Note 11. Income Taxes
The provision for income taxes during interim reporting periods is calculated by applying an estimate of the annual effective tax rate to “ordinary” income or loss for the reporting period, adjusted for discrete items. 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 and nine months ended January 30, 2021 was 82.0 percent and 21.3 percent, respectively, as compared to an effective tax rate benefit of 37.9 percent and 51.6 percent for the three and nine months ended February 1, 2020. The tax rate changes each period are primarily driven by the mathematical calculations of estimated tax credits and other permanent difference levels proportionate to estimated pre-tax earnings levels and the related changes in estimates of each of those variables through the year. For the three months ended January 30, 2021, the rate change was mainly driven by a return to provision benefit booked in proportion to an actual small pre-tax loss for the quarter; whereas the three months ended February 1, 2020, was primarily driven by changes in the proportionate percentage of tax credits and other permanent differences compared to estimated pre-tax earnings. The change in the effective tax rate year over year was driven primarily by a decrease in the proportionate percentage of tax credits and other permanent differences compared to estimated pre-tax earnings.
We are subject to U.S. federal income tax as well as income taxes of multiple state and foreign jurisdictions. Fiscal years 2018,2019 and 2020 remain open to federal tax examinations, and fiscal years 2017,2018,2019 and 2020 remain open for various state income tax examinations. Certain subsidiaries are also subject to income tax in several foreign jurisdictions which have open tax years varying by jurisdiction beginning in fiscal 2010. In the event of any future tax assessments, we have elected to record the income taxes and any related interest and penalties as income tax expense in our condensed consolidated statement of operations.
As of January 30, 2021, undistributed earnings of our foreign subsidiaries are considered to be reinvested indefinitely. Additionally, we had $554 of unrecognized tax benefits which would reduce our effective tax rate if recognized.
Note 12. Fair Value Measurement
The following table sets forth by Level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at January 30, 2021 and May 2, 2020 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 | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Balance as of January 30, 2021 | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 76,877 | | | $ | 0 | | | $ | 0 | | | $ | 76,877 | |
Restricted cash | | | 3,884 | | | | 0 | | | | 0 | | | | 3,884 | |
Available-for-sale securities: | | | | | | | | | | | | | | | | |
Certificates of deposit | | | 0 | | | | 248 | | | | 0 | | | | 248 | |
Derivatives - asset position | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
Derivatives - liability position | | | 0 | | | | (331 | ) | | | 0 | | | | (331 | ) |
Acquisition-related contingent consideration | | | 0 | | | | 0 | | | | (311 | ) | | | (311 | ) |
| | | $ | 80,761 | | | $ | (83 | ) | | $ | (311 | ) | | $ | 80,367 | |
Balance as of May 2, 2020 | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 40,398 | | | $ | 0 | | | $ | 0 | | | $ | 40,398 | |
Restricted cash | | | 14 | | | | 0 | | | | 0 | | | | 14 | |
Available-for-sale securities: | | | | | | | | | | | | | | | | |
Certificates of deposit | | | 0 | | | | 1,230 | | | | 0 | | | | 1,230 | |
Derivatives - asset position | | | 0 | | | | 261 | | | | 0 | | | | 261 | |
Derivatives - liability position | | | 0 | | | | (17 | ) | | | 0 | | | | (17 | ) |
Acquisition-related contingent consideration | | | 0 | | | | 0 | | | | (761 | ) | | | (761 | ) |
| | | $ | 40,412 | | | $ | 1,474 | | | $ | (761 | ) | | $ | 41,125 | |
A roll forward of the Level 3 contingent liabilities, both short- and long-term, for the nine months ended January 30, 2021 is as follows:
Acquisition-related contingent consideration as of May 2, 2020 | | $ | 761 | |
Additions | | | 133 | |
Settlements | | | (600 | ) |
Interest | | | 17 | |
Acquisition-related contingent consideration as of January 30, 2021 | | $ | 311 | |
There have been no changes in the valuation techniques used by us to value our financial instruments since the end of fiscal 2020. For additional information, see our Annual Report on Form 10-K for the fiscal year ended May 2, 2020 for the methods and assumptions used to estimate the fair value of each class of financial instrument.
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, May 1, 2021, to and including January 29, 2022 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 exhibits and any information incorporated by reference herein)including the MD&A, contains both historical and forward-looking statements that involve risks, uncertainties and assumptions. The statements contained in this Report that are not purely historical are forward-looking statements“forward-looking statements” within the meaning of Section 27A of the Private Securities Litigation Reform Act of 1933, as amended, and Section 21B of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for the future.1995. These statements appear in a number of places in this Report and include all statements that are not historical statements of fact regarding the intent, belief orreflect our current expectationsviews with respect to amongfuture events and financial performance. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should,” "will," "continue" and similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Any and all forecasts and projections in this document are “forward looking statements” and are based on management’s current expectations or beliefs. From time to time, we may also provide oral and written forward-looking statements in other things: (i.)materials we release to the public, such as press releases, presentations to securities analysts or investors, or other communications by us. Any or all of our competition; (ii.) our financing plansforward-looking statements in this report and abilityin any public statements we make could be materially different from actual results. Accordingly, we wish to maintain adequate liquidity; (iii.) trendscaution 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.
We also wish to caution investors that other factors might in the future prove to be important in affecting our financial condition or results of operations; (iv.) our growth and operating strategies; (v.) the declaration and paymentoperations. New factors emerge from time to time; it is not possible for management to predict all of dividends; (vi.) the timing and magnitude of future contracts; (vii.) raw material shortages and lead times; (viii.) fluctuations in margins; (ix.) the seasonality of our business; (x.) the introduction of new products and technology; (xi.) the amount and frequency of warranty claims; (xii.) our ability to manage the impact that new or adjusted tariffs may have on the cost of raw materials and components and our ability to sell product internationally; (xiii.) the resolution of litigation contingencies; (xiv.) the timing and magnitude of any acquisitions or dispositions; (xv.)such factors, nor can it assess the impact of governmental laws, regulations, and orders, includingeach 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 the COVID-19 pandemic caused by the coronavirus; and (xvi.) disruptions to our business caused by geopoliticalnew information, future events military actions, work stoppages, natural disasters, or international health emergencies, such as the COVID-19 pandemic. The words “may,” “would,” “could,” “should,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plan” and similar expressions and variations thereof are intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond our ability to control, and that actual results may differ materially from those projectedotherwise.
Our MD&A should be read in the forward-looking statements as a result of various factors discussed herein, including those discussed in our filingsconjunction with the SecuritiesConsolidated Financial Statements and Exchange Commission, includingrelated 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 May 2, 2020 in1, 2021 (including the section entitled “Part I, Item 1A.information presented therein under Risk Factors” and “Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations,” and those factors discussed in detail inFactors), as well other publicly available information about our other filings with the Securities and Exchange Commission.
The following discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"). This discussion should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements included in this Report. The preparation of these condensed financial statements requires us to make estimates and judgments affecting the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate our estimates, including those related to total costs on long-term construction-type contracts, costs to be incurred for product warranties and extended maintenance contracts, bad debts, excess and obsolete inventory, income taxes, share-based compensation, goodwill impairment and contingencies. Our estimates are based on historical experience and on various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates.Company.
OVERVIEW
We are engaged principally in the design, market, and manufacture and sellof a wide range of integrated electronic display systems to customersand related products which are sold in a variety of markets throughout the world.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. Disclosures
The following selected financial data should be read in conjunction with our Annual Report on Form 10-K for the year ended May 1, 2021 and the consolidated financial statements set forth in that Annual Report on Form 10-K, including the notes to consolidated financial statements included therein.
CORONAVIRUS ("COVID-19") PANDEMIC, SUPPLY CHAIN DISRUPTIONS AND DELAYS, AND CURRENT CONDITIONS
Impacts to and changes in global economic conditions are expected as the world economies recover from the COVID-19 pandemic, adjust to supply chain conditions and disruptions, and react to the evolving war and geopolitical environment. We continue to monitor guidance from international and domestic authorities regarding the COVID-19 pandemic and may take additional actions based on their requirements and recommendations. Since late fiscal 2021, our order and quoting activities have increased, creating a strong backlog and positive outlook; however, there is no assurance that this trend will continue in future quarters.
Supply chain disruptions continue as a result of several factors including the pandemic, shipping container shortages, labor shortages, and changes in global demand. We are specifically impacted by the global shortage of semiconductors and related electronic components. We have experienced increased input costs in many areas including material, commodity, freight, and tariff costs and increased personnel spend throughout the 2022 fiscal year. We have responded to input cost increases by increasing pricing and we began quoting at the new price levels in the third quarter of fiscal 2022. We will continue to monitor our supply chains and our marketplaces and adapt our pricing methodologies as we see appropriate.
Although we cannot predict the length or severity of these conditions, we expect continued disruptions in obtaining material, commodities, labor, and freight availability and an increase in inflation as the world economies react to and recover from the pandemic. We also expect impacts to the global economic conditions in reaction to the evolving war and geopolitical environment. Due to longer planning horizons and volatility in supply chains, 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, all likely creating a consumption of cash. We are also planning additional cash use for capital spending to grow our manufacturing capacity.
We anticipate needing to utilize a portion of our line of credit which expires in November 2022, and there can be no assurances that we will be successful in renewing the line of credit with sufficient capacity or that we will otherwise be able to obtain sufficient cash. However, based on our initial discussions with lenders and other alternatives we have available to us, such as increasing prices of our goods and services, reducing capital expenditures, reducing operating expenses, negotiating longer payment terms to our suppliers, and obtaining other forms of debt or equity financing, we believe it is probable our existing cash balances and future actions will be sufficient to fund our normal business segments are provided in "Note 5. Segment Reporting"operations over the next twelve months from the date of the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Report.
Our net sales and profitability historically have fluctuated due to the impactAll of uniquely configured orders, such as display systems for professional sports facilities, colleges and universities, and spectacular projectsthese conditions will cause volatility in the commercial area, as well as the seasonality of the sports market. Uniquely configured orders can include several displays, controllers, and subcontracted structure builds, each of which can occur on varied schedules per the customer's needs. Historically, our third fiscal quarter sales and profit levels are lighter than other quarters due to the seasonality of our sports business, constructioncash flow, pricing, order volumes, lead-times, competitiveness, revenue cycles, and production costs and it is reasonably likely these conditions will negatively affect our financial conditions of operations and cashflows throughout the reduced numberremainder of production days duefiscal 2022 and have some negative impact into fiscal 2023. However, the full impact to holidays in the quarter.
Our gross margins tend to fluctuate more on uniquely configured orders than on limited configured orders. Uniquely configured orders involving competitive bidding and substantial subcontracting work for product installation generally have lower gross margins. Although we follow the over time method of recognizing revenues for uniquely configured orders, we nevertheless have experienced fluctuations in operating results and expect our futurefinancial condition, results of operations willand cash flows cannot be subject to similar fluctuations.determined at this time.
