of increased backlog and strong order bookings into sales and as a strategy to add stability to our manufacturing processes during this time of supply chain disruptions. The decrease in cash was also due to investing in capital assets for increased capacity and automation and loans to affiliated entities. We utilized our line of credit financing to support these uses of cash. | | | | | | | | | | | | | | | | | |
| Three Months Ended |
(in thousands) | July 29, 2023 | | July 30, 2022 | | Dollar Change |
Net cash provided by (used in): | | | | | |
Operating activities | $ | 19,250 | | | $ | (22,815) | | | $ | 42,065 | |
Investing activities | (5,706) | | | (10,372) | | | 4,666 | |
Financing activities | 16,356 | | | 24,128 | | | (7,772) | |
Effect of exchange rate changes on cash | (240) | | | 80 | | | (320) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 29,660 | | | $ | (8,979) | | | $ | 38,639 | |
Net cash used inprovided by (used in) operating activities: Net cash used inprovided by operating activities was $9.5$19.3 million for the first ninethree months of fiscal 20232024 compared to net cash used in operating activities of $25.5$22.8 million in the first ninethree months of fiscal 2022.2023. The difference between net$42.1 million change in cash used inprovided by (used in) operating activities in the first nine months of fiscal 2023 compared to net cash used in operating activities in the first nine months of fiscal 2022 was primarily the result of changesan
increase in net income of $24.5 million over the year time frame as strategic pricing actions and operating assets and liabilities and the resultconditions improved. The was also a $7.3 million of having a net lossnon-cash fair value change of our convertible debt. We also had strategically invested in inventory through the first nine monthsquarter of fiscal 2023 comparedas a reaction to net incomesupply chain constraints and historic backlog which consumed cash. Since last year at the end of July, we have reduced inventory and related payables for inventory as we reduced backlog and generated cash from inventory reduction. Increases in the first nine monthsaccounts receivable and contract assets levels have used some cash for working capital because of 2022.business increases.
The changes in net operating assets and liabilities consisted of the following:
| | | | | | | | | | | |
| Nine Months Ended |
| January 28, 2023 | | January 29, 2022 |
(Increase) decrease: | | | |
Accounts receivable | $ | (15,753) | | | $ | (29,015) | |
Long-term receivables | 1,265 | | | 205 | |
Inventories | (30,346) | | | (37,116) | |
Contract assets | 5,653 | | | (7,534) | |
Prepaid expenses and other current assets | 6,176 | | | (5,465) | |
Income tax receivables | (2,653) | | | (1,696) | |
Investment in affiliates and other assets | (581) | | | (29) | |
Increase (decrease): | | | |
Accounts payable | (2,921) | | | 21,429 | |
Contract liabilities | 9,196 | | | 15,781 | |
Accrued expenses | (1,220) | | | 3,177 | |
Warranty obligations | (623) | | | 916 | |
Long-term warranty obligations | 1,958 | | | 298 | |
Income taxes payable | (150) | | | (239) | |
Long-term marketing obligations and other payables | 793 | | | (1,712) | |
| $ | (29,206) | | | $ | (41,000) | |
| | | | | | | | | | | |
| Three Months Ended |
| July 29, 2023 | | July 30, 2022 |
(Increase) decrease: | | | |
Accounts receivable | $ | (15,437) | | | $ | (12,495) | |
Long-term receivables | 369 | | | 688 | |
Inventories | 4,419 | | | (23,237) | |
Contract assets | (3,693) | | | (3,690) | |
Prepaid expenses and other current assets | (179) | | | 3,342 | |
Income tax receivables | 322 | | | (1,725) | |
Investment in affiliates and other assets | 23 | | | (900) | |
Increase (decrease): | | | |
Accounts payable | (5,958) | | | 7,212 | |
Contract liabilities | (881) | | | 6,975 | |
Accrued expenses | (554) | | | (409) | |
Warranty obligations | 1,415 | | | (110) | |
Long-term warranty obligations | 612 | | | 643 | |
Income taxes payable | 2,786 | | | (6) | |
Long-term marketing obligations and other payables | (119) | | | 969 | |
| $ | (16,875) | | | $ | (22,743) | |
Net cash used in investing activities: Net cash used in investing activities totaled $20.9$5.7 million in the first ninethree months of fiscal 20232024 compared to net cash used in investing activities of $19.9$10.4 million in the first ninethree months of fiscal 2022.2023. Purchases of property and equipment totaled $21.8$4.5 million in the first ninethree months of fiscal 20232024 compared to $10.0$10.7 million in the first ninethree months of fiscal 2022.2023. Fiscal 2023 purchases were higher because of initiatives to upgrade or increase manufacturing equipment for capacity and automation. Purchases of equity and loans to affiliates accounted for by the equity investment method totaled $3.21.2 million in the first ninethree months of fiscal 20232024 as compared to $6.7$1.1 million in the first ninethree months of fiscal 2022.2023.
