Daktronics, Inc. Form 10-Q Summary
Business Context and Reporting Period
Daktronics designs and manufactures electronic scoreboards, programmable displays and large-screen video systems for commercial, live-event, high-school, park and recreation, transportation and international markets. This filing covers the three and nine months ended January 28, 2023, representing fiscal 2023 third-quarter and year-to-date results. The supplied request metadata identifies “2021 Q3,” but the filing itself is for fiscal 2023 Q3.
Financial Results and Key Metrics
| Metric | Three Months Ended Jan. 28, 2023 | Three Months Ended Jan. 29, 2022 | Nine Months Ended Jan. 28, 2023 | Nine Months Ended Jan. 29, 2022 |
|---|---|---|---|---|
| Net sales | $185.0 million | $139.6 million | $544.3 million | $448.8 million |
| Gross profit | $41.7 million | $22.3 million | $99.2 million | $86.8 million |
| Gross margin | 22.6% | 16.0% | 18.2% | 19.3% |
| Operating income (loss) | $7.1 million | $(5.7) million | $3.1 million | $4.4 million |
| Net income (loss) | $3.7 million | $(4.4) million | $(14.6) million | $1.7 million |
| Diluted EPS | $0.08 | $(0.10) | $(0.32) | $0.04 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(9.5) million | $(25.5) million |
- Third-quarter sales increased 32.5%, led by Live Events, Commercial and High School Park and Recreation. Year-to-date sales increased 21.3%.
- Third-quarter operating results benefited from higher volume, pricing actions, increased capacity and fewer supply-chain disruptions. The nine-month gross margin declined because of inflation, freight and labor costs, Shanghai-related disruptions and factory inefficiencies.
- Third-quarter results included a $4.6 million non-cash goodwill impairment charge related to the Live Events and International reporting units. Year-to-date results also included a $1.0 million warranty provision for a component and manufacturing quality issue.
- As of January 28, 2023, cash and cash equivalents were $10.0 million, restricted cash was $0.7 million, and marketable securities were $0.5 million. Inventory was $164.9 million, up from $134.4 million at April 30, 2022.
- Accounts receivable were $115.8 million and total working capital was $129.4 million. Contract liabilities totaled $110.4 million, including current and noncurrent amounts.
- The company had $23.6 million drawn on its line of credit, approximately $7.5 million of letters of credit outstanding and $13.9 million available to advance at January 28, 2023. The facility bears interest at 3.35% plus SOFR under the January 2023 amendment.
- Capital expenditures were $21.8 million during the first nine months, and management projected approximately $28.8 million for fiscal 2023.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected strong demand, conversion of backlog, increased manufacturing capacity and price increases. However, third-quarter orders declined 30.9% year over year to $148.4 million, partly because the prior-year period benefited from unusual post-COVID pent-up demand.
- Product backlog was $429.1 million at January 28, 2023, compared with $353.3 million a year earlier and $471.6 million at April 30, 2022. Management expects fulfillment within approximately 24 months, subject to project delays and parts availability.
- Third-quarter gross margin expanded to 22.6% from 16.0%, while nine-month gross margin contracted to 18.2% from 19.3% because cost inflation and supply-chain disruption preceded the full benefit of pricing actions.
- Cash usage remained significant despite improvement from the prior year. The company used cash for inventory expansion, capital equipment, capacity expansion, automation and investments in affiliates.
- Deferred tax assets were fully offset by a valuation allowance during the second quarter, contributing to nine-month income tax expense of $14.7 million despite a pretax result near breakeven.
Guidance, Outlook, Risks and Unusual Items
- Management expects supply-chain conditions and inventory levels to improve gradually, but expects continued volatility in cash flow, pricing, order volumes, lead times, competitiveness, revenue cycles and production costs through the remainder of fiscal 2023 and into fiscal 2024.
- The company disclosed substantial doubt about its ability to continue as a going concern. Management plans to obtain additional liquidity but stated that potential financing, sale-leaseback, mortgage-backed financing, equipment leasing, asset-based lending and junior-capital alternatives are not finalized and cannot currently be considered probable.
- The company’s credit facility includes financial covenants and maturities, including a $10.0 million portion extended only through May 1, 2023 and the remaining $35.0 million portion maturing in April 2025. Management was in compliance at January 28, 2023 but stated that future compliance is uncertain.
- Key operating risks include semiconductor and component shortages, labor constraints, inflation, freight and tariff costs, geopolitical events, the war in Ukraine, foreign-currency volatility, customer project delays and dependence on certain single-source suppliers.
- Outstanding performance guarantees included $63.3 million of surety bonds, $7.5 million of letters of credit and $0.6 million of bank guarantees. Management reported no known indemnification claims.
- A putative securities class action was filed in December 2022 against the company and two officers. Management believes the claims are without merit and the likelihood of loss is remote; no accrual was recorded.
- Disclosure controls were not effective because of an unresolved material weakness involving communication of the going-concern assessment and its effect on deferred-tax valuation. Remediation was underway but incomplete.
Investor Verification Items
- Verify the company’s ability to secure additional liquidity before the May 1, 2023 credit-facility maturity and maintain compliance with financial covenants.
- Assess whether inventory, accounts receivable and other working-capital balances decline as supply-chain conditions normalize and whether operating cash flow turns positive.
- Monitor the conversion, cancellations and timing of the $429.1 million product backlog and the $491.3 million total remaining performance obligations.
- Evaluate the sustainability of pricing benefits against material, freight, labor and warranty costs, particularly in Live Events and International.
- Review potential additional goodwill impairments, deferred-tax valuation allowance changes and the outcome of the securities litigation.
- Confirm completion and effectiveness testing of the remediation plan for the material weakness in internal control over financial reporting.