Backlog representsRefer to the dollar valueCOVID-19 and raw material and component related risk factors disclosed in Item 1A of ordersPart I in our Annual Report on Form 10-K 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 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 highlights fluctuations caused by seasonality and our large project business. 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. We believe backlog information is useful to investors to provide an indication of future revenues. fiscal year ended May 1, 2021.
GENERAL
Our mission is to be the world leader at informing and entertaining audiences through dynamic audiovisual communication systems. We organize into business units to focus on customer loyalty over time to earn new and replacement business because our products have a finite lifetime. See "Note 5. Segment Reporting" of the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Report for further information. Our strategies include the creation of a comprehensive line of innovative solutions and systems and our ability to create and leverage platform designs and technologies. These strategies align us to effectively deliver value to our varied customers and their market needs, while serving our stakeholders over the long-term. We focus on creating local capabilities for sales, service, and manufacturing in geographies with expected digital market opportunities. We believe consistently generating profitable growth will provide value to our stakeholders (customers, employees, shareholders, suppliers, and communities).
We measure our success using a variety of measures including:
| •
| our percentage of market share by comparing our estimated revenue to the total estimated global digital display revenue,
|
| •
| our order growth compared to the overall digital market order change,
|
| •
| financial metrics such as annual order volume and profit change as compared to our previous financial results,
|
| •
| customer retention and expansion rates,
|
| •
| our ability to generate profits over the long-term to provide a shareholder return.
|
Certain factors impact our ability to succeed in these strategies and impact our business units to varying degrees. For example, the overall cost to manufacture and the selling prices of our products have decreased over the years and are expected to continue to decrease in the future. Our competitors outside the U.S. are impacted differently by the global trade environment allowing them to avoid tariff costs or reduce prices. As a result, additional competitors have entered the market, and each year we must sell more product to generate the same or greater level of net sales as in previous fiscal years. However, the decline of digital solution pricing over the years and increased user adoption and applications have increased the size of the global market.
Competitor offerings, actions and reactions also can vary and change over time or in certain customer situations. Projects with multimillion-dollar revenue potential attracts competition, and competitors can use marketing or other tactics to win business.
Each business unit's long-term performance can be impacted by economic conditions in different ways and to different degrees. The effects of an adverse economy are generally less severe on our sports related business as compared to our other businesses, although in severe economic downturns with social changes causing decreases in sporting event revenues, the sports business can also be seriously impacted.
Outlook: The COVID-19 pandemic has created disruptions since its initial outbreak, first impacting our China operations. Beginning in February 2020, we created COVID-19 response teams to manage our local and global response activities. Using the guidance from the U.S. Centers for Disease Control and Prevention, the World Health Organization, and other applicable regulatory agencies, we enhanced or implemented robust health, safety, and cleaning protocols across our organization.
Throughout the first nine months of fiscal 2021, employees have worked from home where possible, and travel has been limited. When unable to work safely or within the various regulations put in place in certain geographies and locations and as a result of decreased demand, our sales, manufacturing and field service teams temporarily reduced capacity and furloughed employees.
Our sales teams have continued to engage our customers to promote our value, mostly virtually, across our diverse markets and geographies. However, our customers reduced their spend on audiovisual systems and related services through the first nine months of our fiscal year as they work through the economic and business implications of COVID-19. We took corresponding actions to reduce operating expenses to align with expected order and sales declines expected for the remainder of the year. These expense reductions vary in permanency and may change in future periods.
Our supply chain team has remained alert to potential short supply situations and shipping disruptions, and, if necessary, we are utilizing alternative sources and shipping methods.
We expect the COVID-19 pandemic to continue to have an adverse impact on our revenue and our results of operations, the amount and duration of which we are unable to predict. The global impact of COVID-19 continues to evolve. The extent to which COVID-19 will impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate severity and spread of the disease, the duration of the pandemic, the availability and effectiveness of vaccines, travel restrictions and social distancing requirements in the United States and other countries, the pace and extent of the economic recovery, and any change in trends and practices in how people gather. Given the speed and frequency of continuously evolving developments with respect to this pandemic, we cannot reasonably estimate the magnitude of the impact to our business.
In the near-term, our operating results are going to be challenged due to this crisis. We continue to manage our cost structure to meet the uncertain demand, while making additional cost reductions as needed. Our customers' businesses are subject to the fluctuations in global economic cycles and conditions and other business risk factors which may impact their ability to operate their businesses. The performance and financial condition of our customers may cause us to alter our business terms or to cease doing business with a particular customer. Further, the potential impact of the COVID-19 pandemic on their businesses could adversely impact our customers' ability to pay us for work performed, increasing our future estimate of credit losses.
In addition to the COVID-19 impacts noted above, the outlook and unique key growth drivers and challenges by our business units include:
Commercial Business Unit: In the near-term, our customers who rely on advertising revenues for Out-of-Home ("OOH") advertising or who are reliant on customer foot-traffic to drive sales have been adversely impacted by stay-at-home or quarantine orders which started in March 2020 with varied or no published expiration. These customers are expected to delay their discretionary capital spending through the COVID-19 economic recovery. Businesses using our displays for self-promotion or on-premise advertising may have reduced budgets for the foreseeable future or may choose to utilize displays as part of their recovery, both actions creating an impact to the Commercial business' near-term outlook. We cannot reasonably estimate the magnitude or length of time our Commercial business will be impacted.
Over the long-term, we believe growth in the Commercial business unit will result from a number of factors, including:
| •
| Standard display product market growth due to market adoption and lower product costs, which drive marketplace expansion. Standard display products are used to attract or communicate with customers and potential customers of retail, commercial, and other establishments. Pricing and economic conditions are the principal factors that impact our success in this business unit. We utilize a reseller network to distribute our standard products.
|
| •
| National accounts standard display market opportunities due to customers' desire to communicate their message, advertising and content consistently across the country. Increased demand is possible from national retailers, quick serve restaurants, petroleum retailers, and other nationwide organizations.
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| Additional standard display offerings using micro-light emitting diode ("LED") designs.
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| Increasing use of LED technologies replacing signage previously using liquid crystal display ("LCD") technology by existing and new customers.
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| Increasing interest in spectaculars, which include very large and sometimes highly customized displays as part of entertainment venues such as casinos, shopping centers, cruise ships and Times Square type locations.
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| Dynamic messaging systems demand growth due to market adoption and expanded use of this technology.
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| The use of architectural lighting products for commercial buildings, which real estate owners use to add accents or effects to an entire side or circumference of a building to communicate messages or to decorate the building.
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| •
| The continued deployment of digital billboards as OOH advertising companies continue developing new sites and replacing digital billboards reaching end of life. This is dependent on no adverse changes occurring in the digital billboard regulatory environment restricting future billboard deployments, as well as maintaining our current market share in a business that is concentrated in a few large OOH companies.
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| •
| Replacement cycles within each of these areas.
|
Live Events Business Unit: Our customers have been adversely impacted by governmental limitations on the number of people allowed to gather in certain spaces which started in March 2020 with varied or no published expiration. In the near-term, our customers who rely on advertising and event revenues are expected to delay spending on projects because of the COVID-19 pandemic. Changes to the ways and willingness of how people gather may change the demand for our systems.
Over the long-term, we believe growth in the Live Events business unit will result from a number of factors, including:
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| Facilities spending more on larger display systems to enhance the game-day and event experience for attendees.
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| Lower product costs, driving an expansion of the marketplace.
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| Our product and service offerings, including additional micro-LED offerings which remain the most integrated and comprehensive offerings in the industry.
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| The competitive nature of sports teams, which strive to out-perform their competitors with display systems.
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| The desire for high-definition video displays, which typically drives larger displays or higher resolution displays, both of which increase the average transaction size.
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| Dynamic messaging system needs throughout a sports facility.
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| Increasing use of LED technologies replacing signage previously using LCD technology in and surrounding live events facilities.
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| Replacement cycles within each of these areas.
|
High School Park and Recreation Business Unit: In the near-term, our customers who rely on advertising revenue for sports installations or who may be impacted by governmental tax revenue availability may choose to delay spending on projects because of the impacts on their business caused by the COVID-19 pandemic.
Over the long-term, we believe growth in the High School Park and Recreation business unit will result from a number of factors, including:
| •
| Increased demand for video systems in high schools as school districts realize the revenue generating potential of these displays compared to traditional scoreboards and these systems' ability to provide or enhance academic curriculum offerings for students.
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| Increased demand for different types of displays and dynamic messaging systems, such as message centers at schools to communicate to students, parents and the broader community.
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| Lower system costs driving the use of more sophisticated displays in school athletic facilities, such as large integrated video systems.
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| Expanding control system options tailored for the markets' needs.
|
Transportation Business Unit: In the near term, customers in the mass-transit and airport part of the market are expected to delay spending as a result of the limited use of this infrastructure and impact on their financial stability during the COVID-19 pandemic. In the long-term, roadway projects may be impacted due to reduced tax revenues. That impact is expected to increase as the duration of the reduction in infrastructure usage continues.
Over the long-term, we believe growth in the Transportation business unit will result from a number of factors including:
| •
| Increasing applications and acceptance of electronic displays to manage transportation systems, including roadway, airport, parking, transit and other applications.
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| •
| Effective use of the United States transportation infrastructure requires intelligent transportation systems. This growth is highly dependent on government spending, primarily by state and federal governments, along with the continuing acceptance of private/public partnerships as an alternative funding source.
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| Expanded use of dynamic messaging systems for advertising and wayfinding use in public transport and airport terminals due to expanded market usage and displays, with LED technology replacing prior LCD installations and additional display offerings using micro-LEDs.
|
International Business Unit: In the near-term, our customers who rely on advertising, retail, event revenues and governmental tax revenue availability are expected to delay spending on projects due to the impacts caused by the COVID-19 pandemic. Changes to the ways and willingness of how people gather may change the demand for our systems.
Over the long-term, we believe growth in the International business unit will result from a number of factors including:
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| Achieving greater penetration in various geographies and building products more suited to individual markets. We continue to broaden our product offerings into the transportation segment in Europe and the Middle East.
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| Continued focus on sports facility, spectacular-type, OOH advertising products, and architectural lighting market opportunities and the factors listed in each of the other business units to the extent they apply outside of the United States and Canada.
