UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from ___ to ___.
Commission File Number:
Daktronics, Inc.
(Exact Name of Registrant as Specified in its Charter)
| | | ||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||
| | | | |
| (Address of Principal Executive Offices) | |||
(
(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 |
| | | |
| | | |
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.
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).
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 | ☐ | | ☒ | |
| Non-accelerated filer | ☐ | Smaller reporting company | | |
| Emerging growth company | |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares of the registrant’s common stock outstanding as of February 22, 2022 was
DAKTRONICS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended January 29, 2022
| Page |
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| 1 | ||
| Condensed Consolidated Balance Sheets as of January 29, 2022 and May 1, 2021 |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Index to Exhibits | 22 | |
| DAKTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) (unaudited) |
| January 29, | May 1, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Marketable securities | ||||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Contract assets | ||||||||
| Current maturities of long-term receivables | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Income tax receivables | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Long-term receivables, less current maturities | ||||||||
| Goodwill | ||||||||
| Intangibles, net | ||||||||
| Investment in affiliates and other assets | ||||||||
| Deferred income taxes | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Contract liabilities | ||||||||
| Accrued expenses | ||||||||
| Warranty obligations | ||||||||
| Income taxes payable | ||||||||
| Total current liabilities | ||||||||
| Long-term warranty obligations | ||||||||
| Long-term contract liabilities | ||||||||
| Other long-term obligations | ||||||||
| Long-term income taxes payable | ||||||||
| Deferred income taxes | ||||||||
| Total long-term liabilities | ||||||||
| SHAREHOLDERS' EQUITY: | ||||||||
| Common Stock, par value, authorized shares; and shares issued at January 29, 2022 and May 1, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Treasury Stock, at cost, and shares at January 29, 2022 and May 1, 2021, respectively | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| TOTAL SHAREHOLDERS' EQUITY | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | $ |
| |||||
|
See notes to condensed consolidated financial statements. |
| DAKTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) |
| Three Months Ended |
Nine Months Ended |
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| January 29, |
January 30, |
January 29, |
January 30, |
|||||||||||||
| 2022 |
2021 |
2022 |
2021 |
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| Net sales |
$ | $ | $ | $ | ||||||||||||
| Cost of sales |
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| Gross profit |
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| Operating expenses: |
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| Selling |
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| General and administrative |
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| Product design and development |
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| Operating (loss)income |
( |
) | ( |
) | ||||||||||||
| Nonoperating (expense) income: |
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| Interest income (expense), net |
( |
) | ( |
) | ||||||||||||
| Other (expense) income, net |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| (Loss) income before income taxes |
( |
) | ( |
) | ||||||||||||
| Income tax (benefit) expense |
( |
) | ( |
) | ||||||||||||
| Net (loss) income |
$ | ( |
) | $ | ( |
) | $ | $ | ||||||||
| Weighted average shares outstanding: |
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| Basic |
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| Diluted |
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| (Loss) earnings per share: |
||||||||||||||||
| Basic |
$ | ( |
) | $ | ( |
) | $ | $ | ||||||||
| Diluted |
$ | ( |
) | $ | ( |
) | $ | $ | ||||||||
| See notes to condensed consolidated financial statements. |
| DAKTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (in thousands) (unaudited) |
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| January 29, |
January 30, |
January 29, |
January 30, |
|||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Net (loss) income |
$ | ( |
) | $ | ( |
) | $ | $ | ||||||||
| Other comprehensive (loss) income: |
||||||||||||||||
| Cumulative translation adjustments |
( |
) | ( |
) | ||||||||||||
| Unrealized gain (loss) on available-for-sale securities, net of tax |
( |
) | ( |
) | ||||||||||||
| Total other comprehensive (loss) income, net of tax |
( |
) | ( |
) | ||||||||||||
| Comprehensive (loss) income |
$ | ( |
) | $ | $ | $ | ||||||||||
| See notes to condensed consolidated financial statements. |
| 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 May 1, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| Net income |
||||||||||||||||||||||||
| Cumulative translation adjustments |
( |
) | ( |
) | ||||||||||||||||||||
| Share-based compensation |
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| Employee savings plan activity |
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| Treasury stock reissued |
