SEC Filing | Daktronics, Inc.

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dakt-20220730

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 30, 2022

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___.

Commission File Number: 0-23246

https://cdn.kscope.io/a2d7294260572c3b3f48a62ce7fb514e-dakt-20220730_g1.jpg

Daktronics, Inc.

(Exact Name of Registrant as Specified in its Charter)


South Dakota			46-0306862
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)

201 Daktronics Drive	Brookings,	SD	57006
(Address of Principal Executive Offices)

(605) 692-0200

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, No Par Value	DAKT	Nasdaq Global Select Market
Preferred Stock Purchase Rights	DAKT	Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	o	Accelerated filer	x
Non-accelerated filer	o	Smaller reporting company	o
		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of the registrant’s common stock outstanding as of August 24, 2022 was 45,033,839.

Table of Contents

DAKTRONICS, INC. AND SUBSIDIARIES

FORM 10-Q

For the Quarter Ended July 30, 2022

Table of Contents


		Page
Part I.	Financial Information	1
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of July 30, 2022 and April 30, 2022	1
	Condensed Consolidated Statements of Operations for the Three Months Ended July 30, 2022 and July 31, 2021	2
	Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended July 30, 2022 and July 31, 2021	3
	Condensed Consolidated Statements of Shareholders' Equity for the Three Months Ended July 30, 2022 and July 31, 2021	4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended July 30, 2022 and July 31, 2021	6
	Notes to the Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22

Part II.	Other Information	22
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Mine Safety Disclosures	22
Item 5.	Other Information	23
Item 6.	Exhibits	23

Index to Exhibits		24
Signatures		25

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

DAKTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data) (unaudited)


	July 30, 2022		April 30, 2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	8,279	$	17,143
Restricted cash	750		865
Marketable securities	3,023		4,020
Accounts receivable, net	113,189		101,099
Inventories	157,170		134,392
Contract assets	45,204		41,687
Current maturities of long-term receivables	1,617		2,798
Prepaid expenses and other current assets	11,550		14,963
Income tax receivables	2,322		603
Total current assets	343,104		317,570

Property and equipment, net	72,395		66,765
Long-term receivables, less current maturities	1,117		1,490
Goodwill	7,857		7,927
Intangibles, net	1,387		1,472
Investment in affiliates and other assets	34,145		32,321
Deferred income taxes	13,303		13,331
TOTAL ASSETS	$	473,308	$	440,876

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	82,470	$	76,313
Contract liabilities	96,404		90,393
Accrued expenses	33,978		34,959
Warranty obligations	11,510		11,621
Income taxes payable	264		408
Total current liabilities	224,626		213,694

Long-term warranty obligations	17,900		17,257
Long-term contract liabilities	11,764		10,998
Other long-term obligations	7,901		7,076

Line of Credit	24,128		—
Deferred income taxes	287		287
Total long-term liabilities	61,980		35,618

SHAREHOLDERS' EQUITY:
Preferred Shares, no par value, authorized 50,000 shares; no shares issued and outstanding	—		—
Common Stock, no par value, authorized 115,000,000 shares; 46,942,070 and 46,733,544 shares issued at July 30, 2022 and April 30, 2022, respectively	62,388		61,794
Additional paid-in capital	48,883		48,372
Retained earnings	91,282		96,608
Treasury Stock, at cost, 1,907,445 shares at July 30, 2022 and April 30, 2022, respectively	(10,285)		(10,285)
Accumulated other comprehensive loss	(5,566)		(4,925)
TOTAL SHAREHOLDERS' EQUITY	186,702		191,564
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	473,308	$	440,876

See notes to condensed consolidated financial statements.

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DAKTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three Months Ended
	July 30, 2022		July 31, 2021
Net sales	$	171,920	$	144,732
Cost of sales	146,126		112,544
Gross profit	25,794		32,188

Operating expenses:
Selling	14,433		11,795
General and administrative	9,441		7,571
Product design and development	7,439		7,162
	31,313		26,528
Operating (loss)income	(5,519)		5,660

Nonoperating (expense) income:
Interest (expense) income, net	(60)		137
Other expense, net	(747)		(868)

(Loss) income before income taxes	(6,326)		4,929
Income tax (benefit) expense	(1,000)		1,244
Net (loss) income	$	(5,326)	$	3,685

Weighted average shares outstanding:
Basic	45,097		45,139
Diluted	45,097		45,419

(Loss) earnings per share:
Basic	$	(0.12)	$	0.08
Diluted	$	(0.12)	$	0.08

See notes to condensed consolidated financial statements.

