DAKTRONICS INC /SD/ - Quarter Report: 2022 January (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 29, 2022

 

or

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___.

Commission File Number: 0-23246

 

 

Daktronics, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

South Dakota			46-0306862
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)
201 Daktronics Drive	Brookings,	SD	57006
(Address of Principal Executive Offices)

 

(605) 692-0200

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, No Par Value	DAKT	Nasdaq Global Select Market
Preferred Stock Purchase Rights	DAKT	Nasdaq Global Select Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐		Accelerated filer	☒
Non-accelerated filer	☐		Smaller reporting company	☐
			Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

The number of shares of the registrant’s common stock outstanding as of February 22, 2022 was 45,466,357.

 

 

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Table of Contents

  

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollar amounts in thousands, except per share data)

(unaudited)

Note 1. Basis of Presentation

Daktronics, Inc. and its subsidiaries (the “Company”, “Daktronics”, “we”, “our”, or “us”) are the world's industry leader in designing and manufacturing electronic scoreboards, programmable display systems and large screen video displays for sporting, commercial and transportation applications.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present our financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions affecting the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.

Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The balance sheet at May 1, 2021, has been derived from the audited financial statements at that date, but it does not include all the information and disclosures required by GAAP for complete financial statements. These financial statements should be read in conjunction with our financial statements and notes thereto for the year ended May 1, 2021, which are contained in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission ("SEC"). The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

Daktronics, Inc. operates on a 52- or 53-week fiscal year, with our fiscal year ending on the Saturday closest to April 30 of each year. When April 30 falls on a Wednesday, the fiscal year ends on the preceding Saturday. Within each fiscal year, each quarter is comprised of 13-week periods following the beginning of each fiscal year. In each 53-week 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 nine months ended January 29, 2022 and January 30, 2021, contained operating results for 39 weeks. 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the totals of the same amounts shown in the condensed consolidated statements of cash flows. Restricted cash consists of cash and cash equivalents held in bank deposit accounts to secure issuances of foreign bank guarantees. 

Other Business Developments

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. Our ability to fund operations and capital expenditures in the future will be dependent on our ability to generate cash flow from operations in these conditions, to maintain or improve margins, and to use funds from our credit facility or other funding sources.  

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 operations over the next twelve months from the date of this Report. 

Recent Accounting Pronouncements

There have been no material changes to our significant accounting policies and estimates as described in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.

Accounting Standards Adopted

There are no significant Accounting Standard Updates ("ASUs") issued that we adopted as of January 29, 2022.

Accounting Standards Not Yet Adopted

In November 2021, the Financial Accounting Standards Board ("FASB") issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance ("ASU 2021-10"), which requires business entities to disclose information about transactions with a government that are accounted for by applying a grant or contribution model by analogy. For transactions covered by ASU 2021-10, the new standard requires the disclosure of information about the nature of the transaction, including significant terms and conditions, as well as the amounts and specific financial statement line items affected by the transaction. ASU 2021-10 is effective for annual periods beginning after December 15, 2021, which for us is the first quarter of fiscal 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2021-10 to have a material impact on future disclosures. 

Note 2. Investments in Affiliates

The aggregate amount of our investments in affiliates accounted for under the equity method was $17,921 and $19,887 as of  January 29, 2022 and May 1, 2021, respectively. Our proportional share of the respective affiliates' earnings or losses is included in the "Other (expense) income, net" line item in our condensed consolidated statements of operations. For the three and nine months ended January 29, 2022, our share of the losses of our affiliates was $401 and $1,966 as compared to $595 and $1,740 for the three and nine months ended January 30, 2021. We purchased services for research and development activities from our equity method investees. The total of these related party transactions was $1,520 for the nine months ended January 29, 2022, which is included in the "Product design and development" line item in our condensed consolidated statement of operations, and $117 of this remains unpaid and is included in the "Accounts payable " line item in our condensed consolidated balance sheet. We have loaned equity investees $6,335, which is evidenced by convertible notes (“Notes”) and included in the “Long-term receivables, less current maturities" line item in our condensed consolidated balance sheet. 

Note 3. Earnings Per Share ("EPS")

The following is a reconciliation of the net income and common share amounts used in the calculation of basic and diluted EPS for the three and nine months ended January 29, 2022 and January 30, 2021:

Options outstanding to purchase 2,216 shares of common stock with a weighted average exercise price of $8.17 for the three months ended January 29, 2022 and 2,337 shares of common stock with a weighted average exercise price of $8.70 for the three months ended January 30, 2021 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

Options outstanding to purchase 1,857 shares of common stock with a weighted average exercise price of $9.26 for the nine months ended January 29, 2022 and 2,268 shares of common stock with a weighted average exercise price of $9.29 for the nine months ended January 30, 2021 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive. 

