Daktronics, Inc. — Form 10-Q Summary
Reporting period: Three months ended July 30, 2022, the first quarter of fiscal 2023. The provided filing does not correspond to “2021 Q1” in the request metadata; the comparable period ended July 31, 2021.
Business context
Daktronics designs and manufactures electronic scoreboards, programmable display systems, large-screen video displays, and related services for commercial, live-event, high-school, park and recreation, transportation, and international markets.
Management reported continuing supply-chain disruption, semiconductor and component shortages, labor constraints, COVID-19-related operating interruptions, the Shanghai facility closure, inflation, higher freight and personnel costs, and geopolitical uncertainty.
Financial results and key metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $171.9 million | $144.7 million | 18.8% increase |
| Gross profit | $25.8 million | $32.2 million | 19.9% decrease |
| Gross margin | 15.0% | 22.2% | Down 7.2 percentage points |
| Operating income (loss) | $(5.5) million | $5.7 million | Declined $11.2 million |
| Net income (loss) | $(5.3) million | $3.7 million | Declined $9.0 million |
| Diluted EPS | $(0.12) | $0.08 | Declined $0.20 |
| Operating cash flow | $(22.8) million | $(1.0) million | Greater use of $21.8 million |
Gross profit was pressured by material, freight, and personnel inflation, supply-chain inefficiencies, the Shanghai closure, and a $0.8 million provision for estimated losses on contracts in progress. Warranty costs increased to 1.6% of sales from 1.2% in the prior-year quarter.
Operating expenses increased to $31.3 million from $26.5 million. Selling expense increased 22.3%, and general and administrative expense increased 24.7%, including approximately $1.0 million of professional fees related to shareholder engagement.
The effective tax rate was 15.8%, compared with 25.2% in the prior-year quarter. The company recorded a $1.0 million income-tax benefit.
Segment performance and demand
| Segment | Q1 FY2023 sales | Year-over-year change | Q1 FY2023 gross profit |
|---|---|---|---|
| Commercial | $40.1 million | 22.4% increase | $4.8 million |
| Live Events | $56.4 million | 7.6% increase | $3.8 million |
| High School Park and Recreation | $35.8 million | 28.4% increase | $10.0 million |
| Transportation | $19.5 million | 55.6% increase | $5.8 million |
| International | $20.1 million | 5.0% increase | $1.4 million |
Orders were $170.2 million, down 6.3% year over year, partly reflecting unusually strong prior-year bookings. Product backlog was $469.1 million at July 30, 2022, compared with $285.3 million at July 31, 2021 and $471.6 million at April 30, 2022. Management expects to fulfill the backlog within 24 months, subject to project delays and supply-chain constraints.
Liquidity, cash flow, debt, and commitments
- Cash, cash equivalents, and restricted cash were $9.0 million at July 30, 2022, down from $18.0 million at April 30, 2022 and $77.2 million at July 31, 2021.
- Cash used in operations was $22.8 million, primarily reflecting a $23.2 million increase in inventories, a $12.5 million increase in accounts receivable, and a $3.7 million increase in contract assets.
- Capital expenditures were $10.7 million, compared with $1.3 million in the prior-year quarter. Management projects approximately $30 million of fiscal 2023 capital expenditures.
- The company drew $92.1 million and repaid $68.0 million under its line of credit, resulting in $24.1 million outstanding at July 30, 2022. Approximately $4.5 million remained available, excluding the subsequent temporary expansion.
- On August 16, 2022, the credit facility was temporarily expanded by $10.0 million through October 31, 2022, and certain covenants were relaxed through the second and third quarters of fiscal 2023. The facility expires in April 2025.
- The company was not in compliance with financial covenants at July 30, 2022, but obtained a bank waiver. Management expects compliance through the next year but stated that it cannot be certain.
- Outstanding performance-related instruments included $6.3 million of letters of credit, $0.6 million of bank guarantees, and $82.5 million of surety bonds.
Outlook, risks, and unusual items
Management expects supply-chain disruption, inflation, labor constraints, longer lead times, and volatility in customer payment timing to continue negatively affecting fiscal 2023 results, cash flow, production costs, and revenue timing. The company is carrying higher inventory levels to support backlog conversion and plans additional manufacturing-capacity investments.
Management has implemented pricing increases and product redesigns to address input costs and component availability. International demand softened during the quarter because of inflationary and geopolitical conditions. The company also committed to invest an additional $2.0 million in existing affiliates over the following year.
Key contingencies include potential covenant breaches, dependence on additional borrowing or equity financing if waivers are unavailable, project delays or cancellations, single-source supplier constraints, transportation and port disruptions, and obligations under performance guarantees. Management reported no material pending litigation loss and no known customer indemnification claims.
No shares were repurchased during the quarter. The company’s repurchase authorization had $29.4 million of remaining capacity at July 30, 2022.
Important facts for investors to verify
- Reconcile the reporting period: the filing covers Q1 fiscal 2023, not Q1 2021.
- Review the credit agreement amendment, covenant definitions, waiver terms, temporary $10 million expansion, and borrowing availability after October 31, 2022.
- Assess whether pricing actions can offset inflation, freight, labor, warranty, and supply-chain costs and restore gross margins.
- Monitor operating cash usage, inventory growth, capital expenditures, and reliance on the line of credit.
- Validate backlog conversion assumptions, including expected timing, customer cancellations, deferrals, scope changes, and component availability.
- Evaluate exposure under letters of credit, bank guarantees, surety bonds, warranty obligations, and loss-making contracts.
- Confirm the sustainability of demand, particularly the year-over-year decline in orders and softening international markets.