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| Balance as of July 31, 2021 |
( |
) | ( |
) | ||||||||||||||||||||
| Net income |
||||||||||||||||||||||||
| Cumulative translation adjustments |
( |
) | ( |
) | ||||||||||||||||||||
| Share-based compensation |
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| Exercise of stock options |
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| Tax payments related to RSU issuances |
( |
) | ( |
) | ||||||||||||||||||||
| Balance as of October 30, 2021 |
( |
) | ( |
) | ||||||||||||||||||||
| Net loss |
( |
) | ( |
) | ||||||||||||||||||||
| Cumulative translation adjustments |
( |
) | ( |
) | ||||||||||||||||||||
| Unrealized gain (loss) on available-for-sale securities, net of tax |
( |
) | ( |
) | ||||||||||||||||||||
| Share-based compensation |
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| Exercise of stock options |
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| Employee savings plan activity |
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| Treasury stock purchase |
( |
) | ( |
) | ||||||||||||||||||||
| Balance as of January 29, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| See notes to condensed consolidated financial statements. |
| 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 2, 2020 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| Net income |
||||||||||||||||||||||||
| Cumulative translation adjustments |
||||||||||||||||||||||||
| Share-based compensation |
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| Treasury stock reissued |
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| Balance as of August 1, 2020 |
( |
) | ( |
) | ||||||||||||||||||||
| Net income |
||||||||||||||||||||||||
| Cumulative translation adjustments |
||||||||||||||||||||||||
| Share-based compensation |
||||||||||||||||||||||||
| Tax payments related to RSU issuances |
( |
) | ( |
) | ||||||||||||||||||||
| Balance as of October 31, 2020 |
( |
) | ( |
) | ||||||||||||||||||||
| Net loss |
( |
) | ( |
) | ||||||||||||||||||||
| Cumulative translation adjustments |
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| Share-based compensation |
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| Employee savings plan activity |
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| Balance as of January 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| See notes to condensed consolidated financial statements. |
| DAKTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
|
| Nine Months Ended |
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| January 29, |
January 30, |
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| 2022 |
2021 |
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| CASH FLOWS FROM OPERATING ACTIVITIES: |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
||||||||
| Depreciation and amortization |
||||||||
| Gain on sale of property, equipment and other assets |
( |
) | ( |
) | ||||
| Share-based compensation |
||||||||
| Equity in loss of investees |
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| Provision for doubtful accounts |
( |
) | ||||||
| Deferred income taxes, net |
( |
) | ||||||
| Change in operating assets and liabilities |
( |
) | ||||||
| Net cash (used in) provided by operating activities |
( |
) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
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| Purchases of property and equipment |
( |
) | ( |
) | ||||
| Proceeds from sales of property, equipment and other assets |
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| Purchases of marketable securities |
( |
) | ||||||
| Proceeds from sales or maturities of marketable securities |
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| Purchases of and loans to equity investees |
( |
) | ( |
) | ||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
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| Principal payments on long-term obligations |
( |
) | ( |
) | ||||
| Payments for common shares repurchased |
( |
) | ||||||
| Proceed from exercise of stock options |
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| Tax payments related to RSU issuances |
( |
) | ( |
) | ||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH |
( |
) | ||||||
| NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
( |
) | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH: |
||||||||
| Beginning of period |
||||||||
| End of period |
$ | $ | ||||||
| Supplemental disclosures of cash flow information: |
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| Cash paid for: |
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| Interest |
$ | $ | ||||||
| Income taxes, net of refunds |
||||||||
| Supplemental schedule of non-cash investing and financing activities: |
||||||||
| Demonstration equipment transferred to inventory |
$ | $ | ||||||
| Purchases of property and equipment included in accounts payable |
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| Contributions of common stock under the ESPP |
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| See notes to condensed consolidated financial statements. |
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 the world's 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 May 1, 2021, 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 year ended May 1, 2021, 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 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 nine months ended January 29, 2022 and January 30, 2021, contained operating results for 39 weeks.