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| •
| Additional opportunities exist with expanded market usage of LED technology due to price considerations, usage of LED technology replacing prior LCD installations and additional display offerings using micro-LEDs.
|
RESULTS OF OPERATIONS
Daktronics, Inc. operates on a 52- or 53-week fiscal year, with our fiscal year ending on the Saturday closest to April 30 of each year. When April 30 falls on a Wednesday, the fiscal year ends on the preceding Saturday. Within each fiscal year, each quarter is comprised of 13-week periods following the beginning of each fiscal year. In each 53-week year, an additional week is added to the first quarter, and each of the last three quarters is comprised of a 13-week period. The fiscal year ending May 1, 2021 will consist of 52 weeks and the fiscal year ended May 2, 2020 was a 53-week year; therefore, the nine months ended January 30, 2021 contains operating results for 39 weeks while the nine months ended February 1, 2020 contains operating results for 40 weeks.
COMPARISON OF THE THREE MONTHS ENDED January 29, 2022 and January 30, 2021 and February 1, 2020
Net Sales
| | | Three Months Ended | |
| | | January 30, | | | February 1, | | | Dollar | | | Percent | |
(in thousands) | | 2021 | | | 2020 | | | Change | | | Change | |
Net sales: | | | | | | | | | | | | | | | | |
Commercial | | $ | 30,085 | | | $ | 36,880 | | | $ | (6,795 | ) | | | (18.4 | )% |
Live Events | | | 23,330 | | | | 40,571 | | | | (17,241 | ) | | | (42.5 | ) |
High School Park and Recreation | | | 14,644 | | | | 14,775 | | | | (131 | ) | | | (0.9 | ) |
Transportation | | | 11,769 | | | | 13,916 | | | | (2,147 | ) | | | (15.4 | ) |
International | | | 14,311 | | | | 21,515 | | | | (7,204 | ) | | | (33.5 | ) |
| | | $ | 94,139 | | | $ | 127,657 | | | $ | (33,518 | ) | | | (26.3 | )% |
Orders: | | | | | | | | | | | | | | | | |
Commercial | | $ | 34,806 | | | $ | 36,898 | | | $ | (2,092 | ) | | | (5.7 | )% |
Live Events | | | 11,075 | | | | 41,484 | | | | (30,409 | ) | | | (73.3 | ) |
High School Park and Recreation | | | 16,366 | | | | 20,447 | | | | (4,081 | ) | | | (20.0 | ) |
Transportation | | | 12,991 | | | | 16,203 | | | | (3,212 | ) | | | (19.8 | ) |
International | | | 11,650 | | | | 19,992 | | | | (8,342 | ) | | | (41.7 | ) |
| | | $ | 86,888 | | | $ | 135,024 | | | $ | (48,136 | ) | | | (35.6 | )% |
Sales and orders in all business units were impacted as a result of the economic downturn caused by the COVID-19 pandemic. The change in sales was also related to fluctuations in the timing of order bookings, and related conversion to sales. Our third quarter historically has been lower than other quarters due to sports and construction seasonality. The change in orders was also impacted by the timing of large contract orders which causes lumpiness.
During the quarter, order activity in all business units were lower as compared to prior periods due to overall low market activity primarily resulting from customers delaying decisions or deferring upgrades and improvements due to the impact of the COVID-19 pandemic. The Commercial business unit had improved orders for on-premise applications.
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.
TheOrder and backlog levels provide management and investors additional details surrounding the results of our business activities in the marketplace and highlights fluctuation caused by seasonality and our large project business. 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 30, 202129, 2022 was $195$353 million as compared to $187$195 million as of February 1, 2020 and $201 million at the end of the second quarter of fiscal 2021. Historically, our product order backlog varies due to the seasonality of our business, the timing of large projects, and customer delivery schedules for these orders. The product order backlog as of January 30, 2021 and $282 million at October 30, 2021, which was the end of our second quarter of fiscal 2022. We expect to fulfill the backlog as of January 29, 2022 within the next 24 months. The timing and our ability to fulfill backlog may be impacted by project delays resulting from the COVID-19 pandemic and supply chain issues.
Net Sales
The following table shows information regarding net sales for the three months ended January 29, 2022 and January 30, 2021:
| | | Three Months Ended | |
| | | January 29, | | | January 30, | | | Dollar | | | Percent | |
(in thousands) | | 2022 | | | 2021 | | | Change | | | Change | |
Net sales: | | | | | | | | | | | | | | | | |
Commercial | | $ | 40,095 | | | $ | 30,085 | | | $ | 10,010 | | | | 33.3 | % |
Live Events | | | 39,057 | | | | 23,330 | | | | 15,727 | | | | 67.4 | |
High School Park and Recreation | | | 23,721 | | | | 14,644 | | | | 9,077 | | | | 62.0 | |
Transportation | | | 15,823 | | | | 11,769 | | | | 4,054 | | | | 34.4 | |
International | | | 20,862 | | | | 14,311 | | | | 6,551 | | | | 45.8 | |
| | | $ | 139,558 | | | $ | 94,139 | | | $ | 45,419 | | | | 48.2 | % |
Orders: | | | | | | | | | | | | | | | | |
Commercial | | $ | 47,012 | | | $ | 34,806 | | | $ | 12,206 | | | | 35.1 | % |
Live Events | | | 79,478 | | | | 11,075 | | | | 68,403 | | | | 617.6 | |
High School Park and Recreation | | | 35,884 | | | | 16,366 | | | | 19,518 | | | | 119.3 | |
Transportation | | | 20,810 | | | | 12,991 | | | | 7,819 | | | | 60.2 | |
International | | | 31,605 | | | | 11,650 | | | | 19,955 | | | | 171.3 | |
| | | $ | 214,789 | | | $ | 86,888 | | | $ | 127,901 | | | | 147.2 | % |
For the fiscal 2022 third quarter, net sales were $139.6 million, an increase of $45.4 million from the prior year's third quarter. The year-over-year growth was driven by increased orders. Material supply shortages are creating an increase in lead times and extending the timing of converting some orders to sales in the Live Events, Transportation, and Internationalnear-term. We expect supply chain conditions to persist through the calendar year.
Order volume increased across all business units and decreased in the Commercialthird quarter of fiscal 2022, reflecting the continued recovery from the impact of the global pandemic among our customers. The pandemic recovery in regions around the world has varied. Some countries have eased travel restrictions and High School Park and Recreationwe have seen business units from February 1, 2020.in those locations increase. However, other countries still continue to deal with the ongoing challenges of the pandemic.
Gross Profit and Contribution Margin
| | | Three Months Ended | |
| | | January 30, 2021 | | | February 1, 2020 | |
| | | | | | | As a Percent | | | | | | | As a Percent | |
(in thousands) | | Amount | | | of Net Sales | | | Amount | | | of Net Sales | |
| Gross Profit: | | | | | | | | | | | | | | | | |
Commercial | | $ | 8,410 | | | | 28.0 | % | | $ | 5,399 | | | | 14.6 | % |
Live Events | | | 4,256 | | | | 18.2 | | | | 7,815 | | | | 19.3 | |
High School Park and Recreation | | | 6,437 | | | | 44.0 | | | | 3,184 | | | | 21.5 | |
Transportation | | | 3,845 | | | | 32.7 | | | | 4,316 | | | | 31.0 | |
International | | | 993 | | | | 6.9 | | | | 3,768 | | | | 17.5 | |
| | | $ | 23,941 | | | | 25.4 | % | | $ | 24,482 | | | | 19.2 | % |
Gross profit is net sales less cost of sales. Cost of sales consists primarily of inventory, logistics related costs including tariffs and duties, consumables, salaries, other employee-related costs, facilities-related costs for manufacturing locations, machinery and equipment maintenance and depreciation, site sub-contractors, warranty costs, and other service delivery expenses.
| | | Three Months Ended | |
| | | January 29, 2022 | | | January 30, 2021 | |
| | | | | | | As a Percent | | | | | | | As a Percent | |
(in thousands) | | Amount | | | of Net Sales | | | Amount | | | of Net Sales | |
Gross Profit: | | | | | | | | | | | | | | | | |
Commercial | | $ | 8,239 | | | | 20.5 | % | | $ | 8,410 | | | | 28.0 | % |
Live Events | | | 3,094 | | | | 7.9 | | | | 4,256 | | | | 18.2 | |
High School Park and Recreation | | | 6,958 | | | | 29.3 | | | | 6,437 | | | | 44.0 | |
Transportation | | | 4,108 | | | | 26.0 | | | | 3,845 | | | | 32.7 | |
International | | | (91 | ) | | | (0.4 | ) | | | 993 | | | | 6.9 | |
| | | $ | 22,308 | | | | 16.0 | % | | $ | 23,941 | | | | 25.4 | % |
The improveddecline in gross profit ratepercentage is primarily related to the ongoing supply chain disruptions and inflationary challenges in input and personnel related cost, the difference in sales mix between periods, a result ofwarranty charge in fiscal 2022 third quarter, and other factors experienced during fiscal 2021 which had a positive impact on fiscal 2021 margins. The factors impacting the mix of service agreement and product sales and a $2.1 million litigation claim reversalgross profit in the third quarter of fiscal 2021 as compared to the third quarter of fiscal 2020. Excluding theincluded a positive $2.1 million or 14.4% gross profit impact of the litigation claim reversal gross profit as a percentagein High School Park and Recreation and adjustments to operations because of sales was 23.2 percent in the third quarter of fiscal 2021. In addition, duringCOVID-19 pandemic. During the third quarter of fiscal 2021, we have lowered overall staffing and temporarily furloughed employees to achieve lower operating costs to align with the uncertainties faced at that time created by the COVID-19 pandemic. DuringSince the third quarterbeginning of fiscal 20202022, we experienced additional expenses of approximately $1.1 million for project delivery costs. The gross profit percentagehave increased in our Commercialmanufacturing and High School Parkservice staffing levels to achieve current and Recreation business units primarily due to the reasons described above. expected future sales levels.