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DAKTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

(unaudited)


	Three Months Ended
	July 30, 2022		July 31, 2021

Net (loss) income	$	(5,326)	$	3,685

Other comprehensive (loss):
Cumulative translation adjustments	(642)		(373)
Unrealized gain (loss) on available-for-sale securities, net of tax	1		—
Total other comprehensive (loss), net of tax	(641)		(373)
Comprehensive (loss) income	$	(5,967)	$	3,312

See notes to condensed consolidated financial statements.

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DAKTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(in thousands)

(unaudited)


	Common Stock		Additional Paid-In Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Loss		Total
Balance as of April 30, 2022	$	61,794	$	48,372	$	96,608	$	(10,285)	$	(4,925)	$	191,564
Net loss	—		—		(5,326)		—		—		(5,326)
Cumulative translation adjustments	—		—		—		—		(642)		(642)
Unrealized gain (loss) on available-for-sale securities, net of tax	—		—		—		—		1		1
Share-based compensation	—		511		—		—		—		511
Employee savings plan activity	594		—		—		—		—		594

Balance as of July 30, 2022	$	62,388	$	48,883	$	91,282	$	(10,285)	$	(5,566)	$	186,702

See notes to condensed consolidated financial statements.

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DAKTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(continued)

(in thousands)

(unaudited)


	Common Stock		Additional Paid-In Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Loss		Total
Balance as of May 1, 2021	$	60,575	$	46,595	$	96,016	$	(7,297)	$	(2,335)	$	193,554
Net income	—		—		3,685		—		—		3,685
Cumulative translation adjustments	—		—		—		—		(373)		(373)
Share-based compensation	—		518		—		—		—		518
Employee savings plan activity	597		—		—		—		—		597
Treasury stock reissued	—		4		—		196		—		200
Balance as of July 31, 2021	$	61,172	$	47,117	$	99,701	$	(7,101)	$	(2,708)	$	198,181

See notes to condensed consolidated financial statements.

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DAKTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Three Months Ended
	July 30, 2022		July 31, 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(5,326)	$	3,685
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization	4,025		4,052
Gain on sale of property, equipment and other assets	(361)		(106)
Share-based compensation	511		518
Equity in loss of affiliates	890		746
Provision for doubtful accounts, net of recovery	177		(421)
Deferred income taxes, net	12		(32)
Change in operating assets and liabilities	(22,743)		(9,461)
Net cash (used in) operating activities	(22,815)		(1,019)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(10,655)		(1,283)
Proceeds from sales of property, equipment and other assets	365		149

Proceeds from sales or maturities of marketable securities	999		—
Purchases of equity and loans to equity investees	(1,081)		(718)
Net cash (used in) investing activities	(10,372)		(1,852)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable	92,098		—
Payments on notes payable	(67,970)		—
Principal payments on long-term obligations	—		(200)



Net cash provided by (used in) financing activities	24,128		(200)

EFFECT OF EXCHANGE RATE CHANGES ON CASH	80		(132)
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	(8,979)		(3,203)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
Beginning of period	18,008		80,402
End of period	$	9,029	$	77,199

Supplemental disclosures of cash flow information:
Cash paid for:
Interest	$	75	$	—
Income taxes, net of refunds	685		980

Supplemental schedule of non-cash investing and financing activities:
Demonstration equipment transferred to inventory	$	—	$	46
Purchases of property and equipment included in accounts payable	3,326		868
Contributions of common stock under the ESPP	594		597

See notes to condensed consolidated financial statements.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollar amounts in thousands, except per share data)

(unaudited)

Note 1. Basis of Presentation

Daktronics, Inc. and its subsidiaries (the “Company”, “Daktronics”, “we”, “our”, or “us”) are an industry leader in designing and manufacturing electronic scoreboards, programmable display systems and large screen video displays for sporting, commercial and transportation applications.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present our financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions affecting the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.

Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The balance sheet at April 30, 2022 has been derived from the audited financial statements at that date, but it does not include all the information and disclosures required by GAAP for complete financial statements. These financial statements should be read in conjunction with our financial statements and notes thereto for the fiscal year ended April 30, 2022, which are contained in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission ("SEC"). The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

Daktronics, Inc. operates on a 52- or 53-week fiscal year, with our fiscal year ending on the Saturday closest to April 30 of each year. When April 30 falls on a Wednesday, the fiscal year ends on the preceding Saturday. Within each fiscal year, each quarter is comprised of 13-week periods following the beginning of each fiscal year. In each 53-week fiscal year, an additional week is added to the first quarter, and each of the last three quarters is comprised of a 13-week period. The three months ended July 30, 2022 and July 31, 2021, contained operating results for 13 weeks.