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.
| January 29, | January 30, | |||||||
| 2022 | 2021 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | $ | ||||||
Other Business Developments
Impacts to and changes in global economic conditions are expected as the world economies recover from the COVID-19 pandemic, adjust to supply chain conditions and disruptions, and react to the evolving war and geopolitical environment. Our ability to fund operations and capital expenditures in the future will be dependent on our ability to generate cash flow from operations in these conditions, to maintain or improve margins, and to use funds from our credit facility or other funding sources.
We anticipate needing to utilize a portion of our line of credit which expires in November 2022, and there can be no assurances that we will be successful in renewing the line of credit with sufficient capacity or that we will otherwise be able to obtain sufficient cash. However, based on our initial discussions with lenders and other alternatives we have available to us, such as increasing prices of our goods and services, reducing capital expenditures, reducing operating expenses, negotiating longer payment terms to our suppliers, and obtaining other forms of debt or equity financing, we believe it is probable our existing cash balances and future actions will be sufficient to fund our normal business operations over the next twelve months from the date of this Report.
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 May 1, 2021.
Accounting Standards Adopted
There are no significant Accounting Standard Updates ("ASUs") issued that we adopted as of January 29, 2022.
Accounting Standards Not Yet Adopted
In November 2021, the Financial Accounting Standards Board ("FASB") issued 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, which for us is the first quarter of fiscal 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2021-10 to have a material impact on future disclosures.
Note 2. Investments in Affiliates
The aggregate amount of our investments in affiliates accounted for under the equity method was $
Note 3. Earnings Per Share ("EPS")
The following is a reconciliation of the net income and common share amounts used in the calculation of basic and diluted EPS for the three and nine months ended January 29, 2022 and January 30, 2021:
| Net (loss) income | Shares | Per share (loss) income | ||||||||||
| For the three months ended January 29, 2022 | ||||||||||||
| Basic (loss) earnings per share | $ | ( | ) | $ | ( | ) | ||||||
| Dilution associated with stock compensation plans | — | — | — | |||||||||
| Diluted (loss) earnings per share | $ | ( | ) | $ | ( | ) | ||||||
| For the three months ended January 30, 2021 | ||||||||||||
| Basic (loss) earnings per share | $ | ( | ) | $ | ( | ) | ||||||
| Dilution associated with stock compensation plans | — | — | — | |||||||||
| Diluted (loss) earnings per share | $ | ( | ) | $ | ( | ) | ||||||
| For the nine months ended January 29, 2022 | ||||||||||||
| Basic earnings per share | $ | $ | ||||||||||
| Dilution associated with stock compensation plans | — | — | ||||||||||
| Diluted earnings per share | $ | $ | ||||||||||
| For the nine months ended January 30, 2021 | ||||||||||||
| Basic earnings per share | $ | $ | ||||||||||
| Dilution associated with stock compensation plans | — | — | ||||||||||
| Diluted earnings per share | $ | $ | ||||||||||
Options outstanding to purchase
Options outstanding to purchase
Note 4. Revenue Recognition
Disaggregation of revenue
The following table presents our disaggregation of revenue by segments:
| Three Months Ended January 29, 2022 | ||||||||||||||||||||||||
| High School | ||||||||||||||||||||||||
| Commercial | Live Events | Park and Recreation | Transportation | International | Total | |||||||||||||||||||
| Type of performance obligation | ||||||||||||||||||||||||
| Unique configuration | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Limited configuration | ||||||||||||||||||||||||
| Service and other | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Timing of revenue recognition | ||||||||||||||||||||||||
| Goods/services transferred at a point in time | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Goods/services transferred over time | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Nine Months Ended January 29, 2022 | ||||||||||||||||||||||||
| High School | ||||||||||||||||||||||||
| Commercial | Live Events | Park and Recreation | Transportation | International | Total | |||||||||||||||||||
| Type of performance obligation | ||||||||||||||||||||||||
| Unique configuration | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Limited configuration | ||||||||||||||||||||||||
| Service and other | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Timing of revenue recognition | ||||||||||||||||||||||||
| Goods/services transferred at a point in time | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Goods/services transferred over time | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Three Months Ended January 30, 2021 | ||||||||||||||||||||||||
| High School | ||||||||||||||||||||||||
| Commercial | Live Events | Park and Recreation | Transportation | International | Total | |||||||||||||||||||
| Type of performance obligation | ||||||||||||||||||||||||
| Unique configuration | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Limited configuration | ||||||||||||||||||||||||
| Service and other | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Timing of revenue recognition | ||||||||||||||||||||||||
| Goods/services transferred at a point in time | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Goods/services transferred over time | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Nine Months Ended January 30, 2021 | ||||||||||||||||||||||||
| High School | ||||||||||||||||||||||||
| Commercial | Live Events | Park and Recreation | Transportation | International | Total | |||||||||||||||||||
| Type of performance obligation | ||||||||||||||||||||||||
| Unique configuration | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Limited configuration | ||||||||||||||||||||||||
| Service and other | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Timing of revenue recognition | ||||||||||||||||||||||||
| Goods/services transferred at a point in time | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Goods/services transferred over time | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
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.