We earned a higher rate of gross profit on our service agreements due to reduced stand ready services conducted during the quarter. This was due to lower on-site demand as events were either not being held or held at a reduced frequency as compared to prior quarters. We believe this higher gross profit level will not be sustained in future quarters. This was offset by totalTotal warranty costs as a percent of sales was 1.6 percent for the three months ended January 30, 2021 as29, 2022 compared to 1.3the same period one year ago increased to 2.4 percent during the three months ended February 1, 2020.from 1.6 percent.
| | | Three Months Ended | | | Three Months Ended | |
| | | January 30, 2021 | | | | | | | | | | | February 1, 2020 | | | January 29, 2022 | | | | | | | | | January 30, 2021 | |
| | | | | | | As a Percent | | Dollar | | Percent | | | | | | As a Percent | | | | | | As a Percent | | Dollar | | Percent | | | | | As a Percent | |
(in thousands) | | Amount | | | of Net Sales | | | Change | | | Change | | | Amount | | | of Net Sales | | |
(in thousands) | | | Amount | | | of Net Sales | | | Change | | | Change | | | Amount | | | of Net Sales | |
Contribution Margin: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 5,061 | | | 16.8 | % | | $ | 4,241 | | | 517.2 | % | | $ | 820 | | | 2.2 | % | | $ | 4,321 | | | 10.8 | % | | $ | (740 | ) | | (14.6 | )% | | $ | 5,061 | | | 16.8 | % |
Live Events | | 2,062 | | | 8.8 | | | (1,993 | ) | | (49.1 | ) | | 4,055 | | | 10.0 | | | 547 | | | 1.4 | | | (1,515 | ) | | (73.5 | ) | | 2,062 | | | 8.8 | |
High School Park and Recreation | | 4,276 | | | 29.2 | | | 4,553 | | | (1,643.7 | ) | | (277 | ) | | (1.9 | ) | | 3,938 | | | 16.6 | | | (338 | ) | | (7.9 | ) | | 4,276 | | | 29.2 | |
Transportation | | 3,212 | | | 27.3 | | | (46 | ) | | (1.4 | ) | | 3,258 | | | 23.4 | | | 3,237 | | | 20.5 | | | 25 | | | 0.8 | | | 3,212 | | | 27.3 | |
International | | | (2,674 | ) | | (18.7 | ) | | | (2,748 | ) | | (3,713.5 | ) | | | 74 | | | 0.3 | | | | (2,470 | ) | | (11.8 | ) | | | 204 | | | (7.6 | ) | | | (2,674 | ) | | (18.7 | ) |
| | | $ | 11,937 | | | 12.7 | % | | $ | 4,007 | | | 50.5 | % | | $ | 7,930 | | | 6.2 | % | | $ | 9,573 | | | 6.9 | % | | $ | (2,364 | ) | | (19.8 | )% | | $ | 11,937 | | | 12.7 | % |
Contribution margin is a non-GAAP measure and consists of gross profit less selling expenses. Selling expenses consist primarily of salaries, other employee-relatedpersonnel related costs, travel and entertainment expenses, facility-related costs for salesmarketing related expenses (show rooms, product demonstration, depreciation and service offices,maintenance, conventions and trade show expenses), customer relationship management/marketing systems, bad debt expenses, third-party commissions, and expenditures for marketing efforts, including the costs of collateral materials, conventions and trade shows, product demonstrations, customer relationship management systems, and supplies.other expenses.
Contribution margin is impacted by the previously discussed sales and gross margin for each business unit. Eachunit and other factors experienced during fiscal 2021. During fiscal 2021, each business unit's contribution margin was impacted by a decrease in personnel related expenses and continued reductions in travel and entertainment, marketing, and convention related expenses due to limited ability to travel or delayedfewer number of conventions which wasbecause of COVID-19 restrictions. These savings were partly offset by a $1.3 million increase in bad debt expenses. During fiscal 2021, we had lowered overall staffing and furloughed employees to achieve lower operating costs to align with the uncertainties created by the COVID-19 pandemic. Since the beginning of fiscal 2022, we have adjusted our sales and marketing activities and staffing levels to achieve current and expected future sales levels.
Reconciliation from non-GAAP contribution margin to operating loss GAAP measure is as follows:
| | | Three Months Ended | |
| | | January 29, 2022 | | | | | | | | | | | January 30, 2021 | |
| | | | | | | As a Percent | | | Dollar | | | Percent | | | | | | | As a Percent | |
(in thousands) | | Amount | | | of Net Sales | | | Change | | | Change | | | Amount | | | of Net Sales | |
Contribution margin | | $ | 9,573 | | | | 6.9 | % | | $ | (2,364 | ) | | | (19.8 | )% | | $ | 11,937 | | | | 12.7 | % |
General and administrative | | | 8,328 | | | | 6.0 | | | | 1,939 | | | | 30.3 | | | | 6,389 | | | | 6.8 | |
Product design and development | | | 6,925 | | | | 5.0 | | | | 1,141 | | | | 19.7 | | | | 5,784 | | | | 6.1 | |
Operating (loss) income | | $ | (5,680 | ) | | | (4.1 | )% | | $ | (5,444 | ) | | | 2306.8 | % | | $ | (236 | ) | | | (0.3 | )% |
Since the beginning of fiscal 2022, we have adjusted our staffing levels to current and expected future business activity levels. Through the third quarter of fiscal 2021, we lowered overall staffing and temporarily furloughed employees to achieve lower operating costs to align with the uncertainties faced at that time created by the COVID-19 pandemic.
General and administrative expenses in the third quarter of fiscal 2022 increased as compared to the same period one year ago primarily due to increases in personnel related expenses.
Product design and development expensesin the third quarter of fiscal 2022 increased as compared to the same period one year ago primarily due to an increase in personnel related expenses.
Decreased contribution margin and increased spend in general and administrative and product development led to a larger operating loss for the third quarter of fiscal 2022 compared to the prior year third quarter.
Other Income and Expenses
| | | Three Months Ended | |
| | | January 29, 2022 | | | | | | | | | | | January 30, 2021 | |
| | | | | | | As a Percent | | | Dollar | | | Percent | | | | | | | As a Percent | |
(in thousands) | | Amount | | | of Net Sales | | | Change | | | Change | | | Amount | | | of Net Sales | |
Interest (expense) income, net | | $ | 56 | | | | 0.0 | % | | $ | 96 | | | | (240.0 | )% | | $ | (40 | ) | | | (0.0 | )% |
Other (expense) income, net | | $ | (793 | ) | | | (0.6 | )% | | $ | 120 | | | | (13.1 | )% | | $ | (913 | ) | | | (1.0 | )% |
Interest (expense) income, net: The change in interest income and expense, net for the third quarter of fiscal 2022 compared to the same period one year ago was primarily due to the reduction of interest expense, as we have no outstanding amounts due on the line of credit this year as compared to $15.0 million last year.
Other (expense) income, net: The change in other income and expense, net for the third quarter of fiscal 2022 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
We have recorded an effective tax rate of 32.2 percent for the third quarter of fiscal 2022 as compared to 82.0 percent for the third quarter of fiscal 2021. The decrease in tax rate is primarily driven by an increase in estimated permanent tax costs such as BEAT and GILTI proportionate to a decrease in estimated pre-tax earnings in the third quarter of fiscal 2022 compared to discrete tax benefits recorded proportionate to the book loss recognized in the third quarter of fiscal 2021.
RESULTS OF OPERATIONS
COMPARISON OF THE Nine MONTHS ENDED January 29, 2022 and January 30, 2021
Net Sales
The following table shows information regarding net sales for the nine months ended January 29, 2022 and January 30, 2021:
| | | Nine Months Ended | |
| | | January 29, | | | January 30, | | | Dollar | | | Percent | |
(in thousands) | | 2022 | | | 2021 | | | Change | | | Change | |
Net sales: | | | | | | | | | | | | | | | | |
Commercial | | $ | 107,339 | | | $ | 94,947 | | | $ | 12,392 | | | | 13.1 | % |
Live Events | | | 150,840 | | | | 112,626 | | | | 38,214 | | | | 33.9 | |
High School Park and Recreation | | | 84,362 | | | | 71,165 | | | | 13,197 | | | | 18.5 | |
Transportation | | | 42,434 | | | | 41,590 | | | | 844 | | | | 2.0 | |
International | | | 63,792 | | | | 44,822 | | | | 18,970 | | | | 42.3 | |
| | | $ | 448,767 | | | $ | 365,150 | | | $ | 83,617 | | | | 22.9 | % |
Orders: | | | | | | | | | | | | | | | | |
Commercial | | $ | 143,699 | | | $ | 92,929 | | | $ | 50,770 | | | | 54.6 | % |
Live Events | | | 169,665 | | | | 93,619 | | | | 76,046 | | | | 81.2 | |
High School Park and Recreation | | | 107,246 | | | | 64,582 | | | | 42,664 | | | | 66.1 | |
Transportation | | | 56,854 | | | | 37,713 | | | | 19,141 | | | | 50.8 | |
International | | | 82,778 | | | | 55,864 | | | | 26,914 | | | | 48.2 | |
| | | $ | 560,242 | | | $ | 344,707 | | | $ | 215,535 | | | | 62.5 | % |
Sales and orders increased, as demand was up across all markets in the nine months ended January 29, 2022 compared to the prior year nine-month periods. During the nine months ended January 30, 2021, sales and orders in all business units were negatively impacted as a result of the economic downturn caused by the COVID-19 pandemic.
Net sales during thenine months ended January 29, 2022increased due to the conversion of the higher order volume for reasons noted below to sales during the first nine months of the year, including several large multimillion-dollar orders ("large orders") in both Live Events and International. Material supply and labor shortages are creating an increase in lead times, extending the timing of converting some orders to sales in the near-term.
Orders during the first nine months ended January 29, 2022 continued to improve, reflecting the continued economic recovery from the impact of the global pandemic among our customers.
Gross Profit and Contribution Margin
| | | Nine Months Ended | |
| | | January 29, 2022 | | | January 30, 2021 | |
| | | | | | | As a Percent | | | | | | | As a Percent | |
(in thousands) | | Amount | | | of Net Sales | | | Amount | | | of Net Sales | |
Gross Profit: | | | | | | | | | | | | | | | | |
Commercial | | $ | 22,862 | | | | 21.3 | % | | $ | 24,730 | | | | 26.0 | % |
Live Events | | | 17,261 | | | | 11.4 | | | | 20,910 | | | | 18.6 | |
High School Park and Recreation | | | 27,216 | | | | 32.3 | | | | 25,410 | | | | 35.7 | |
Transportation | | | 12,263 | | | | 28.9 | | | | 14,300 | | | | 34.4 | |
International | | | 7,158 | | | | 11.2 | | | | 7,666 | | | | 17.1 | |
| | | $ | 86,760 | | | | 19.3 | % | | $ | 93,016 | | | | 25.5 | % |
The decline in gross profit percentage is primarily related to the ongoing supply chain disruptions and inflationary challenges in materials, freight and personnel related costs; the difference in sales mix between periods; and other factors experienced during fiscal 2021 which had a positive impact on fiscal 2021 margins. The factors impacting the gross profit in fiscal 2021 included the positive $2.1 million litigation claim reversal in High School Park and Recreation and $1.6 million of COVID relief governmental subsidies offset by $2.8 million of severance costs to reduce our workforce to adjust to the impacts of the COVID-19 pandemic.
During the uncertainties created by the COVID-19 pandemic during fiscal 2021, we lowered overall staffing and temporarily furloughed employees. Since the beginning of fiscal 2022, we have increased our manufacturing and services personnel levels to achieve current and expected future sales levels.
During the first nine months of fiscal 2021, we earned a higher rate of gross profit on our service agreements due to reduced stand ready services conducted during the year because of the pandemic. During the first nine months of fiscal year 2022, we had more large project sales which generally have lower gross profit because of their competitive nature.
