Daktronics, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended January 29, 2022, representing fiscal 2022 third quarter and nine months. The request metadata identifies “2020 Q3,” but the filing itself reports fiscal 2022 results and compares them with January 30, 2021.
Business context
Daktronics designs and manufactures electronic scoreboards, programmable display systems and large-screen video displays for commercial, live-event, high-school, park and recreation, transportation and international markets. The company also provides maintenance and professional services.
Key financial metrics
| Metric | Three months ended January 29, 2022 | Three months ended January 30, 2021 | Nine months ended January 29, 2022 | Nine months ended January 30, 2021 |
|---|---|---|---|---|
| Net sales | $139.6 million | $94.1 million | $448.8 million | $365.2 million |
| Gross profit | $22.3 million | $23.9 million | $86.8 million | $93.0 million |
| Gross margin | 16.0% | 25.4% | 19.3% | 25.5% |
| Operating income (loss) | $(5.7) million | $(0.2) million | $4.4 million | $16.0 million |
| Net income (loss) | $(4.4) million | $(0.2) million | $1.7 million | $10.7 million |
| Diluted earnings per share | $(0.10) | $0.00 | $0.04 | $0.24 |
| Cash flow from operating activities | Not separately reported | Not separately reported | $(25.5) million | $48.2 million |
Balance sheet and liquidity: At January 29, 2022, cash and cash equivalents were $30.9 million, restricted cash was $0.8 million, and marketable securities were $4.0 million. Total assets were $415.1 million and shareholders’ equity was $193.8 million. Working capital was $113.9 million.
The company had no borrowings under the loan portion of its credit facility, approximately $4.5 million of letters of credit outstanding, and $30.5 million of remaining facility availability. The facility expires in November 2022, and the company was in compliance with applicable covenants. The filing does not provide a separate total-debt balance beyond disclosed long-term obligations and financing arrangements.
Cash, cash equivalents and restricted cash declined by $48.7 million during the first nine months, ending at $31.7 million. Investing cash use included $10.0 million of capital expenditures, $4.0 million of marketable-security purchases and $6.7 million of purchases of and loans to equity investees.
Material changes versus the prior comparable period
- Third-quarter sales increased 48.2%, while nine-month sales increased 22.9%, reflecting higher orders and recovery across all business units.
- Third-quarter gross margin fell to 16.0% from 25.4%; nine-month gross margin fell to 19.3% from 25.5%.
- Management attributed margin pressure to supply-chain disruptions, inflation in materials, freight and personnel costs, sales mix, increased staffing and a warranty charge. The prior-year period benefited from a $2.1 million litigation-claim reversal, COVID-related cost reductions and, for the nine-month period, $1.6 million of government subsidies.
- Third-quarter operating loss widened to $5.7 million from $0.2 million. Nine-month operating income declined 72.7% to $4.4 million.
- Accounts receivable increased to $96.7 million from $67.8 million at May 1, 2021, and inventories increased to $111.1 million from $74.4 million, contributing to operating cash usage.
- Contract assets increased 21.6% to $39.9 million, while current contract liabilities increased 23.4% to $79.6 million.
- The board reauthorized the share-repurchase program on December 2, 2021. The company repurchased approximately 600,125 shares for $3.0 million during the nine months, leaving approximately $29.5 million of authorization.
Orders, outlook and risks
Product order backlog was $353 million at January 29, 2022, compared with $195 million a year earlier and $282 million at October 30, 2021. Management expected to fulfill the backlog within 24 months, subject to project delays, cancellations, scope changes and supply-chain constraints. Remaining performance obligations totaled $412.7 million, of which approximately $378.1 million was expected to be recognized within the next 12 months.
Management reported increased order and quoting activity and a positive backlog outlook, but expected supply-chain disruptions, semiconductor shortages, labor constraints, freight issues and inflation to continue through the calendar year. The company began quoting at higher price levels during the third quarter to offset input-cost increases.
Management expects approximately $25 million of fiscal 2022 capital expenditures, including manufacturing-capacity expansion. Higher inventory levels, customer payment-timing changes and additional capacity investment are expected to consume cash. The company anticipates using part of its credit facility and stated that existing cash and planned actions are probable to fund normal operations for the next 12 months; however, renewal of the facility with sufficient capacity is not assured.
Additional exposures include foreign-currency, interest-rate and commodity risks; single-source suppliers; performance guarantees and surety bonds; warranty obligations; and continuing COVID-19, geopolitical and war-related uncertainty. Outstanding performance-related instruments included $4.5 million of letters of credit, $0.7 million of bank guarantees and $39.2 million of surety bonds. Management reported no material expected loss from unresolved litigation and no known customer indemnification claims.
Most important facts for investors to verify
- Whether pricing actions and supply-chain improvements can restore gross margins after the substantial fiscal 2022 decline.
- The conversion rate and timing of the $353 million backlog and $412.7 million of remaining performance obligations.
- Cash usage from receivables, inventories, contract assets, customer payment timing and planned capital expenditures.
- Renewal or replacement of the credit facility before its November 2022 expiration and the company’s access to sufficient liquidity.
- Exposure to semiconductor shortages, freight and labor constraints, inflation, geopolitical conditions and foreign-currency volatility.
- Warranty trends, including the increase in third-quarter warranty costs to 2.4% of sales from 1.6% in the prior-year quarter.
- The company’s continued share repurchases despite negative third-quarter earnings and cash flow from operations.