Net cash provided by (used in) financing activities: Net cash provided by financing activities was $23.5$16.4 million for the ninethree months ended January 28,July 29, 2023 due to cash provided by the closing of a $25.0 million convertible note financing and a $15.0 million mortgage financing offset by the payoff of our previous credit line of $17.8 million and $5.8 million of debt issuance costs as compared to $24.1 million of cash provided from financing due to draws on our line of credit compared to cash used by financing activities of $3.4 million for other investing activities in the first ninethree months of fiscal 2022.2023.
Other LiquidityDebt and Capital Resources Discussion: The timing and amounts of working capital changes, dividend payments, stock repurchases, capital spending, profitability, and investments in affiliates impact our liquidity. Our cash needs are funded through a combination of cash flow from operations and borrowings under bank credit agreements.
We believe the audiovisual industry fundamentals will drive long-term growth for our business; however, our customers may reduce their spend on audiovisual systems and related services because of the impacts of global economic conditions, business implications of COVID-19, supply chain challenges, and war and geopolitical situations. Resulting supply chain disruptions and inflationary challenges in materials, freight and personnel related costs are also likely to continue, yet have eased during this past quarter. These conditions likely will continue to cause volatility in our cash flow, pricing, order volumes, lead-times, competitiveness, revenue cycles, and production costs. We are proactively monitoring and adjusting our business operations for these factors.
To improve operations and cash flows, we have increased prices of our goods and services. We have also increased investment in inventory levels to add production stability to our production processes to fulfill backlog, and we are focused on reducing these levels as supply chains stabilize. We also continue to selectively invest in property and equipment to expand our capacity and add automation. Our ability to fund inventory levels, operations and capital expenditures in the future will be dependent on our ability to generate cash flow from operations in these conditions, to maintain or improve margins, and to use funds from our credit facility. $35.0a $60.0 million of ourasset-based revolving credit facility expires in April 2025 and $10.0 million expires in May 2023, and it requires us to comply("ABL") with certain covenants.
Although supply chain disruptions have started to ease and we expect our inventory levels to decline, we cannot be certain we will not experience future disruptions or need additional liquidity to fund inventory levels, operations, and capital expenditures. We plan to obtain additional liquidity to meet our obligations as they come due in the 12 months following thea maturity date of this Report, and we cannot be assured that such liquidity will be available or the form of such liquidity, such as equity raises or debt financing. Although we are in the process of obtaining additional liquidity through various means, including but not limited to obtaining financing secured by a mortgage on our facilities, a sales-leaseback transaction, leasing property and equipment, and continued focus on reducing working capital, these plans are not finalized and areMay 11, 2027 subject to market conditions that are not within our control. See "Note 1. Basiscustomary covenants and conditions. As of Presentation - Liquidity and Going Concern" of the Notes to our Condensed Consolidated Financial Statements included in this Report.
Working capital was $129.4 million and $103.9 million as of January 28, 2023 and April 30, 2022, respectively. The changes in working capital, particularly changes in inventory, accounts payable, accounts receivable, contract assets and liabilities, are impacted by the sports market and construction seasonality. These changes can have a significant impact on the amount of net cash provided or used by 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 cashflows. We expect to use cash in operations as our business returns and exceeds pre-pandemic levels and due to longer planning horizons and volatility in supply chains. While these conditions continue, we plan to carry higher quantities of inventory and anticipate changes in the timing of payments from our customers as we work through different disruptions and fulfill our backlog.
We have $35.0 million line of credit of which expires in April 2025. On January 23,July 29, 2023, we entered intohad no borrowings against the seventh amendment (the "Amendment") to the credit facility to, among other things, increases the maturity of a $10.0 million portion of the line of credit through May 1, 2023. We had $23.6 million advanced on our line of creditABL and $7.5$1.5 million used to secure letters of credit asoutstanding. We also have a delayed draw loan of January 28, 2023. As$15.0 million secured by a first priority mortgage on our Brookings, South Dakota real estate and $25.0 million of January 28, 2023, there was $13.9 million available to advanceconvertible debt secured by a second priority lien on assets securing the lineABL facility and a first priority lien on substantially all the other assets of credit.the Company, excluding all real property.
TheAs of July 29, 2023, we had $45.8 million in cash and cash equivalents and $47.6 million in borrowing capacity under our ABL. We believe cash flow from operations, existing lines of credit, agreement and amendments require usaccess to debt and capital markets will be sufficient to meet our current liquidity needs, and we have committed liquidity and cash reserves in compliance with certain financial ratios, including a covenant to maintain the ratioexcess of interest-bearing debt to earnings before income taxes, depreciation,our anticipated funding requirements.