Other Developments

We continue to experience volatility in our business driven by global economic conditions and supply chain disruptions. We anticipate needing to utilize a portion of our line of credit which expires in April 2025, and requires us to comply with certain covenants. As described in "Note 7. Financing Agreements", we did not comply with our debt covenants this quarter and obtained a waiver from the bank. Based on our projections we expect to be in compliance with these covenants through the next year; however, with the uncertainty and volatility in the supply chain and sensitivity of the covenants, we cannot be certain. If we violate a covenant and cannot obtain a waiver from the bank, we may need to seek additional debt or equity financing.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the totals of the same amounts shown in the condensed consolidated statements of cash flows. Restricted cash consists of cash and cash equivalents held in bank deposit accounts to secure issuances of foreign bank guarantees.


	July 30, 2022		July 31, 2021
Cash and cash equivalents	$	8,279	$	74,658
Restricted cash	750		2,541
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows	$	9,029	$	77,199

Recent Accounting Pronouncements

There have been no material changes to our significant accounting policies and estimates as described in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022.

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Accounting Standards Adopted

In November 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance ("ASU 2021-10"), which requires business entities to disclose information about transactions with a government that are accounted for by applying a grant or contribution model by analogy. For transactions covered by ASU 2021-10, the new standard requires the disclosure of information about the nature of the transaction, including significant terms and conditions, as well as the amounts and specific financial statement line items affected by the transaction. ASU 2021-10 is effective for annual periods beginning after December 15, 2021. The Company has adopted ASU 2021-10 effective May 1, 2022 and notes there is no impact of ASU 2021-10 on its accounting or disclosures for governmental assistance.

Accounting Standards Not Yet Adopted

There are no significant ASUs issued that the Company has not yet adopted as of July 30, 2022.

Note 2. Investments in Affiliates

The aggregate amount of our investments accounted for under the equity method was $16,026 and $16,916 as of July 30, 2022 and April 30, 2022, respectively. Our proportional share of the respective affiliates' earnings or losses is included in the "Other expense, net" line item in our condensed consolidated statements of operations. For the three months ended July 30, 2022, our share of the losses of our affiliates was $890 as compared to $746 for the three months ended July 31, 2021. We purchased services for research and development activities from our equity method investees. The total of these related party transactions for the three months ended July 30, 2022 and July 31, 2021 was $0 and $470, respectively, which is included in the "Product design and development" line item in our condensed consolidated statements of operations, and for the three months ended July 30, 2022, $52 remains unpaid and is included in the "Accounts payable " line item in our condensed consolidated balance sheets. During the three months ended July 30, 2022, we invested $1,081 of convertible notes ("Notes") which are included in the "Investment in affiliates and other assets" line item in our condensed consolidated balance sheets.

Note 3. Earnings Per Share ("EPS")

The following is a reconciliation of the net (loss) income and common share amounts used in the calculation of basic and diluted EPS for the three months ended July 30, 2022 and July 31, 2021:


	Net (loss) income		Shares	Per share (loss) income
For the three months ended July 30, 2022
Basic (loss) earnings per share	$	(5,326)	45,097	$	(0.12)
Dilution associated with stock compensation plans	—		—	—
Diluted (loss) earnings per share	$	(5,326)	45,097	$	(0.12)
For the three months ended July 31, 2021
Basic earnings per share	$	3,685	45,139	$	0.08
Dilution associated with stock compensation plans	—		280	—
Diluted earnings per share	$	3,685	45,419	$	0.08

Options outstanding to purchase 2,102 shares of common stock with a weighted average exercise price of $8.12 for the three months ended July 30, 2022 and 1,810 shares of common stock with a weighted average exercise price of $9.52 for the three months ended July 31, 2021 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

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Note 4. Revenue Recognition

Disaggregation of revenue

The following table presents our disaggregation of revenue by segments:


	Three Months Ended July 30, 2022
	Commercial		Live Events		High School Park and Recreation		Transportation		International		Total
Type of performance obligation
Unique configuration	$	4,687	$	42,168	$	6,592	$	12,486	$	6,501	$	72,434
Limited configuration	31,776		8,480		28,283		6,099		11,501		86,139
Service and other	3,655		5,735		934		955		2,068		13,347
	$	40,118	$	56,383	$	35,809	$	19,540	$	20,070	$	171,920
Timing of revenue recognition
Goods/services transferred at a point in time	$	32,557	$	9,222	$	27,090	$	6,382	$	11,876	$	87,127
Goods/services transferred over time	7,561		47,161		8,719		13,158		8,194		84,793
	$	40,118	$	56,383	$	35,809	$	19,540	$	20,070	$	171,920