The following table reflects the changes in our contract assets and liabilities:
| January 29, | May 1, | Dollar | Percent | |||||||||||||
| 2022 | 2021 | Change | Change | |||||||||||||
| Contract assets | $ | $ | $ | % | ||||||||||||
| Contract liabilities - current | % | |||||||||||||||
| Contract liabilities - noncurrent | % | |||||||||||||||
The changes in our contract assets and contract liabilities from May 1, 2021 to January 29, 2022 were due to the timing of billing schedules and revenue recognition, which can vary significantly depending on the contractual payment terms and the construction and sports market seasonality. We had no impairments of contract assets for the nine months ended January 29, 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" line items in our condensed consolidated balance sheets. Changes in unearned service-type warranty contracts, net were as follows:
| January 29, | ||||
| 2022 | ||||
| Balance at beginning of period | $ | |||
| New contracts sold | ||||
| Less: reductions for revenue recognized | ( | ) | ||
| Foreign currency translation and other | ( | ) | ||
| Balance at end of period | $ | |||
As of January 29, 2022 and May 1, 2021, our contracts in progress that were identified as loss contracts were immaterial. For these contracts, the provision for losses is included in the "Accrued expenses" line item in our condensed consolidated balance sheets.
During the nine months ended January 29, 2022, we recognized revenue of $
Remaining performance obligations
As of January 29, 2022, the aggregate amount of the transaction price allocated to the remaining performance obligations was $
Note 5. Segment Reporting
The following table sets forth certain financial information for each of our
| Three Months Ended | Nine Months Ended | |||||||||||||||
| January 29, | January 30, | January 29, | January 30, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net sales: | ||||||||||||||||
| Commercial | $ | $ | $ | $ | ||||||||||||
| Live Events | ||||||||||||||||
| High School Park and Recreation | ||||||||||||||||
| Transportation | ||||||||||||||||
| International | ||||||||||||||||
| Gross profit: | ||||||||||||||||
| Commercial | ||||||||||||||||
| Live Events | ||||||||||||||||
| High School Park and Recreation | ||||||||||||||||
| Transportation | ||||||||||||||||
| International | ( | ) | ||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Product design and development | ||||||||||||||||
| Operating (loss) income | ( | ) | ( | ) | ||||||||||||
| Nonoperating income (expense): | ||||||||||||||||
| Interest (expense) income, net | ( | ) | ( | ) | ||||||||||||
| Other (expense) income, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (Loss) income before income taxes | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Depreciation and amortization: | ||||||||||||||||
| Commercial | $ | $ | $ | $ | ||||||||||||
| Live Events | ||||||||||||||||
| High School Park and Recreation | ||||||||||||||||
| Transportation | ||||||||||||||||
| International | ||||||||||||||||
| Unallocated corporate depreciation | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
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 | Nine Months Ended | |||||||||||||||
| January 29, | January 30, | January 29, | January 30, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net sales: | ||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Outside United States | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| January 29, | May 1, | |||||||
| 2022 | 2021 | |||||||
| Property and equipment, net of accumulated depreciation: | ||||||||
| United States | $ | $ | ||||||
| Outside United States | ||||||||
| $ | $ | |||||||
We have numerous customers worldwide for sales of our products and services. No customer accounted for 10 percent or more of net sales for the three and nine months ended January 29, 2022; 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 number of single-source suppliers that could limit our supply or cause delays in obtaining raw material and components needed in manufacturing.