Our cash and amortization at less than 4.0 for the fiscal quarter ending January 28,cash equivalent balances consist of high-quality, short-term money market instruments.
Working Capital
Working capital was $182.2 million and $132.5 million as of July 29, 2023 3.50 for the fiscal quarter endingand April 29, 2023, and 3.00 for each fiscal quarter thereafter. A minimum fixed charge coverage ratio must be met of at least 1.50 to 1 for the fiscal quarter ending January 28, 2023, and at 1.25 for any fiscal quarter thereafter. On January 23, 2023, we entered into the Amendment to our credit agreement. The Amendment, among other things, extended the maturity of $10.0 million of the $45.0 million of the credit facility through May 1, 2023, increased the rate of interest to 3.35% plus the secured overnight financial rate, and revised certain definitions and covenants (refer to "Note 7. Financing Agreements" to the Condensed Consolidated Financial Statements included in this Report).As of January 28, 2023, we were in compliance with these covenants. Based on future projections, we expect to be in compliance with these covenants through the next fiscal year; however, with the uncertainty and volatility in the supply chain, the sensitivity of the covenants in the credit agreement, as amended, and our current going concern condition, we cannot be certain we will remain in compliance with the covenants. If we violate a covenant and cannot obtain a waiver from the bank providing the credit facility, we would need to seek additional debt or equity financing.
respectively. We had $10.1$12.5 million of retainage on long-term contracts included in receivables and contract assets as of January 28,July 29, 2023, which has an impact on our liquidity. We expect to collect these amounts within one year.
Other Liquidity and Capital Uses
We are sometimes required to obtain bank guarantees or other financial instruments for display installations, and we utilize a global bank to provide such instruments. If we are unable to complete the installation work, our customer would draw on the banking arrangement, and the bank would subrogate its loss to Daktronics' restricted cash accounts. As of January 28,July 29, 2023, we had $0.6 million of such instruments outstanding.
We are sometimes required to obtain performance bonds for display installations; we have a bonding line available through surety companies for an aggregate of $190.0 million in bonded work outstanding. If we were unable to complete the installation work, and our customer would call upon the bond for payment, the surety company would subrogate its loss to Daktronics. As of January 28,July 29, 2023, we had $63.3$40.4 million of bonded work outstanding.
Our business growth and profitability improvement strategies depend on investments in capital expenditures and strategic investments. We are projecting total capital expenditures to be approximately $28.8less than $19 million for all of fiscal 2023.2024. Projected capital expenditures include purchasing manufacturing equipment for new or enhanced product production and expanded capacity and increased automation of processes; investments in quality and reliability equipment and demonstration and showroom assets; and continued information infrastructure investments.
We also 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 $1.3$1.5 million overfor the nextremainder of fiscal year2024 in our current affiliates, which required approval under our credit agreement.affiliates.
We may repurchase shares of our common stock from time to time in open market purchases, private transactions or other transactions. The timing, volumeContractual Obligations and nature of share repurchases will be at the sole discretion of management; will be dependent on market conditions, applicable securities laws and other factors; and may be suspended or discontinued at any time. Commercial Commitments
During the three monthsquarter, we entered into a new credit facility, mortgage, and convertible debt as disclosed within this report, there have been no other material changes in our contractual obligations since the end of fiscal 2023. See our Annual Report on Form 10-K for the fiscal year ended JanuaryApril 28, 2023 we repurchased no shares of common stock.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 30, 2022.29, 2023. 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 30, 2022. There have been no material changes in our significant accounting policies or critical accounting estimates since the end of fiscal 2022.29, 2023.
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 elsewhere in this Report.
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 30, 2022. 29, 2023. During the first quarter of fiscal 2024, we entered into the ABL and Delayed Draw Loan which are subject to interest rate risks.
There have been no other material changes in our exposure to these risks during the first ninethree months of fiscal 2023.2024.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried outManagement of our Company is responsible for establishing and maintaining effective disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. As of July 29, 2023, an evaluation was performed, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our “disclosuredisclosure controls and procedures,” as that term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as of January 28, 2023, which is the end of the period covered by this Report.procedures. Based upon that evaluation, theour Chief Executive Officer and Chief Financial Officer concluded that as of that date,July 29, 2023, our disclosure controls and procedures were not effective at a reasonable assurance level, because ofdue to the previously reported material weaknessesweakness in internal control over financial reporting which we view as an integral part of our disclosure controls and procedures. In making this assessment, management used the criteria set forth in the “Internal Control - Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).described below.
