Daktronics, Inc. Form 10-Q Summary
Reporting period: Three months ended July 31, 2021, the first quarter of fiscal 2022. The request metadata identifies “2020 Q1,” but the filing covers fiscal 2022 Q1 and compares it with the three months ended August 1, 2020.
Business context
Daktronics designs and manufactures electronic scoreboards, programmable display systems, large-screen video displays, and related services for commercial, live-event, high-school and recreation, transportation, and international markets. The company reported 13-week quarters and operates in a business affected by project timing, sports-market seasonality, COVID-19 recovery, and supply-chain availability.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $144.7 million | $143.6 million | 0.8% increase |
| Gross profit | $32.2 million | $35.8 million | 10.0% decrease |
| Gross margin | 22.2% | 24.9% | Down 2.7 percentage points |
| Operating income | $5.7 million | $9.5 million | 40.7% decrease |
| Operating margin | 3.9% | 6.6% | Down 2.7 percentage points |
| Net income | $3.7 million | $7.5 million | 50.7% decrease |
| Diluted EPS | $0.08 | $0.17 | Decrease of $0.09 |
| Operating cash flow | $(1.0) million | $8.5 million | Declined by $9.6 million |
Net margin was approximately 2.5% versus approximately 5.2% in the prior-year quarter. Interest expense declined because the company had no outstanding line-of-credit borrowings, compared with $15.0 million drawn in the prior-year period. Other expense, net, was $0.9 million, primarily reflecting equity-method affiliate losses and foreign-currency volatility.
Financial position and liquidity
- Cash and cash equivalents were $74.7 million; total cash, cash equivalents, and restricted cash were $77.2 million at July 31, 2021.
- Working capital was $127.1 million, compared with $118.4 million at May 1, 2021.
- Total assets were $396.5 million and shareholders’ equity was $198.2 million.
- The company had no advances under its credit facility, approximately $8.1 million of letters of credit outstanding, and $26.9 million of remaining availability. It was in compliance with applicable covenants.
- Cash used in investing activities was $1.9 million, including $1.3 million of capital expenditures and $0.7 million of purchases of and loans to an equity investment.
- Cash used in financing activities was $0.2 million for principal payments on long-term obligations.
- The board’s suspension of dividends and share repurchases remained in effect; no shares were repurchased during the quarter.
Material changes versus the prior comparable period
- Sales were broadly flat overall, but International sales increased 34.4% to $19.1 million, while Transportation declined 13.4% to $12.6 million, Commercial declined 5.0% to $32.8 million, and High School Park and Recreation declined 3.6% to $27.9 million. Live Events increased 1.8% to $52.4 million.
- Orders increased 48.8% to $181.7 million. Product backlog rose to $285 million from $192 million a year earlier and $251 million at fiscal year-end. Management expects to fulfill the backlog within 24 months, subject to delays and cancellations.
- Gross margin declined primarily because of higher material, freight, tariff, labor, and capacity-related costs, as well as a higher mix of large projects with lower margins and less service revenue.
- Contribution margin, a non-GAAP measure, decreased to $20.4 million, or 14.1% of sales, from $24.2 million, or 16.9%.
- Operating cash flow turned negative because of increases in accounts receivable, inventory, and contract assets associated with higher activity and work in process.
- The effective tax rate increased to 25.2% from 16.4%, primarily because estimated tax credits and permanent items represented a smaller proportion of estimated pretax earnings.
Outlook, risks, contingencies, and unusual items
- Management reported increased order and quoting activity, a strong backlog, and a positive near-term outlook as customers recover from the pandemic.
- Supply-chain risks remain significant, including semiconductor and electronic-component shortages, shipping-container shortages, freight constraints, labor availability, inflation, and longer lead times. These conditions may continue to affect fiscal 2022 revenue timing and production costs.
- Management projects approximately $25 million of fiscal 2022 capital expenditures and may make additional investments in affiliates, microLED, other technologies, or acquisitions.
- Deferred employer payroll taxes totaled $5.1 million at July 31, 2021; 50% was due December 31, 2021, with the remainder due December 31, 2022.
- Outstanding performance-related instruments included $8.1 million of letters of credit, $2.5 million of bank guarantees, and $50.3 million of surety bonds. The company reported no known customer indemnification claims.
- Warranty obligations totaled $25.4 million at quarter-end. Management did not identify material litigation exposure or material loss-contract provisions.
- Remaining performance obligations totaled $339.2 million, of which approximately $297.8 million was expected to be recognized over the next 12 months. These obligations may be affected by cancellations, deferrals, scope changes, and foreign-currency movements.
- Management stated that available working capital and other liquidity sources should meet foreseeable operating needs, but additional financing could be required if pandemic effects persist, growth exceeds expectations, or strategic investments increase.
Important facts for investors to verify
- Confirm the applicable period: this filing is for July 31, 2021, not calendar or fiscal 2020 Q1.
- Assess whether the substantial increase in orders and backlog converts into revenue without significant supply-chain delays, cancellations, or margin pressure.
- Monitor gross margin, labor, freight, component costs, inflation, and the timing of large projects.
- Review working-capital requirements and cash conversion, particularly inventory, receivables, contract assets, and retainage of $7.1 million.
- Verify the continuing suspension of dividends and share repurchases and any changes to credit-facility availability or covenants.
- Evaluate exposure under letters of credit, bank guarantees, surety bonds, warranties, and deferred payroll taxes.
- Consider the sensitivity of earnings to affiliate losses, foreign-currency movements, tax-rate changes, and COVID-19-related customer demand.