Total warranty cost as a percent of sales for the nine months ended January 29, 2022 compared to the same period one year ago increased to 1.6 percent from 1.5 percent.
| | | Nine Months Ended | |
| | | January 29, 2022 | | | | | | | | | | | January 30, 2021 | |
| | | | | | | As a Percent | | | Dollar | | | Percent | | | | | | | As a Percent | |
(in thousands) | | Amount | | | of Net Sales | | | Change | | | Change | | | Amount | | | of Net Sales | |
Contribution Margin: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 11,247 | | | | 10.5 | % | | $ | (3,036 | ) | | | (21.3 | )% | | $ | 14,283 | | | | 15.0 | % |
Live Events | | | 10,199 | | | | 6.8 | | | | (3,882 | ) | | | (27.6 | ) | | | 14,081 | | | | 12.5 | |
High School Park and Recreation | | | 18,539 | | | | 22.0 | | | | 397 | | | | 2.2 | | | | 18,142 | | | | 25.5 | |
Transportation | | | 9,601 | | | | 22.6 | | | | (2,438 | ) | | | (20.3 | ) | | | 12,039 | | | | 28.9 | |
International | | | 162 | | | | 0.3 | | | | 1,905 | | | | (109.3 | ) | | | (1,743 | ) | | | (3.9 | ) |
| | | $ | 49,748 | | | | 11.1 | % | | $ | (7,054 | ) | | | (12.4 | )% | | $ | 56,802 | | | | 15.6 | % |
Contribution margin in the nine months ended January 29, 2022 was impacted by the previously discussed sales levels and impacts within gross profit.
Since the beginning of fiscal 2022, we have adjusted our sales and marketing activities and staffing levels to achieve current and expected future sales levels. During fiscal 2021, each business unit's contribution margin was impacted by a decrease in personnel related expenses and continued reductions in travel and entertainment, marketing, and convention related expenses due to limited ability to travel or fewer number of conventions because of COVID-19 restrictions. These fiscal 2021 savings were partly offset by a $1.5 million increase in bad debt expenses. During fiscal 2021, we had lowered overall staffing and furloughed employees to achieve lower operating costs to align with the uncertainties created by the COVID-19 pandemic.
Reconciliation from non-GAAP contribution margin to operating marginincome GAAP measure is as follows:
| | | Three Months Ended | | | | | | | Nine Months Ended | |
| | | January 30, 2021 | | | | | | | | | | | February 1, 2020 | | | January 29, 2022 | | | | | | | | | January 30, 2021 | |
| | | | | | | As a Percent | | Dollar | | Percent | | | | | | As a Percent | | | | | | As a Percent | | Dollar | | Percent | | | | | As a Percent | |
(in thousands) | | Amount | | | of Net Sales | | | Change | | | Change | | | Amount | | | of Net Sales | | |
(in thousands) | | | Amount | | | of Net Sales | | | Change | | | Change | | | Amount | | | of Net Sales | |
Contribution margin | | $ | 11,937 | | | 12.7 | % | | $ | 4,007 | | | 50.5 | % | | $ | 7,930 | | | 6.2 | % | | $ | 49,748 | | | 11.1 | % | | $ | (7,054 | ) | | (12.4 | )% | | $ | 56,802 | | | 15.6 | % |
General and administrative | | 6,389 | | | 6.8 | | | (2,251 | ) | | (26.1 | ) | | 8,640 | | | 6.8 | | | 24,100 | | | 5.4 | | | 3,323 | | | 16.0 | | | 20,777 | | | 5.7 | |
Product design and development | | | 5,784 | | | 6.1 | | | | (2,658 | ) | | (31.5 | ) | | | 8,442 | | | 6.6 | | | | 21,283 | | | 4.7 | | | | 1,230 | | | 6.1 | | | | 20,053 | | | 5.5 | |
Operating loss | | $ | (236 | ) | | (0.3 | )% | | $ | 8,916 | | | (97.4 | )% | | $ | (9,152 | ) | | (7.2 | )% | |
Operating income | | | $ | 4,365 | | | 1.0 | % | | $ | (11,607 | ) | | (72.7 | )% | | $ | 15,972 | | | 4.4 | % |
General and administrative expenses consist primarily of salaries, other employee-related costs, professional fees, shareholder relations costs, facilities and equipment-related costs for administrative departments, training costs, and the cost of supplies.
General and administrative expensesinThrough the third quarter of fiscal 2021, decreased as compared to the same period one year ago primarily due to decreases in personnel related expenses and professional fees. We have lowered overall staffing and furloughed employees to achieve lower operating costs to align with the uncertainties created by the COVID-19 pandemic.
Product design and development expenses consist primarily of salaries, other employee-related costs, professional services, facilities costs and equipment-related costs and supplies. Product design and development investments in the near term are focused on developing or improving our video technology over a wide range of pixel pitches for both indoor and outdoor applications. These new or improved technologies are focused on varied pixel density for image quality and use, expanded product line offerings for our various markets and geographies, improved quality and reliability, and improved cost points. We plan to make continued investments in our software and controller capabilities throughout our various product offerings. Through our design efforts, we focus on standardizing display components and control systems for both single site and network displays.
Our costs for product design and development represent an allocated amount of costs based on time charges, professional services, material costs and the overhead of our engineering departments. Generally, a significant portion of our engineering time is spent on product design and development, while the rest is allocated to large contract work and included in cost of sales.
Product design and development expenses in the third quarter of fiscal 2021 decreased as compared to the same period one year ago primarily due to decreased labor costs and professional services assigned to product design and development projects. We have lowered overall staffing, furloughed employees, and lowered the use of contractors in our development area to achieve lower operating costs to align with the uncertainties created by the COVID-19 pandemic.
Other Income and Expenses
| | | Three Months Ended | | | | | |
| | | January 30, 2021 | | | | | | | | | | | February 1, 2020 | |
| | | | | | | As a Percent | | | Dollar | | | Percent | | | | | | | As a Percent | |
(in thousands) | | Amount | | | of Net Sales | | | Change | | | Change | | | Amount | | | of Net Sales | |
Interest (expense) income, net | | $ | (40 | ) | | | (0.0 | )% | | $ | (286 | ) | | | (116.3 | )% | | $ | 246 | | | | 0.2 | % |
Other (expense) income, net | | $ | (913 | ) | | | (1.0 | )% | | $ | (582 | ) | | | 175.8 | % | | $ | (331 | ) | | | (0.3 | )% |
Interest (expense) income, net: We generate interest income through short-term cash investments, marketable securities, and product sales on an installment basis or in exchange for the rights to sell and retain advertising revenues from displays, which result in long-term receivables. Interest expense is comprised primarily of interest costs on our line of credit and any long-term obligations.
The change in interest income and expense, net for the third quarter of fiscal 2021 compared to the same period one year ago was primarily due to the change in investment levels caused by the volatility of working capital needs and interest expense for our drawings on the line of credit.
Other (expense) income, net: The change in other income and expense, net for the third quarter of fiscal 2021 as compared to the same period one year ago was primarily due to foreign currency volatility and the increases in the losses recorded for equity method affiliates.
Income Taxes
The provision for income taxes during interim reporting periods is calculated by applying an estimate of the annual effective tax rate to “ordinary” income or loss for the reporting period, adjusted for discrete items. Due to various factors, including our estimate of annual income, our effective tax rate is subject to fluctuation.
We have recorded an effective tax rate of 82.0 percent for the third quarter of fiscal 2021 as compared to a negative effective tax rate of 37.9 percent for the third quarter of fiscal 2020. The tax rate changes each period are primarily driven by the mathematical calculations of estimated tax credits and other permanent difference levels proportionate to estimated pre-tax earnings levels and the related changes in estimates of each of those variables through the year. For the three months ended January 30, 2021, the rate change was mainly driven by a return to provision benefit booked in proportion to an actual small pre-tax loss for the quarter; whereas the three months ended February 1, 2020, was primarily driven by changes in the proportionate percentage of estimated tax credits and other permanent differences compared to estimated pre-tax earnings.
COMPARISON OF THE nine months ended January 30, 2021 and February 1, 2020
Net Sales
| | | Nine Months Ended | |
| | | January 30, | | | February 1, | | | Dollar | | | Percent | |
(in thousands) | | 2021 | | | 2020 | | | Change | | | Change | |
Net sales: | | | | | | | | | | | | | | | | |
Commercial | | $ | 94,947 | | | $ | 120,566 | | | $ | (25,619 | ) | | | (21.2 | )% |
| Live Events | | | 112,626 | | | | 159,196 | | | | (46,570 | ) | | | (29.3 | ) |
High School Park and Recreation | | | 71,165 | | | | 75,433 | | | | (4,268 | ) | | | (5.7 | ) |
| Transportation | | | 41,590 | | | | 53,264 | | | | (11,674 | ) | | | (21.9 | ) |
| International | | | 44,822 | | | | 74,365 | | | | (29,543 | ) | | | (39.7 | ) |
| | | $ | 365,150 | | | $ | 482,824 | | | $ | (117,674 | ) | | | (24.4 | )% |
Orders: | | | | | | | | | | | | | | | | |
Commercial | | $ | 92,929 | | | $ | 119,059 | | | $ | (26,130 | ) | | | (21.9 | )% |
| Live Events | | | 93,619 | | | | 149,461 | | | | (55,842 | ) | | | (37.4 | ) |
High School Park and Recreation | | | 64,582 | | | | 73,852 | | | | (9,270 | ) | | | (12.6 | ) |
| Transportation | | | 37,713 | | | | 55,410 | | | | (17,697 | ) | | | (31.9 | ) |
| International | | | 55,864 | | | | 75,827 | | | | (19,963 | ) | | | (26.3 | ) |
| | | $ | 344,707 | | | $ | 473,609 | | | $ | (128,902 | ) | | | (27.2 | )% |
Sales and orders in all business units were impacted as a result of the economic downturn caused by the COVID-19 pandemic as well as the nine months ended February 1, 2020 included 40 weeks compared to the more common 39 weeks. The nine months ended January 30, 2021 contained 39 weeks.
For net sales, during the first nine months ended January 30, 2021, we achieved a $9.4 million per week average run rate as compared to $12.1 million per week during the first nine months ended February 1, 2020, or an approximate 22 percent decrease. The change in sales was also related to fluctuations in the timing of order bookings, and related conversion to sales.
For orders, during the first nine months ended January 30, 2021, we achieved a $8.8 million per week average run rate as compared to $11.8 million per week during the first nine months ended February 1, 2020, or an approximate 25 percent decrease. The change in orders was also impacted by the timing of large contract orders which causes lumpiness.