	Three Months Ended July 31, 2021
	Commercial		Live Events		High School Park and Recreation		Transportation		International		Total
Type of performance obligation
Unique configuration	$	3,587	$	41,508	$	4,166	$	6,541	$	5,883	$	61,685
Limited configuration	25,907		5,842		22,957		5,352		11,545		71,603
Service and other	3,287		5,037		771		665		1,684		11,444
	$	32,781	$	52,387	$	27,894	$	12,558	$	19,112	$	144,732
Timing of revenue recognition
Goods/services transferred at a point in time	$	26,379	$	6,829	$	21,941	$	5,571	$	12,019	$	72,739
Goods/services transferred over time	6,402		45,558		5,953		6,987		7,093		71,993
	$	32,781	$	52,387	$	27,894	$	12,558	$	19,112	$	144,732

See "Note 5. Segment Reporting" for a disaggregation of revenue by geography.

Contract balances

Contract assets represent revenue recognized in excess of amounts billed and include unbilled receivables. Unbilled receivables, which represent an unconditional right to payment subject only to the passage of time, are reclassified to accounts receivable when they are billed according to the contract terms. Contract liabilities represent amounts billed to the customers in excess of revenue recognized to date.

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The following table reflects the changes in our contract assets and liabilities:


	July 30, 2022		April 30, 2022		Dollar Change		Percent Change
Contract assets	$	45,204	$	41,687	$	3,517	8.4	%
Contract liabilities - current	96,404		90,393		6,011		6.6
Contract liabilities - noncurrent	11,764		10,998		766		7.0

The changes in our contract assets and contract liabilities from April 30, 2022 to July 30, 2022 were due to the timing of billing schedules and revenue recognition, which can vary significantly depending on the contractual payment terms and the seasonality of the sports markets. We had no impairments of contract assets for the three months ended July 30, 2022.

For service-type warranty contracts, we allocate revenue to this performance obligation, recognize the revenue over time, and recognize costs as incurred. Earned and unearned revenues for these contracts are included in the "Contract assets" and "Contract liabilities". Changes in unearned service-type warranty contracts, net were as follows:


	July 30, 2022
Balance at beginning of period	$	26,346
New contracts sold	13,007
Less: reductions for revenue recognized	(10,109)
Foreign currency translation and other	(433)
Balance at end of period	$	28,811

Contracts in progress identified as loss contracts as of July 30, 2022 were $839 and as of April 30, 2022 were immaterial. Loss provisions are recorded in the "Accrued expenses" line item in our condensed consolidated balance sheets.

During the three months ended July 30, 2022, we recognized revenue of $46,041 related to our contract liabilities as of April 30, 2022.

Remaining performance obligations

As of July 30, 2022, the aggregate amount of the transaction price allocated to the remaining performance obligations was $530,457. We expect approximately $462,516 of our remaining performance obligations to be recognized over the next 12 months, with the remainder recognized thereafter. Remaining performance obligations related to product and service agreements at July 30, 2022 were $469,126 and $61,331, respectively. Although remaining performance obligations reflect business that is considered to be legally binding, cancellations, deferrals or scope adjustments may occur. Any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations, and project deferrals are reflected or excluded in the remaining performance obligation balance, as appropriate.

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Note 5. Segment Reporting

The following table sets forth certain financial information for each of our five reporting segments for the periods indicated:


	Three Months Ended
	July 30, 2022		July 31, 2021
Net sales:
Commercial	$	40,118	$	32,781
Live Events	56,383		52,387
High School Park and Recreation	35,809		27,894
Transportation	19,540		12,558
International	20,070		19,112
	171,920		144,732

Gross profit:
Commercial	4,821		7,178
Live Events	3,786		8,582
High School Park and Recreation	9,977		9,509
Transportation	5,838		3,751
International	1,372		3,168
	25,794		32,188

Operating expenses:
Selling	14,433		11,795
General and administrative	9,441		7,571
Product design and development	7,439		7,162
	31,313		26,528
Operating (loss) income	(5,519)		5,660

Nonoperating (expense) income:
Interest (expense) income, net	(60)		137
Other expense, net	(747)		(868)
(Loss) income before income taxes	$	(6,326)	$	4,929

Depreciation and amortization:
Commercial	$	803	$	702
Live Events	1,566		1,337
High School Park and Recreation	339		438
Transportation	125		139
International	545		726
Unallocated corporate depreciation	647		710
	$	4,025	$	4,052

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No single geographic area comprises a material amount of our net sales or property and equipment, net of accumulated depreciation, other than the United States. The following table presents information about net sales and property and equipment, net of accumulated depreciation, in the United States and elsewhere:


	Three Months Ended
	July 30, 2022		July 31, 2021
Net sales:
United States	$	149,438	$	123,482
Outside United States	22,482		21,250
	$	171,920	$	144,732


	July 30, 2022		April 30, 2022
Property and equipment, net of accumulated depreciation:
United States	$	63,720	$	58,643
Outside United States	8,675		8,122
	$	72,395	$	66,765

We have numerous customers worldwide for sales of our products and services, and no customer accounted for 10 percent or more of net sales for the three months ended July 30, 2022 and July 31, 2021; therefore, we are not economically dependent on a limited number of customers for the sale of our products and services.

We have numerous raw material and component suppliers, and no supplier accounts for 10 percent or more of our cost of sales; however, we have a complex global supply chain and a number of single-source suppliers that could limit our supply or cause delays in obtaining raw materials and components needed in manufacturing.

Note 6. Goodwill

The changes in the carrying amount of goodwill related to each reportable segment for the three months ended July 30, 2022 were as follows:


	Live Events		Commercial		Transportation		International		Total
Balance as of April 30, 2022	$	2,296	$	3,349	$	68	$	2,214	$	7,927
Foreign currency translation	—		—		—		(70)		(70)
Balance as of July 30, 2022	$	2,296	$	3,349	$	68	$	2,144	$	7,857

We perform an analysis of goodwill on an annual basis and test for impairment more frequently if events or changes in circumstances indicate that an asset might be impaired. Our annual analysis is performed during our third quarter of each fiscal year based on the goodwill amount as of the first business day of our third fiscal quarter. We performed our annual impairment test on October 31, 2021 and concluded no goodwill impairment existed. Our market capitalization has decreased since the completion of the October 31, 2021 evaluation which caused a trigger analysis to test goodwill impairment due to supply chain and labor supply uncertainty. After evaluating our results, events and circumstances, we determined no goodwill impairment was necessary.

Note 7. Financing Agreements

As of July 30, 2022, $24,128 had been advanced under the loan portion of our line of credit, and the balance of letters of credit outstanding was approximately $6,342. As of July 30, 2022, $4,530 of the credit facility was available for borrowing. On August 16, 2022, we entered into an agreement to temporarily expand the line of credit by $10,000 through October 31, 2022. In addition, certain financial covenants were modified to temporarily relax them through the second and third quarter of fiscal 2023. As of July 30, 2022, we were not in compliance with our financial covenants and our bank provided a waiver for these covenants.

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As of July 30, 2022, we had $616 of bank guarantees or other financial instruments for display installations issued by another bank and secured by a restricted cash deposit. If we are unable to meet the terms of the arrangement, the bank would subrogate its loss by drawing on the secured cash deposit.

Note 8. Commitments and Contingencies

Litigation: We are a party to legal proceedings and claims which arise during the ordinary course of business. We review our legal proceedings and claims, regulatory reviews and inspections, and other legal matters on an ongoing basis and follow appropriate accounting guidance when making accrual and disclosure decisions. For unresolved legal proceedings or claims, we do not believe there is a reasonable probability that any material loss will be incurred. Accordingly, no material accrual or disclosure of a potential range of loss has been made related to these matters. We do not expect the ultimate liability of these unresolved legal proceedings or claims to have a material effect on our financial position, liquidity or capital resources.

Warranties: Changes in our warranty obligation for the three months ended July 30, 2022 consisted of the following:


	July 30, 2022
Beginning accrued warranty obligations	$	28,878
Warranties issued during the period	2,959
Settlements made during the period	(1,820)
Changes in accrued warranty obligations for pre-existing warranties during the period, including expirations	(607)
Ending accrued warranty obligations	$	29,410

Performance guarantees: We have entered into standby letters of credit, bank guarantees and surety bonds with financial institutions relating to the guarantee of our future performance on contracts, primarily construction-type contracts. As of July 30, 2022, we had outstanding letters of credit, bank guarantees and surety bonds in the amount of $6,342, $616 and $82,528, respectively. Performance guarantees are issued to certain customers to guarantee the operation and installation of the equipment and our ability to complete a contract. These performance guarantees have various terms but are generally one year. We enter into written agreements with our customers, and those agreements often contain indemnification provisions that require us to make the customer whole if certain acts or omissions by us cause the customer financial loss. We make efforts to negotiate reasonable caps and limitations on the recovery of such damages. As of July 30, 2022, we were not aware of any indemnification claim from a customer.