Notwithstanding thethis identified material weaknesses inweakness, our internal control over financial reporting, we have concluded thatChief Executive Officer and Chief Financial Officer believe the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present,represent, in all material respects, our financial position,condition, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America. We are in the process of remediating the material weakness in our internal control, as described below under the section entitled “Remediation Plan”"Remediation Plan".
Material Weakness in Internal Control Over Financial Reporting
In Part 1,2, Item 49A of our QuarterlyAnnual Report on Form 10-Q10-K for the fiscal quarteryear ended OctoberApril 29, 2022,2023, which was filed with the Securities and Exchange Commission on December 13, 2022,July 12, 2023, management concluded that our internal control over financial reporting was not effective as of OctoberApril 29, 2022. In the evaluation, management2023. Management identified a material weakness in internal control related to (a) the failureineffective operation of certain transactional level controls related to timely communicate the result of our going concern assessmentrevenue contracts recognized over time. These controls operated ineffectively due to all appropriate internal parties necessary, which led to us not considering the impactinsufficient training of the going concern assessment oncontrol operators as to the valuationlevel of our deferred tax assets and (b) management not appropriately designing its going concern policy control to contemplate evaluatingprecision expected when executing the income tax implications when reaching a substantial doubt going concern conclusion. The material weaknesses did not resultrevenue controls in any uncorrected misstatements inaccordance with the unaudited condensed consolidated financial statements during this period, nor in any restatements of consolidated financial statements previously reported by us, and there were no changes in previously released financial results.Company's policy.
Remediation Plan
In responseOur remediation plan includes providing training to the material weakness described above,revenue control operators relating to the level of precision expected when executing these controls in accordance with the Company's policy. During the first quarter of fiscal 2024, we are in the process of remediating the deficiencies by:
1.Implementing a policy and practice that our going concern analysis is communicated and provided to appropriate members of the organization, including employees in our tax department, so they can consider the impactsbegan additional training of our going concern conclusion.
2.Implementing a control activity that considers results of our going concern analysis when determining the valuation of deferred taxes and other reporting and disclosures when preparing our financial statements.
While we believe the steps taken to date and those planned for implementation will improve the effectiveness of our internal control over financial reporting, we have not completed all remediation efforts. We will not be able to fully remediate these material weaknesses until management has determined through testing that the controls have been operating effectively for a sufficient period of time.operators.
Changes in Internal Control Over Financial Reporting
Besides the remediation items noted above, there were no changes during
During the quarter ended January 28,July 29, 2023, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On December 21, 2022,We are involved in a putative class action lawsuit captioned Settles, et al. v. Daktronics, Inc., et al., Case No. 22-cv-10793 (“Securities Action”) was filed againstvariety of legal actions relating to various matters during the Companynormal course of business. Although we are unable to predict the ultimate outcome of these legal actions, it is the opinion of management that the disposition of these matters, taken as a whole, will not have a material adverse effect on our financial condition or results of operations. See "Note 8. Commitments and two of its officers in the U.S. District Court for the Southern District of New York. The Securities Action asserts claims under §§ 10(b) and 20(a)Contingencies" of the Securities Exchange Act of 1934 alleging, among other things, the Company made materially falseNotes to our Condensed Consolidated Financial Statements included in this Form 10-Q for further information on any legal proceedings and misleading statements and failed to disclose material adverse facts which allegedly resulted in harm to a putative class of purchasers of our securities from March 10, 2022 through December 6, 2022. We are still evaluating the complaint, which is subject to amendment, but based on current knowledge we believe that the claims are without merit. We believe the likelihood of loss is remote. Accordingly, no accrual has been made.claims.
Item 1A. RISK FACTORS
The discussion of our business and operations included in this Quarterly Report on Form 10-Q should be read together with the risk factors described in Item 1A. of Part I of our Annual Report on Form 10-K for the fiscal year ended April 30, 2022 and Item 1A. of Part II of our Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2022.2023. They describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties, together with other factors described elsewhere in this Report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. New risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect our financial condition or financial results.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES, AND USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Share Repurchases
During the three months ended January 28,July 29, 2023, we did not repurchase any shares of our common stock.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS
A list of exhibits filed as part of this Report is set forth in the following Index to Exhibits.
Index to Exhibits
Certain of the following exhibits are incorporated by reference from prior filings. The form with which each exhibit was filed and the date of filing are as indicated below; the reports described below are filed as Commission File No. 0-23246001-38747 unless otherwise indicated.
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101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| (1)Filed herewith electronically. |
| * Indicates a management contract or compensatory plan or arrangement. |
1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
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| /s/ Sheila M. Anderson |
| Daktronics, Inc. |
| Sheila M. Anderson |
| Chief Financial Officer |
| (Principal Financial Officer and |
| Principal Accounting Officer) |
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Date: March 13,September 8, 2023 | |