Gross Profit and Contribution Margin
| | | Nine Months Ended | |
| | | January 30, 2021 | | | February 1, 2020 | |
| | | | | | | As a Percent | | | | | | | As a Percent | |
(in thousands) | | Amount | | | of Net Sales | | | Amount | | | of Net Sales | |
| Gross Profit: | | | | | | | | | | | | | | | | |
Commercial | | $ | 24,730 | | | | 26.0 | % | | $ | 22,479 | | | | 18.6 | % |
Live Events | | | 20,910 | | | | 18.6 | | | | 32,486 | | | | 20.4 | |
High School Park and Recreation | | | 25,410 | | | | 35.7 | | | | 22,595 | | | | 30.0 | |
Transportation | | | 14,300 | | | | 34.4 | | | | 18,073 | | | | 33.9 | |
International | | | 7,666 | | | | 17.1 | | | | 14,441 | | | | 19.4 | |
| | | $ | 93,016 | | | | 25.5 | % | | $ | 110,074 | | | | 22.8 | % |
Gross profit is net sales less cost of sales. Cost of sales consists primarily of inventory, logistics related costs including tariffs and duties, consumables, salaries, other employee-related costs, facilities-related costs for manufacturing locations, machinery and equipment maintenance and depreciation, site sub-contractors, warranty costs, and other service delivery expenses.
The increase in our gross profit percentage for the nine months ended January 30, 2021 compared to the same period one year ago was the result of the mix of service agreement and product sales, a $2.1 million litigation claim reversal in High School Park and Recreation, and the following impacts across all business units: $2.8 million of severance costs to reducing our workforce, offset by $1.6 million of COVID relief governmental subsidies. In addition, during fiscal 2021, we have lowered overall staffing and temporarily furloughed employees to achieve lower operating costs to align with the uncertainties faced at that time created by the COVID-19 pandemic. DuringSince the beginning of fiscal 2020,2022, we experienced additional expenses of approximately $3.2 million for project delivery costs,have adjusted our staffing levels to current and $2.5 million in tariff related expenses, decreasing the gross profit rate for the year.
We earned a higher rate of gross profit on our service agreements due to reduced stand ready services conducted during the nine months ended January 30, 2021. This was due to lower on-site demand as events were not being held. We believe this higher gross profit level will not be sustained inexpected future quarters. Total warranty as a percent of sales decreased to 1.5 percent for the nine months ended January 30, 2021 as compared to 1.9 percent during the nine months ended February 1, 2020.
| | | Nine Months Ended | | | | | |
| | | January 30, 2021 | | | | | | | | | | | February 1, 2020 | |
| | | | | | | As a Percent | | | Dollar | | | Percent | | | | | | | As a Percent | |
(in thousands) | | Amount | | | of Net Sales | | | Change | | | Change | | | Amount | | | of Net Sales | |
Contribution Margin: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 14,283 | | | | 15.0 | % | | $ | 6,526 | | | | 84.1 | % | | $ | 7,757 | | | | 6.4 | % |
Live Events | | | 14,081 | | | | 12.5 | | | | (7,208 | ) | | | (33.9 | ) | | | 21,289 | | | | 13.4 | |
High School Park and Recreation | | | 18,142 | | | | 25.5 | | | | 5,839 | | | | 47.5 | | | | 12,303 | | | | 16.3 | |
Transportation | | | 12,039 | | | | 28.9 | | | | (2,566 | ) | | | (17.6 | ) | | | 14,605 | | | | 27.4 | |
International | | | (1,743 | ) | | | (3.9 | ) | | | (4,837 | ) | | | (156.3 | ) | | | 3,094 | | | | 4.2 | |
| | | $ | 56,802 | | | | 15.6 | % | | $ | (2,246 | ) | | | (3.8 | )% | | $ | 59,048 | | | | 12.2 | % |
Contribution margin is a non-GAAP measure and consists of gross profit less selling expenses. Selling expenses consist primarily of salaries, other employee-related costs, travel and entertainment expenses, facility-related costs for sales and service offices, bad debt expenses, third-party commissions and expenditures for marketing efforts, including the costs of collateral materials, conventions and trade shows, product demonstrations, customer relationship management systems, and supplies.
Contribution margin is impacted by the previously discussed sales and gross margin for each business unit. Each business unit's contribution margin was impacted as a result of the economic downturn caused by the COVID-19 pandemic, as well as the nine months ended February 1, 2020 included 40 weeks compared to the more common 39 weeks. The nine months ended January 30, 2021 contained 39 weeks. In addition, each business unit's contribution margin had a decrease in personnel related expenses offset by severance costs for reductions in force, as well as reductions in travel and entertainment, marketing, and convention related expenses. This was partially offset by a $2.0 million increase in bad debt expenses. We have lowered overall staffing and furloughed employees to achieve lower operating costs to align with the uncertainties created by the COVID-19 pandemic.
Reconciliation from non-GAAP contribution margin to operating margin GAAP measure is as follows:
| | | Nine Months Ended | | | | | |
| | | January 30, 2021 | | | | | | | | | | | February 1, 2020 | |
| | | | | | | As a Percent | | | Dollar | | | Percent | | | | | | | As a Percent | |
(in thousands) | | Amount | | | of Net Sales | | | Change | | | Change | | | Amount | | | of Net Sales | |
Contribution margin | | $ | 56,802 | | | | 15.6 | % | | $ | (2,246 | ) | | | (3.8 | )% | | $ | 59,048 | | | | 12.2 | % |
General and administrative | | | 20,777 | | | | 5.7 | | | | (5,921 | ) | | | (22.2 | ) | | | 26,698 | | | | 5.5 | |
Product design and development | | | 20,053 | | | | 5.5 | | | | (9,010 | ) | | | (31.0 | ) | | | 29,063 | | | | 6.0 | |
Operating income | | $ | 15,972 | | | | 4.4 | % | | $ | 12,685 | | | | 385.9 | % | | $ | 3,287 | | | | 0.7 | % |
All areas of operating expenses were impacted as a result of the economic downturn caused by the COVID-19 pandemic. In addition, the nine months ended February 1, 2020 included 40 weeks compared to the 39 weeks in the nine months ended January 30, 2021.
General and administrative expenses consist primarily of salaries, other employee-related costs, professional fees, shareholder relations costs, facilities and equipment-related costs for administrative departments, training costs, and the cost of supplies.activity levels.
General and administrative expenses infor the nine months ended January 30, 2021 decreased29, 2022 increased as compared to the same period one year ago primarily due to decreasesincreases in personnel related expenses and professional fees offset by severance costs from the reduction in force. We have lowered overall staffing and furloughed employees to achieve lower operating costs to align with the uncertainties created by the COVID-19 pandemic.
Product design and development expenses consist primarily of salaries, other employee-related costs, professional services, facilities costs and equipment-related costs and supplies. Product design and development investments in the near term are focused on developing or improving our video technology over a wide range of pixel pitches for both indoor and outdoor applications. These new or improved technologies are focused on varied pixel density for image quality and use, expanded product line offerings for our various markets and geographies, improved quality and reliability, and improved cost points. We plan to make continued investments in our software and controller capabilities throughout our various product offerings. Through our design efforts, we focus on standardizing display components and control systems for both single site and network displays.
Our costs for product design and development represent an allocated amount of costs based on time charges, professional services, material costs and the overhead of our engineering departments. Generally, a significant portion of our engineering time is spent on product design and development, while the rest is allocated to large contract work and included in cost of sales.expenses.
Product design and development expenses in the nine months ended January 30, 202129, 2022 stayed relatively steady as compared to the same period one year ago decreased primarilyago.
Operating income was lower than the previous year due to decreased labor costsa lower contribution margin and professional services assignedan increase in personnel expense to product design and development projects offset by severance costs formatch the reductionincrease in force. We have lowered overall staffing and furloughed employees to achieve lower operating costs to align with the uncertainties created by the COVID-19 pandemic.orders discussed above.
Other Income and Expenses
| | | Nine Months Ended | | | | | | | Nine Months Ended | |
| | | January 30, 2021 | | | | | | | | | | | February 1, 2020 | | | January 29, 2022 | | | | | | | | | January 30, 2021 | |
| | | | | | | As a Percent | | Dollar | | Percent | | | | | | As a Percent | | | | | | As a Percent | | Dollar | | Percent | | | | | As a Percent | |
(in thousands) | | Amount | | | of Net Sales | | | Change | | | Change | | | Amount | | | of Net Sales | | | Amount | | | of Net Sales | | | Change | | | Change | | | Amount | | | of Net Sales | |
Interest (expense) income, net | | $ | (46 | ) | | (0.0 | )% | | $ | (657 | ) | | (107.5 | )% | | $ | 611 | | | 0.1 | % | | $ | 134 | | | 0.0 | % | | $ | 180 | | | (391.3 | )% | | $ | (46 | ) | | (0.0 | )% |
Other (expense) income, net | | $ | (2,377 | ) | | (0.7 | )% | | $ | (1,725 | ) | | 264.6 | % | | $ | (652 | ) | | (0.1 | )% | | $ | (2,613 | ) | | (0.6 | )% | | $ | (236 | ) | | 9.9 | % | | $ | (2,377 | ) | | (0.7 | )% |
Interest (expense) income, net:We generate interest income through short-term cash investments, marketable securities, and product sales on an installment basis or in exchange for the rights to sell and retain advertising revenues from displays, which result in long-term receivables. Interest expense is comprised primarily of interest costs on our line of credit and any long-term obligations.
The change in interest income and expense, net infor the nine months ended January 30, 202129, 2022 compared to the same period one year ago was primarily due to the change in investment levels caused by the volatilityreduction of working capital needs and interest expense, for ouras we have no outstanding drawings on the line of credit.credit this year as compared to $15.0 million last year.
Other (expense) income, net: The change in other income and expense, net for the nine months ended January 30, 202129, 2022 as compared to the same period one year ago was primarily due to foreign currency volatility and the increases in the losses recorded for equity method affiliates. During the nine months ended January 30, 2021, we recorded equity method affiliate losses of $1.7 million as compared to $0.4 million during the nine months ended February 1, 2020.affiliates and foreign currency volatility.
Income Taxes
The provision for income taxes during interim reporting periods is calculated by applyingWe have recorded an estimate of the annual effective tax rate to “ordinary” income or lossof 9.4 percent for the reporting period, adjusted for discrete items. Duenine months ended January 29, 2022, as compared to various factors, including our estimate of annual income, our effective tax rate is subject to fluctuation.