Note 9. Income Taxes

The provision for income taxes during interim reporting periods is calculated by applying an estimate of the annual effective tax rate to “ordinary” income or loss for the reporting period, adjusted for discrete items. Due to various factors, including our estimate of annual income, our effective tax rate is subject to fluctuation.

Our effective tax rate for the three months ended July 30, 2022 was 15.8 percent, as compared to an effective tax rate of 25.2 percent tax for the three months ended July 31, 2021. The decrease in tax rate is primarily driven by an increase in estimated tax credits and other permanent items less valuation allowances as a percentage of estimated pre-tax earnings for fiscal 2023 compared to the estimated value of tax credits and other permanent items less valuation allowances as a percentage to the estimated pre-tax earnings at the first quarter of fiscal 2022.

We operate both domestically and internationally and, as of July 30, 2022, undistributed earnings of our foreign subsidiaries were considered to be reinvested indefinitely. Additionally, as of July 30, 2022, we had $610 of unrecognized tax benefits which would reduce our effective tax rate if recognized.

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Note 10. Fair Value Measurement

The following table sets forth by Level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at July 30, 2022 and April 30, 2022 according to the valuation techniques we used to determine their fair values. There have been no transfers of assets or liabilities among the fair value hierarchies presented.


	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
Balance as of July 30, 2022
Cash and cash equivalents	$	8,279	$	—	$	—	$	8,279
Restricted cash	750		—		—		750
Available-for-sale securities:
US Government securities	2,490		—		—		2,490
US Government sponsored entities	—		533		—		533
Derivatives - asset position	—		951		—		951


	$	11,519	$	1,484	$	—	$	13,003
Balance as of April 30, 2022
Cash and cash equivalents	$	17,143	$	—	$	—	$	17,143
Restricted cash	865		—		—		865
Available-for-sale securities:
US Government securities	3,486		—		—		3,486
US Government sponsored entities	—		534		—		534

Derivatives - asset position	—		934		—		934
Derivatives - liability position	—		(311)		—		(311)

	$	21,494	$	1,157	$	—	$	22,651

There have been no changes in the valuation techniques used by us to value our financial instruments since the end of fiscal 2022. For additional information, see our Annual Report on Form 10-K for the fiscal year ended April 30, 2022 for the methods and assumptions used to estimate the fair value of each class of financial instrument.

Note 11. Share Repurchase Program

On June 17, 2016, our Board of Directors approved a stock repurchase program under which we may purchase up to $40,000 of the Company's outstanding shares of common stock. Under this program, we may repurchase shares from time to time in open market transactions and in privately negotiated transactions based on business, market, applicable legal requirements and other considerations. The repurchase program does not require the repurchase of a specific number of shares and may be terminated at any time.

In April 2020, the Board had suspended the program. On December 2, 2021, the Board of Directors of Daktronics voted to reauthorize the stock repurchase program.

During the three months ended July 30, 2022, we repurchased no shares of common stock. As of July 30, 2022, we had $29,355 of remaining capacity under our current share repurchase program.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This section entitled "Management’s Discussion and Analysis of Financial Condition and Results of Operations" (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The MD&A provides a narrative analysis explaining the reasons for material changes in the Company’s (i) financial condition during the period from the most recent fiscal year-end, April 30, 2022, to and including July 30, 2022 and (ii) results of operations during the current fiscal period(s) as compared to the corresponding period(s) of the preceding fiscal year.

This Quarterly Report on Form 10-Q, including the MD&A, contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect our current views with respect to future events and financial performance. The words "may," "would," "could," "should," "will," "expect," "estimate," "anticipate," "believe," "intend," "plan" and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any and all forecasts and projections in this document are “forward looking statements” and are based on management’s current expectations or beliefs. From time to time, we may also provide oral and written forward-looking statements in other materials we release to the public, such as press releases, presentations to securities analysts or investors, or other communications by us. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. Accordingly, we wish to caution investors that any forward-looking statements made by or on behalf of us are subject to uncertainties and other factors that could cause actual results to differ materially from such statements.

We also wish to caution investors that other factors might in the future prove to be important in affecting our results of operations. New factors emerge from time to time; it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended April 30, 2022 (including the information presented therein under Risk Factors), as well other publicly available information about our Company.

OVERVIEW

We are engaged principally in the design, marketing, and manufacture of a wide range of integrated electronic display systems and related products which are sold in a variety of markets throughout the world and the rendering of related maintenance and professional services. We focus our sales and marketing efforts on markets, geographical regions and products. Our five business segments consist of four domestic business units and the International business unit. The four domestic business units consist of Commercial, Live Events, High School Park and Recreation, and Transportation, all of which include the geographic territories of the United States and Canada.