Note 4. Revenue Recognition

Disaggregation of revenue

The following table presents our disaggregation of revenue by segments:

See "Note 5. Segment Reporting" for a disaggregation of revenue by geography.

Contract balances

Contract assets represent revenue recognized in excess of amounts billed and include unbilled receivables. Unbilled receivables, which represent an unconditional right to payment subject only to the passage of time, are reclassified to accounts receivable when they are billed according to the contract terms. Contract liabilities represent amounts billed to the customers in excess of revenue recognized to date.

The following table reflects the changes in our contract assets and liabilities:

The changes in our contract assets and contract liabilities from May 1, 2021 to January 29, 2022 were due to the timing of billing schedules and revenue recognition, which can vary significantly depending on the contractual payment terms and the construction and sports market seasonality. We had no impairments of contract assets for the nine months ended January 29, 2022.

For service-type warranty contracts, we allocate revenue to this performance obligation, recognize the revenue over time, and recognize costs as incurred. Earned and unearned revenues for these contracts are included in the "Contract assets" and "Contract liabilities" line items in our condensed consolidated balance sheets. Changes in unearned service-type warranty contracts, net were as follows:

As of January 29, 2022 and May 1, 2021, our contracts in progress that were identified as loss contracts were immaterial. For these contracts, the provision for losses is included in the "Accrued expenses" line item in our condensed consolidated balance sheets.

During the nine months ended January 29, 2022, we recognized revenue of $47,356 related to our contract liabilities as of May 1, 2021.

Remaining performance obligations

As of January 29, 2022, the aggregate amount of the transaction price allocated to the remaining performance obligations was $412,675. We expect approximately $378,092 of our remaining performance obligations to be recognized over the next 12 months, with the remainder recognized thereafter. Remaining performance obligations related to product and service agreements at January 29, 2022 are $353,345 and $59,330, respectively. Although remaining performance obligations reflect business that is considered to be legally binding, cancellations, deferrals or scope adjustments may occur. Any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations, and project deferrals are reflected or excluded in the remaining performance obligation balance, as appropriate.

Note 5. Segment Reporting

The following table sets forth certain financial information for each of our five reporting segments for the periods indicated:

No single geographic area comprises a material amount of our net sales or property and equipment, net of accumulated depreciation, other than the United States. The following table presents information about net sales and property and equipment, net of accumulated depreciation, in the United States and elsewhere:

We have numerous customers worldwide for sales of our products and services. No customer accounted for 10 percent or more of net sales for the three and nine months ended January 29, 2022; therefore, we are not economically dependent on a limited number of customers for the sale of our products and services.

We have numerous raw material and component suppliers, and no supplier accounts for 10 percent or more of our cost of sales; however, we have a number of single-source suppliers that could limit our supply or cause delays in obtaining raw material and components needed in manufacturing.

Note 6. Goodwill

The changes in the carrying amount of goodwill related to each reportable segment for the nine months ended January 29, 2022 were as follows:

We perform an analysis of goodwill on an annual basis, and it is tested for impairment more frequently if events or changes in circumstances indicate that an asset might be impaired. Our annual analysis is performed during our third quarter of each fiscal year based on the goodwill amount as of the first business day of our third fiscal quarter. We performed our annual impairment test on October 31, 2021 and concluded no goodwill impairment existed.

Note 7. Financing Agreements

As of January 29, 2022, there were no advances under the loan portion of our line of credit, and the balance of letters of credit outstanding was approximately $4,463. As of January 29, 2022, $30,537 of the credit facility remains in place and available.

We are sometimes required to obtain bank guarantees or other financial instruments for display installations. If we are unable to meet the terms of the arrangement, our customer would draw on the banking arrangement, and the bank would subrogate its loss to Daktronics. As of January 29, 2022, we had $715 of such instruments outstanding.

As of January 29, 2022, we were in compliance with all applicable bank loan covenants.

Note 8. Commitments and Contingencies

Litigation: We are a party to legal proceedings and claims which arise during the ordinary course of business. For unresolved legal proceedings or claims, we do not believe there is a reasonable probability that any material loss will be incurred. Accordingly, no material accrual or disclosure of a potential range of loss has been made related to these matters. We do not expect the ultimate liability of these unresolved legal proceedings or claims to have a material effect on our financial position, liquidity or capital resources.

Warranties: Changes in our warranty obligation for the nine months ended January 29, 2022 consisted of the following:

Performance guarantees: We have entered into standby letters of credit, bank guarantees and surety bonds with financial institutions relating to the guarantee of our future performance on contracts, primarily construction-type contracts. As of January 29, 2022, we had outstanding letters of credit, bank guarantees and surety bonds in the amount of $4,463, $715 and $39,150, respectively. Performance guarantees are issued to certain customers to guarantee the operation and installation of the equipment and our ability to complete a contract. These performance guarantees have various terms but are generally one year. We enter into written agreements with our customers, and those agreements often contain indemnification provisions that require us to make the customer whole if certain acts or omissions by us cause the customer financial loss. We make efforts to negotiate reasonable caps and limitations on the recovery of such damages. As of January 29, 2022, we were not aware of any indemnification claim from a customer.