We have recorded an effective tax rate of 21.3 percent for the nine months ended January 30, 2021 as compared to an effective2021. The difference in tax rate of 51.6 percent for the nine months ended February 1, 2020. The tax rate changes each period arerates is primarily driven by the mathematical calculations of estimatedan increase in permanent tax creditscosts such as BEAT and other permanent difference levelsGILTI proportionate to a decrease in estimated pre-tax earnings levels andin the related changes in estimatesthird quarter of each of those variables through the year. Thefiscal 2022 compared to no change in the effectiveestimated tax rate year over yearfrom the second quarter to the third quarter of fiscal 2021. Additionally, a return to provision expense was driven primarily by a decrease inrecorded for the proportionate percentage of tax credits and other permanent differencesthird quarter impacting the overall effective rate compared to estimated pre-tax earnings.a return to provision benefit recorded in fiscal 2021.
LIQUIDITY AND CAPITAL RESOURCES
| | | Nine Months Ended | | | Nine Months Ended | |
| | | January 30, | | February 1, | | Percent | | | January 29, | | January 30, | | Dollar | |
(in thousands) | | 2021 | | | 2020 | | | Change | | | 2022 | | | 2021 | | | Change | |
Net cash provided by (used in): | | | | | | | |
Net cash (used in) provided by: | | | | | | | |
Operating activities | | $ | 48,221 | | | $ | 6,190 | | | 679.0 | % | | $ | (25,464 | ) | | $ | 48,221 | | | $ | (73,685 | ) |
Investing activities | | (6,811 | ) | | 10,034 | | | (167.9 | ) | | (19,926 | ) | | (6,811 | ) | | (13,115 | ) |
Financing activities | | (556 | ) | | (11,424 | ) | | (95.1 | ) | | (3,391 | ) | | (556 | ) | | (2,835 | ) |
Effect of exchange rate changes on cash | | | (505 | ) | | | (166 | ) | | | 204.2 | | | | 98 | | | | (505 | ) | | | 603 | |
Net increase in cash, cash equivalents and restricted cash | | $ | 40,349 | | | $ | 4,634 | | | | 770.7 | % | |
Net (decrease) increase in cash, cash equivalents and restricted cash | | | $ | (48,683 | ) | | $ | 40,349 | | | $ | (89,032 | ) |
Cash increaseddecreased by $40.3$48.7 million for the first nine months of fiscal 20212022 primarily due to the use of cash for increases in accounts receivable, contract assets, and inventory required to support the increased order volume and holding more inventory as compareda strategy during this time of supply chain disruptions. The decrease in cash was also due to an increaseinvesting in capital assets for increased capacity, loans to affiliates, purchase of $4.6marketable securities, and purchase of shares through the share repurchase program. Cash increased by $40.3 million in the first nine months of fiscal 2020, which is primarily due to2021 because of cash generation of operations, a decreaseconservation measures during the pandemic, including: reductions in operating asset levels, decreases in capital expenditures, and suspendingthe suspension of our dividend and share repurchase programs.program.
Net cash (used in) provided by operating activities: Cash generated by operating activities is primarily derived from cash received from customers, offset by cash payments for inventories, subcontractors, employee related costs, and operating expense outflows. Operating cash flows consist primarily of net income adjusted for non-cash items, including depreciation and amortization, stock-based compensation, deferred income taxes, and the effect of changes in operating assets and liabilities. Overall, changes in net operating assets and liabilities can be impacted by the timing of cash flows on large orders, which can cause significant short-term and seasonal fluctuations in inventory, accounts receivables, accounts payable, contract assets and liabilities, and various other operating assets and liabilities. Variability in contract assets and liabilities relates to the timing of billings on construction-type contracts and revenue recognition, which can vary significantly depending on contractual payment terms and build and installation schedules. Balances are also impacted by the seasonality of the sports market.
Net cash provided byused in operating activities was $48.2$25.5 million for the first nine months of fiscal 20212022 compared to net cash provided by operating activities of $6.2$48.2 million in the first nine months of fiscal 2020.2021. The $42.0$73.7 million increasedifference between net cash used in fiscal 2022 compared to net cash provided in fiscal 2021 by operating activities was primarily the result of changes in net operating assets and liabilities and an increase of $9.1 million in net income.liabilities.
The changes in net operating assets and liabilities consisted of the following:
| | | Nine Months Ended | | | Nine Months Ended | |
| | | January 30, | | February 1, | | | January 29, | | January 30, | |
| | | 2021 | | | 2020 | | | 2022 | | | 2021 | |
(Increase) decrease: | | | | | | | | |
Accounts receivable | | $ | 9,089 | | | $ | (14,253 | ) | | $ | (29,015 | ) | | $ | 9,089 | |
Long-term receivables | | 2,318 | | | (2,048 | ) | | 205 | | | 2,318 | |
Inventories | | 15,757 | | | (1,523 | ) | | (37,116 | ) | | 15,757 | |
Contract assets | | 5,558 | | | (1,602 | ) | | (7,534 | ) | | 5,558 | |
Prepaid expenses and other current assets | | 2,342 | | | 201 | | | (5,465 | ) | | 2,342 | |
Income tax receivables | | 492 | | | 884 | | | (1,696 | ) | | 492 | |
Investment in affiliates and other assets | | 594 | | | (578 | ) | | (29 | ) | | 594 | |
Increase (decrease): | | | | | | | | |
Accounts payable | | (14,355 | ) | | 237 | | | 21,429 | | | (14,355 | ) |
| Contract liabilities | | 1,480 | | | 3,335 | | | 15,781 | | | 1,480 | |
Accrued expenses | | (7,557 | ) | | 3,711 | | | 3,177 | | | (7,557 | ) |
Warranty obligations | | 998 | | | 53 | | | 916 | | | 998 | |
Long-term warranty obligations | | (166 | ) | | 1,192 | | | 298 | | | (166 | ) |
Income taxes payable | | 1,185 | | | 484 | | | (239 | ) | | 1,185 | |
Long-term marketing obligations and other payables | | | 2,380 | | | | (128 | ) | | | (1,712 | ) | | | 2,380 | |
| | | $ | 20,115 | | | $ | (10,035 | ) | | $ | (41,000 | ) | | $ | 20,115 | |
Net cash (used in) provided byused in investing activities: Net cash used in investing activities totaled $19.9 million in the first nine months of fiscal 2022 compared to net cash used in investing activities of $6.8 million in the first nine months of fiscal 2021 compared to net cash provided by investing activities2021. Purchases of property and equipment totaled $10.0 million in the first nine months of fiscal 2020.2022 compared to $6.9 million in the first nine months of fiscal 2021. We hadused $4.0 million for purchases of marketable securities in the first nine months of fiscal 2022 as compared to $1.0 million proceeds from sales or maturities of marketable securities in the first nine months of fiscal 2021 as compared2021. Purchases of and loans to $24.7affiliates accounted for by the equity investment method totaled $6.7 million in the first nine months of fiscal 2020. Net proceeds of marketable securities in fiscal 2020 were utilized2022 as compared to cover working capital needs for changes in operating assets and liabilities described above. Purchases of property and equipment totaled $6.9 million $1.3 million in the first nine months of fiscal 2021 compared to $13.6 million in the first nine months of fiscal 2020.2021.
Net cash used in financing activities: Net cash used in financing activities was $0.6$3.4 million for the nine months ended January 30, 202129, 2022 compared to $11.4$0.6 million in the same period one year ago. Principalago primarily due to payments on long-term obligations for the first nine months of fiscal 2021 were $0.4 million compared to $2.1 million during the first nine months of fiscal 2020, which was mostly related to contingent liability payments. Dividends of $6.8 million, or $0.15 per share, paid to Daktronics shareholders during the first nine months of fiscal 2020, while there were no dividends paid during the first nine months of fiscal 2021. During the first nine months of fiscal 2020, we repurchased $2.3 million of shares as part of the $40.0 million share repurchase plan authorized by our Board of Directors. There were no share repurchases in the first nine months of fiscal 2021. As part of our COVID-19 response, our Board of Directors has suspended dividends and stock repurchases for the foreseeable future.repurchased.
Other Liquidity and Capital Resources Discussion: The timing and amounts of working capital changes, dividend payments, stock repurchase program,repurchases, and capital spending impact our liquidity.
Working capital was $132.7$113.9 million and $106.0$118.4 million atas of January 30, 202129, 2022 and May 2, 2020,1, 2021, respectively. The changes in working capital, particularly changes in accounts receivable, accounts payable, inventory, and contract assets and liabilities, and the sports market and construction seasonality can have a significant impact on the amount of net cash provided by operating activities largely due to the timing of payments and receipts. On multimillion-dollar orders, the time between order acceptance and project completion may extend up to or exceed 12 months or more depending on the amount of custom work and a customer’s delivery needs. We often receive down payments or progress payments on these orders. We expect to use cash in operations as our business returns and exceeds pre-pandemic levels.
We had $5.5$8.9 million of retainage on long-term contracts included in receivables and contract assets as of January 30, 2021,29, 2022, which has an impact on our liquidity. We expect to collect these amounts within one year. We have historically financed our cash needs through a combination of cash flow from operations and borrowings under bank credit agreements.
On November 15, 2019, we entered into an amendment to extend the maturity dateThe Board of Directors suspended dividends and share repurchases during fiscal 2020 as part of our credit agreement and a related revolving bank note from November 15, 2019 to November 15, 2022 and to modify certain other terms and financial covenants. On August 28, 2020, we entered intocash conservations measures through the third amendment topandemic. The timing of the future reinstatement of dividends is at the discretion of the Board of Directors. Future dividends are also impacted by the limitations imposed in our credit agreementfacility, as further described in "Note 7. Financing Agreements" in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021. The share repurchase program was reinstated on December 2, 2021.
Shares may be repurchased from time to time in open market purchases, private transactions or other transactions. The timing, volume and a security agreement over certain assets. The third amendment adds a liquidity covenantnature of share repurchases will be at the sole discretion of management and revises other financial covenants. The revolving amount of the agreement and note remains at $35.0 million, including up to $20.0 million for commercial and standby letters of credit. The credit agreement and amendments require us towill be in compliance with certain financial ratios, including the most sensitive covenant of interest bearing debt to earnings before income taxes, depreciation, and amortization of less than 2.5;dependent on market conditions, applicable securities laws and other covenantsfactors, and contain customary eventsmay be suspended or discontinued at any time. During the nine months ended January 29, 2022, we repurchased 600 shares of default, including failure to comply with covenants, failure to pay or discharge material judgments and taxes, bankruptcy, failure to pay loans and fees, and changecommon stock at a total cost of control. The occurrence of an event of default by us would permit the lenders to terminate their commitments and accelerate loans repayment, obtain securitized assets, and require collateralization of outstanding letters of credit. As of January 30, 2021, $15.0 million had been advanced to us under the loan portion of the line of credit, and the balance of letters of credit outstanding was approximately $6.7 million. As of January 30, 2021, $13.3 million of the credit facility remains in place and available. As of January 30, 2021, we were in compliance with all applicable bank loan covenants.$3,000.
