Daktronics, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended October 30, 2021, compared with October 31, 2020. The filing is for fiscal 2022 second quarter; the request metadata identifies “2020 Q2,” which does not match the filing period.
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. Results continued to reflect recovery from COVID-19, while semiconductor, labor, freight, and other supply-chain constraints affected production, costs, and delivery timing.
Key Financial Metrics
| Metric | Three months ended October 30, 2021 | Three months ended October 31, 2020 | Six months ended October 30, 2021 | Six months ended October 31, 2020 |
|---|---|---|---|---|
| Net sales | $164.5 million | $127.4 million | $309.2 million | $271.0 million |
| Gross profit | $32.3 million | $33.3 million | $64.5 million | $69.1 million |
| Gross margin | 19.6% | 26.2% | 20.8% | 25.5% |
| Operating income | $4.4 million | $6.7 million | $10.0 million | $16.2 million |
| Operating margin | 2.7% | 5.2% | 3.2% | 6.0% |
| Net income | $2.4 million | $3.4 million | $6.1 million | $10.9 million |
| Diluted EPS | $0.05 | $0.08 | $0.13 | $0.24 |
Six-month net cash used in operating activities was $8.5 million, compared with $40.0 million provided in the prior-year period. Investing cash use was $9.9 million, including $4.5 million of capital expenditures and $6.1 million of purchases of and loans to affiliates. Financing cash use was $0.4 million.
Cash, cash equivalents, and restricted cash declined to $61.6 million at October 30, 2021, from $80.4 million at May 1, 2021. Cash and cash equivalents were $59.7 million. Working capital was $125.2 million. No borrowings were outstanding under the credit facility; approximately $26.7 million remained available, and the company was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased 29.1%; six-month sales increased 14.1%, driven primarily by higher orders and recovery in customer markets.
- Quarterly orders increased 20.7% to $163.7 million, while six-month orders increased 34.0% to $345.5 million.
- Quarterly backlog was $282 million, up from $201 million a year earlier and slightly below $285 million at July 31, 2021. Management expects to fulfill the backlog within 24 months, subject to delays and cancellations.
- Live Events was the largest quarterly growth contributor, with sales up 57.0%. International sales increased 46.2%; Transportation sales declined 8.3%.
- Gross margin declined substantially because of higher material, freight, tariff, outsourced-installation, staffing, and warranty costs, as well as a less favorable mix of large projects.
- Quarterly operating income fell 34.1% and six-month operating income fell 38.0%, despite higher sales, reflecting lower contribution margins and increased personnel-related general and administrative costs.
- Accounts receivable, inventory, and contract assets increased to support higher order volume, contributing to negative operating cash flow. At October 30, 2021, accounts receivable were $95.2 million, inventory was $94.8 million, and contract assets were $40.2 million.
Outlook, Risks, and Unusual Items
- Management reported stronger order and quoting activity, a strong backlog, and a positive outlook, but provided no specific revenue or earnings guidance.
- Supply-chain disruptions, semiconductor shortages, component and labor shortages, shipping-container and freight constraints, inflation, tariffs, and possible OSHA-related compliance costs may continue through the remainder of fiscal 2022 and into fiscal 2023.
- Management expects approximately $25 million of fiscal 2022 capital expenditures, primarily for manufacturing capacity, equipment, quality and reliability initiatives, and information infrastructure.
- The company expects to use cash in operations as business activity returns toward pre-pandemic levels and believes available working capital will meet foreseeable requirements. Additional financing could be needed if pandemic effects persist, growth exceeds expectations, or strategic investments increase.
- Employer payroll-tax deferrals totaled $5.1 million at October 30, 2021; 50% was due December 31, 2021, with the remainder due December 31, 2022.
- Outstanding performance-related instruments included $8.3 million of letters of credit, $0.7 million of bank guarantees, and $52.2 million of surety bonds. No material indemnification claims were known.
- The company had $25.8 million of accrued warranty obligations. Quarterly warranty costs were 1.4% of sales, compared with 0.6% in the prior-year quarter.
- Equity-method affiliate losses were $1.6 million for the six months, and the company made $6.1 million of purchases of and loans to affiliates, including a $5.0 million convertible-note loan during the second quarter.
- Dividends and share repurchases remained suspended; no shares were repurchased during the six months. On November 19, 2021, the company extended its shareholder-rights agreement through November 19, 2024.
- Management stated that no material litigation loss was probable, disclosure controls were effective, and no material change in internal control over financial reporting occurred.
Investor Verification Priorities
- Verify whether backlog converts to revenue as expected despite supply-chain, labor, freight, and project-delay risks.
- Monitor gross-margin recovery and the effect of material, freight, tariff, installation, staffing, and warranty costs.
- Assess working-capital requirements, operating cash conversion, inventory and receivables growth, and the timing of payroll-tax payments.
- Review liquidity after planned fiscal 2022 capital expenditures and affiliate investments, including available credit-facility capacity.
- Track demand by segment, particularly Live Events, Commercial, Transportation, and International, and evaluate the effect of large-project timing on quarterly volatility.
- Confirm the status of suspended dividends and share repurchases and any subsequent changes to the credit facility or rights agreement.