The following selected financial data should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended April 30, 2022 and the consolidated financial statements set forth in that Annual Report on Form 10-K, including the notes to consolidated financial statements included therein.

CURRENT CONDITIONS

Supply chain disruptions continue as a result of several factors, including the pandemic lockdowns, shipping container shortages, labor shortages, war and other conflicts, and changes in global demand. We are specifically impacted by the global shortage of semiconductors and related electronic components. Over the past months, our capacity was constrained due to significant and unusual part shortages, a challenging labor environment, and operating disruptions from COVID-19 related absences, and shutdown of our facilities in Shanghai, China due to a government mandated COVID-19 zero tolerance policy. Through this time, we also have experienced increased input costs for materials, commodities, personnel,

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freight, and tariffs. In addition, recent disputes by railroad workers regarding the terms of labor agreements have increased the likelihood of a potential strike or work stoppage by certain railroad workers. In response to these increased tensions, President Biden recently took an executive action to temporarily prevent approximately 115,000 U.S. railroad workers from going on strike for sixty days. It is uncertain at this time whether negotiations will be successful in preventing a strike or work stoppage by railroad workers. The International Longshore and Warehouse Union (ILWU) contract with the Pacific Maritime Association expired July 1st. While negotiations are in process, a strike or work slow-down mandate is possible. This would have a negative impact on the movement of material through west coast ports. We are monitoring these situations but it is difficult and uncertain to predict the level of impact this may have on our organization or our supply chain.

We have responded to input cost increases by increasing pricing through the last half of fiscal 2022 and implemented additional increases at the beginning of fiscal 2023. We also use pricing policies and opportunity evaluations across markets to manage price levels. We will continue to monitor our supply chains and our marketplaces and adapt our pricing methodologies as we see appropriate. We have also allocated resources to redesigns of certain products to provide the ability to source available components

Macroeconomic events including the possibility of sustained high inflation and tightening financials conditions, including the potential for higher interest rates, could increase the likelihood of deteriorating global economic conditions. We also expect impacts to the global economic conditions in reaction to the evolving war and geopolitical environment. Although we cannot predict the length or severity of these conditions, we expect continued disruptions in obtaining materials, commodities, labor, and freight availability and an increase in inflation. Due to longer planning horizons and volatility in supply chains, we plan to carry higher quantities of inventory and anticipate changes in the timing of payments from our customers as we work through different disruptions and fulfill our backlog, likely creating an increased consumption of cash. We are also planning additional cash use for capital spending to grow our manufacturing capacity.

All of these conditions have and will continue to cause volatility in our cash flow, pricing, order volumes, lead-times, competitiveness, revenue cycles, and production costs, and it is likely these conditions will continue to have negative impact in fiscal 2023.

For additional information, refer to the COVID-19 and raw material and component related risk factors disclosed in Item 1A of Part I in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED JULY 30, 2022 AND JULY 31, 2021

Product Order Backlog

Backlog represents the dollar value of orders for integrated electronic display systems and related products and services which are expected to be recognized in net sales in the future. Orders are contractually binding purchase commitments from customers. Orders are included in backlog when we are in receipt of an executed contract and any required deposits or security and have not yet been recognized into net sales. Certain orders for which we have received binding letters of intent or contracts will not be included in backlog until all required contractual documents and deposits are received. Orders and backlog are not measures defined by accounting principles generally accepted in the United States of America ("GAAP"), and our methodology for determining orders and backlog may vary from the methodology used by other companies in determining their orders and backlog amounts.

Order and backlog levels provide management and investors additional details surrounding the results of our business activities in the marketplace and highlight fluctuations caused by seasonality and our large project business. Management uses orders to evaluate market share and performance in the competitive environment. Management uses backlog information for capacity and resource planning. We believe order information is useful to investors because it provides an indication of our market share and future revenues.

Our product order backlog as of July 30, 2022 was $469.1 million as compared to $285.3 million as of July 31, 2021 and $471.6 million at April 30, 2022, which was the end of our fiscal 2022.

We expect to fulfill the backlog as of July 30, 2022 within the next 24 months. The timing of backlog may be impacted by project delays resulting from parts availability and other constraints stemming from the supply chain disruptions.