We are sometimes required to obtain bank guarantees or other financial instruments for display installations and 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 DaktronicsDaktronics' restricted cash accounts. As of January 30, 2021,29, 2022, we had $3.6$0.7 million of such instruments outstanding.
We are sometimes required to obtain performance bonds for display installations, and we have a bonding line available through a surety company for an aggregate of $150.0 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 30, 2021,29, 2022, we had $38.9$39.2 million of bonded work outstanding against this line.
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 $10$25 million for fiscal 2021.2022. Projected capital expenditures include manufacturing equipment for new or enhanced product production, expanded capacity, investments in quality and reliability equipment, demonstration and showroom assets, and continued information infrastructure investments. We also evaluate and may investmake strategic investments in new technologies, in our affiliates, or acquire companies aligned with our business strategy.
We believe our working capital available from all sources will be adequate to meet the cash requirements of our operations and strategies in the foreseeable future. If our growth extends beyond current expectations, or if we make significant strategic investments, we may need to utilize and possibly increase our credit facilities or seek other means of financing. We anticipate we will be able to obtain any needed funds under commercially reasonable terms from our current lenders or other sources, although this availability cannot be guaranteed, especially given the uncertainties resulting from the COVID-19 pandemic.
We believe the audiovisual industry fundamentals will drive long-term growth for our business, butbusiness; however, for the near-term outlook, shows contraction and greater volatility overall. Wewe expect our customers willmay continue to have disruptions and may continue to reduce or increase their spend on audiovisual systems and related services as they work through the economic and business implications of COVID-19, supply chain challenges, and emerging war and geopolitical situations. Ongoing supply chain disruptions and inflationary challenges in revenue caused by COVID-19. While it is difficult to estimate the longevitymaterials, freight and severity of the COVID-19 pandemicpersonnel related costs also impact to the economy and to our financial position, operating results,profitability and cash flows,flows. We have increased pricing when we continueare able in effort to take proactive steps to solidify our financial position and mitigate any adverse consequences. These steps include:offset the increase in input costs.
| •
| preserving liquidity by drawing down $15 million from our existing line of credit and pursuing other sources of financing;
|
| •
| reducing investments in capital assets; we estimate approximately $10 million in capital expenses in fiscal year 2021;
|
| •
| reducing executive pay and Board member compensation;
|
| •
| utilizing tax and other government opportunities to improve liquidity;
|
| •
| temporarily furloughing and permanently reducing our staffing and associated salaries, where necessary, to maintain a right-sized skilled workforce;
|
| •
| instituting other cost reductions across the business;
|
| •
| suspending stock repurchases under our share repurchase program; and
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| •
| suspending dividend declarations for the foreseeable future.
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Due to longer planning horizons and volatility in supply chains, 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. In addition, we are planning additional capital spending to grow our manufacturing capacity. We believe these measures are necessaryanticipate needing to help preserveutilize a portion of our ability to borrow for liquidity needsline of credit which expires in November 2022, and provide adequate working capital to weather the economic downturn caused by the COVID-19 pandemic. However, no assurancethere can be madeno assurances that we will be successful in renewing the line of credit with sufficient capacity or that we will otherwise be able to secureobtain sufficient cash. However, based on our initial discussions with lenders and other alternatives we have available to us, such as increasing prices of our goods and services, reducing operating expenses, negotiating longer payment terms to our suppliers, reducing capital expenditures and obtaining other forms of debt or equity financing, if needed, on favorable terms or at all, or that these strategieswe believe it is probable our existing cash balances and future actions will be successful. We continuesufficient to carefully monitorfund our normal business operations over the next twelve months from the date of this crisis, its impact on market demand, and our expense structure and will take additional actions as needed.
Off-Balance Sheet Arrangements and Contractual Obligations
There has been no material change in our off-balance sheet arrangements and contractual obligations since the end of our 2020 fiscal year on May 2, 2020. For additional information, see our Annual Report on Form 10-K for the fiscal year ended May 2, 2020.Report.
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 May 2, 2020.1, 2021. 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 May 2, 2020. In the first quarter of fiscal 2021, we adopted Accounting Standards Update ("ASU") 2017-04, Intangibles-Goodwill and Other (Topic 350) andASU 2016-13, Measurement of Credit Losses on Financial Instruments, as described in "Note 1. Basis of Presentation" of the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Report.1, 2021. There have been no other significantmaterial changes in our significant accounting policies or critical accounting estimates since the end of fiscal 2020.2021.
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 May 2, 2020.1, 2021. There have been no material changes in our exposure to these risks during the first nine months of fiscal 2021.2022.
Item 4. CONTROLS AND PROCEDURES
We carried out an evaluation, 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 “disclosure 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 30, 2021,29, 2022, which is the end of the period covered by this Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of January 30, 2021,29, 2022, our disclosure controls and procedures were effective.
Based on the evaluation described in the foregoing paragraph, our Chief Executive Officer and Chief Financial Officer concluded that during the quarter ended January 30, 2021,29, 2022, there was no change in our internal control over financial reporting which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
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 our Annual Report on Form 10-K for the fiscal year ended May 2, 2020.1, 2021. 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
Share Repurchases
DuringThe following table provides information about share repurchases of common stock during the nine monthsthird quarter of fiscal 2022 there were no share repurchases during the first two quarters of fiscal 2022:
Period | | Total number of shares purchased | | | Average price paid per share (including fees) | | | Total number of shares purchased as part of publicly announces plans or programs | | | Approximate dollar value of shares may yet be purchased under the share repurchase program (1) | |
May 2, 2021 - November 27, 2021 | | | — | | | | — | | | | — | | | $ | 32,539,076 | |
November 28, 2021 - December 25, 2021 | | | 413,055 | | | $ | 5.04 | | | | 413,055 | | | | 30,457,171 | |
December 26, 2021 - January 29, 2022 | | | 187,070 | | | $ | 4.91 | | | | 187,070 | | | | 29,539,079 | |
Total | | | 600,125 | | | | | | | | 600,125 | | | | | |
(1) The share repurchases described in the above table were made pursuant to the $40.0 million share repurchase program authorized by the Board of Directors on June 17, 2016 and reinstated on December 2, 2021.
Repurchases of shares are treated as dividends under the South Dakota Business Corporation Act (which is codified as Chapter 47-1A to the South Dakota statutes), our repurchases of shares could be affected by the limitations imposed on dividends in our credit facility, as further described in "Note 7. Financing Agreements" in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021, we did not repurchase any shares of our common stock.May 1, 2021.
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 required to be filed as part of this report is set forth in the Index of Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference.
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.
| | /s/ Sheila M. Anderson
|
| | Daktronics, Inc.
|
| | Sheila M. Anderson
|
| | Chief Financial Officer
|
| | (Principal Financial Officer and
|
| | Principal Accounting Officer)
|
| | |
Date:
| March 3, 2021
| |
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. 0-23246 unless otherwise indicated.
3.1 | Amended and Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 10-Q/A (Amendment No. 1) of Daktronics, Inc. filed on December 21, 2018). |
3.2 | Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.4 filed with our Annual Report on Form 10-K on June 12, 2013). |
4.1 | Rights Agreement dated as of November 16, 2018 between Daktronics, Inc. and Equiniti Trust Company, as Rights Agent (Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K of Daktronics, Inc. filed on November 16, 2018). |
| 4.2 | First Amendment to Rights Agreement dated as of November 19, 2021 between Daktronics, Inc. and Equiniti Trust Company, as Rights Agent (Incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K of Daktronics, Inc. filed on November 19, 2021). |
10.1 | Credit Agreement dated November 15, 2016 by and between the Company and U.S. Bank National Association (Incorporated by reference to Exhibit 10.1 filed with our Current Report on Form 8-K filed on November 16, 2016). |
10.2 | Revolving Note dated November 15, 2016 issued by the Company to U.S. Bank National Association (Incorporated by reference to Exhibit 10.2 filed with our Current Report on Form 8-K filed on November 16, 2016). |
10.3 | Second Amendment to Credit Agreement dated as of November 15, 2019 by and between the Company and U.S. Bank National Association (Incorporated by reference to Exhibit 10.1 filed with our Current Report on Form 8-K filed on November 15, 2019). |
10.4 | Third Amendment to Credit Agreement dated as of August 28, 2020 by and between the Company and U.S. Bank National Association (Incorporated by reference to Exhibit 10.4 filed with our Current Report on Form 10-Q of Daktronics, Inc. filed on August 28, 2020). |
| 10.5 | Fourth Amendment to Credit Agreement dated as of March 11, 2021 by and between the Company and U.S. Bank National Association (Incorporated by reference to Exhibit 10.5 filed with our Annual Report on Form 10-K on June 11, 2021). |
10.510.6
| Security Agreement dated as of August 28, 2020 by and between the Company and U.S. Bank National Association (Incorporated by reference to Exhibit 10.5 filed with our Current Report on Form 10-Q of Daktronics, Inc. filed on August 28, 2020). |
10.610.7
| Daktronics, Inc. 2020 Stock Incentive Plan ("2020 Plan") (Incorporated by reference to Exhibit A to the Company's Definitive Proxy Statement on Schedule 14A filed on July 16, 2020). |
10.710.8
| Form of Restricted Stock Award Agreement under the 2020 Plan (Incorporated by reference to Exhibit 10.2 filed with our Current Report on Form 8-K on September 3, 2020). |
10.810.9
| Form of Non-Qualified Stock Option Agreement Terms and Conditions under the 2020 Plan (Incorporated by reference to Exhibit 10.3 filed with our Current Report on Form 8-K on September 3, 2020). |
10.910.10
| Form of Incentive Stock Option Terms and Conditions under the 2020 Plan (Incorporated by reference to Exhibit 10.4 filed with our Current Report on Form 8-K on September 3, 2020). |
10.1010.11
| Form of Restricted Stock Unit Terms and Conditions under the 2020 Plan (Incorporated by reference to Exhibit 10.5 filed with our Current Report on Form 8-K on September 3, 2020). |
31.1 | Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1) |
31.2 | Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1) |
32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). (1) |
32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). (1) |
101101.INS
| The following financial information from our Quarterly Report on Form 10-Q forInline XBRL Instance Document (the instance document does not appear in the period ended January 30, 2021 formatted inInteractive Data File because its XBRL tags are embedded within the Inline Extensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) Condensed Consolidated Statements of Shareholders' Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements. (1)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 iXBRLInline XBRL and contained in Exhibit 101) |
| | (1) | Filed herewith electronically. |
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.
| | /s/ Sheila M. Anderson |
| | Daktronics, Inc. |
| | Sheila M. Anderson |
| | Chief Financial Officer |
| | (Principal Financial Officer and |
| | Principal Accounting Officer) |
| | |
Date: | March 10, 2022 | |