Note 9. Income Taxes

The provision for income taxes during interim reporting periods is calculated by applying an estimate of the annual effective tax rate 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 29, 2022 reflected effective tax rates of 32.2 percent and 9.4 percent, respectively, as compared to effective tax rates of 82.0 percent and 21.3 percent tax for the three and nine months ended January 30, 2021. The difference in tax rates 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 no change in the estimated tax rate from the second quarter to the third quarter of fiscal 2021. Additionally, a return to provision expense was recorded for the third quarter of fiscal 2022 which impacted the overall effective rate compared to a return to provision benefit recorded in fiscal 2021.

We operate both domestically and internationally and, as of January 29, 2022, undistributed earnings of our foreign subsidiaries were considered to be reinvested indefinitely. Additionally, as of  January 29, 2022, we had $478 of unrecognized tax benefits which would reduce our effective tax rate if recognized.

Note 10. 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 29, 2022 and May 1, 2021 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.

,

A roll forward of the Level 3 contingent liabilities, both short- and long-term, for the nine months ended January 29, 2022 is as follows:

There have been no changes in the valuation techniques used by us to value our financial instruments since the end of fiscal 2021. For additional information, see our Annual Report on Form 10-K for the fiscal year ended May 1, 2021 for the methods and assumptions used to estimate the fair value of each class of financial instrument.

Note 11. Share Repurchase Program

On June 17, 2016, our Board of Directors approved a stock repurchase program under which we may purchase up to $40,000 of the Company's outstanding shares of common stock. Under this program, we may repurchase shares from time to time in open market transactions and in privately negotiated transactions based on business, market, applicable legal requirements and other considerations. The repurchase program does not require the repurchase of a specific number of shares and may be terminated at any time.

In April 2020, the Board had suspended the program. On December 2, 2021, the Board of Directors of Daktronics voted to reauthorize the stock repurchase program.

During the nine months ended January 29, 2022, we repurchased 600 shares of common stock at a total cost of $3,000. As of  January 29, 2022, we had $29,539 of remaining capacity under our current share repurchase program.

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 the MD&A, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect our current views with respect to future events and financial performance. The words “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 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 forward-looking statements in this report and in any public statements we make could be materially different from actual results. Accordingly, we wish to caution investors that any forward-looking statements made by or on behalf of us are subject to uncertainties and other factors that could cause actual results to differ materially from such statements.

We also wish to caution investors that other factors might in the future prove to be important in affecting our results of operations. New factors emerge from time to time; it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

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

Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended May 1, 2021 (including the information presented therein under Risk Factors), as well other publicly available information about our Company.

OVERVIEW

We are engaged principally in the design, market, and manufacture of a wide range of integrated electronic display systems and related products which are sold in a variety of markets throughout the world and the rendering of related maintenance and professional services. We focus our sales and marketing efforts on markets, geographical regions and products. Our five business segments consist of four domestic business units and the International business unit. The four domestic business units consist of Commercial, Live Events, High School Park and Recreation, and Transportation, all of which include the geographic territories of the United States and Canada.

The following selected financial data should be read in conjunction with our Annual Report on Form 10-K for the 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 operations over the next twelve months from the date of this Report. 

All of these conditions will cause volatility in our cash 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 remainder of fiscal 2022 and have some negative impact into fiscal 2023. However, the full impact to our financial condition, results of operations and cash flows cannot be determined at this time.   

Refer to the COVID-19 and raw material and component related risk factors disclosed in Item 1A of Part I in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED January 29, 2022 and January 30, 2021

Product Order Backlog

Backlog represents the dollar value of orders for integrated electronic display systems and related products and services which are expected to be recognized in net sales in the future. Orders are contractually binding purchase commitments from customers. Orders are included in backlog when we are in receipt of an executed contract and any required deposits or security and have not yet been recognized into net sales. Certain orders for which we have received binding letters of intent or contracts will not be included in backlog until all required contractual documents and deposits are received. Orders and backlog are not measures defined by accounting principles generally accepted in the United States of America ("GAAP"), and our methodology for determining orders and backlog may vary from the methodology used by other companies in determining their orders and backlog amounts.

Order and backlog levels provide management and investors additional details surrounding the results of our business activities in the marketplace and 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 29, 2022 was $353 million as compared to $195 million 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:

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 near-term. We expect supply chain conditions to persist through the calendar year.

Order volume increased across all business units in the third 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 we have seen business in those locations increase. However, other countries still continue to deal with the ongoing challenges of the pandemic.

Gross Profit and Contribution Margin