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Net Sales

The following table shows information regarding net sales for the three months ended July 30, 2022 and July 31, 2021:


	Three Months Ended
(in thousands)	July 30, 2022		July 31, 2021		Dollar Change		Percent Change
Net Sales:
Commercial	$	40,118	$	32,781	$	7,337	22.4	%
Live Events	56,383		52,387		3,996		7.6
High School Park and Recreation	35,809		27,894		7,915		28.4
Transportation	19,540		12,558		6,982		55.6
International	20,070		19,112		958		5.0
	$	171,920	$	144,732	$	27,188	18.8	%
Orders:
Commercial	$	47,678	$	38,329	$	9,349	24.4	%
Live Events	51,753		49,686		2,067		4.2
High School Park and Recreation	37,579		45,711		(8,132)		(17.8)
Transportation	15,704		21,345		(5,641)		(26.4)
International	17,509		26,675		(9,166)		(34.4)
	$	170,223	$	181,746	$	(11,523)	(6.3)	%

For the fiscal 2023 first quarter, net sales were $171.9 million, an increase of $27.2 million from the prior year's first quarter. The year-over-year growth was driven by fulfilling orders in the backlog and continued strong orders. Material supply shortages and labor challenges are creating an increase in lead times and extending the timing of converting some orders to sales in the near-term. We expect supply chain conditions to persist through the fiscal year.

Order volume decreased in the first quarter of fiscal 2023 from the prior year's first quarter. Fiscal 2022 saw a record number of orders from pent up demand during the COVID-19 pandemic and orders for fiscal 2023 continue to be strong. Order bookings in the first quarter of fiscal 2023 were strong for shopping centers, casinos, and out of home advertising display systems in the Commercial business unit and in multiple sports venues in the Live Events unit. International markets have seen some softening in demand through the first quarter of fiscal 2023 due to the inflationary environment and geopolitical events.

Gross Profit and Contribution Margin


	Three Months Ended
	July 30, 2022				July 31, 2021
(in thousands)	Amount		As a Percent of Net Sales		Amount		As a Percent of Net Sales
Gross Profit:
Commercial	$	4,821	12.0	%	$	7,178	21.9	%
Live Events	3,786		6.7		8,582		16.4
High School Park and Recreation	9,977		27.9		9,509		34.1
Transportation	5,838		29.9		3,751		29.9
International	1,372		6.8		3,168		16.6
	$	25,794	15.0	%	$	32,188	22.2	%

The decline in gross profit percentage was primarily impacted by inflationary challenges in materials, freight, and personnel related costs. In addition, extraordinary supply chain disruptions, including the Shanghai factory closure, created intermittent work stoppages and factory inefficiencies, adding additional costs to meet customer commitments, especially

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in the Live Events business unit. We also recorded a $0.8 million provision for estimated losses on contracts in progress during the three months ended July 30, 2022.

Total warranty costs as a percent of sales for the three months ended July 30, 2022 compared to the same period one year ago increased to 1.6 percent from 1.2 percent.


	Three Months Ended
	July 30, 2022								July 31, 2021
(in thousands)	Amount		As a Percent of Net Sales		Dollar Change		Percent Change		Amount		As a Percent of Net Sales
Contribution Margin:
Commercial	$	200	0.5	%	$	(3,317)	(94.3)	%	$	3,517	10.7	%
Live Events	974		1.7		(5,354)		(84.6)		6,328		12.1
High School Park and Recreation	6,581		18.4		(184)		(2.7)		6,765		24.3
Transportation	4,943		25.3		2,089		73.2		2,854		22.7
International	(1,337)		(6.7)		(2,266)		(243.9)		929		4.9
	$	11,361	6.6	%	$	(9,032)	(44.3)	%	$	20,393	14.1	%

Contribution margin is a non-GAAP measure and consists of gross profit less selling expenses. Selling expenses consist primarily of personnel related costs, travel and entertainment expenses, marketing related expenses (show rooms, product demonstration, depreciation and maintenance, conventions and trade show expenses), the cost of customer relationship management/marketing systems, bad debt expenses, third-party commissions, and other expenses.

Contribution margin was impacted by the previously discussed sales levels and impacts on gross profit, as well as a 22.3 percent increase in selling expenses in the first three months of fiscal 2023 compared to the prior year three-month period. We have adjusted our sales and marketing activities and staffing levels to achieve current and expected future sales levels. Our order volume is directly associated with our marketing and sales expenses.

The following table reconciles non-GAAP contribution margin to GAAP operating loss:


	Three Months Ended
	July 30, 2022								July 31, 2021
(in thousands)	Amount		As a Percent of Net Sales		Dollar Change		Percent Change		Amount		As a Percent of Net Sales
Contribution margin	$	11,361	6.6	%	$	(9,032)	(44.3)	%	$	20,393	14.1	%
General and administrative	9,441		5.5		1,870		24.7		7,571		5.2
Product design and development	7,439		4.3		277		3.9		7,162		4.9
Operating (loss) income	$	(5,519)	(3.2)	%	$