Note 6. Goodwill
The changes in the carrying amount of goodwill related to each reportable segment for the nine months ended January 29, 2022 were as follows:
| Live Events | Commercial | Transportation | International | Total | ||||||||||||||||
| Balance as of May 1, 2021 | $ | $ | $ | $ | $ | |||||||||||||||
| Foreign currency translation | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Balance as of January 29, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
We perform an analysis of goodwill on an annual basis, and it is tested 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 goodwill impairment existed.
Note 7. Financing Agreements
As of January 29, 2022, there were no advances under the loan portion of our line of credit, and the balance of letters of credit outstanding was approximately $
We are sometimes required to obtain bank guarantees or other financial instruments for display installations. If we are unable to meet the terms of the arrangement, our customer would draw on the banking arrangement, and the bank would subrogate its loss to Daktronics. As of January 29, 2022, we had $
As of January 29, 2022, we were in compliance with all applicable bank loan covenants.
Note 8. Commitments and Contingencies
Litigation: We are a party to legal proceedings and claims which arise during the ordinary course of business. 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 nine months ended January 29, 2022 consisted of the following:
| January 29, | ||||
| 2022 | ||||
| Beginning accrued warranty obligations | $ | |||
| Warranties issued during the period | ||||
| Settlements made during the period | ( | ) | ||
| Changes in accrued warranty obligations for pre-existing warranties during the period, including expirations | ( | ) | ||
| Ending accrued warranty obligations | $ | |||
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 January 29, 2022, we had outstanding letters of credit, bank guarantees and surety bonds in the amount of $
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 and nine months ended January 29, 2022 reflected effective tax rates of
We operate both domestically and internationally and, as of January 29, 2022, undistributed earnings of our foreign subsidiaries were considered to be reinvested indefinitely. Additionally, as of January 29, 2022, we had $
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 January 29, 2022 and May 1, 2021 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 January 29, 2022 | ||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| US Government Securities | ||||||||||||||||
| US Government sponsored entities | ||||||||||||||||
| Derivatives - asset position | ||||||||||||||||
| Derivatives - liability position | ( | ) | ( | ) | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Balance as of May 1, 2021 | ||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||||
| Derivatives - asset position | ||||||||||||||||
| Derivatives - liability position | ( | ) | ( | ) | ||||||||||||
| Acquisition-related contingent consideration | ( | ) | ( | ) | ||||||||||||
| $ | $ | ( | ) | $ | ( | ) | $ | |||||||||
A roll forward of the Level 3 contingent liabilities, both short- and long-term, for the nine months ended January 29, 2022 is as follows:
| Acquisition-related contingent consideration as of May 1, 2021 | $ | |||
| Additions | ||||
| Settlements | ( | ) | ||
| Interest | ||||
| Acquisition-related contingent consideration as of January 29, 2022 | $ |
There have been no changes in the valuation techniques used by us to value our financial instruments since the end of fiscal 2021. For additional information, see our Annual Report on Form 10-K for the fiscal year ended May 1, 2021 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 $
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 nine months ended January 29, 2022, we repurchased
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, May 1, 2021, to and including January 29, 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 “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should,” "will," "continue" 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 May 1, 2021 (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, market, 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 year ended May 1, 2021 and the consolidated financial statements set forth in that Annual Report on Form 10-K, including the notes to consolidated financial statements included therein.
CORONAVIRUS ("COVID-19") PANDEMIC, SUPPLY CHAIN DISRUPTIONS AND DELAYS, AND CURRENT CONDITIONS
Impacts to and changes in global economic conditions are expected as the world economies recover from the COVID-19 pandemic, adjust to supply chain conditions and disruptions, and react to the evolving war and geopolitical environment. We continue to monitor guidance from international and domestic authorities regarding the COVID-19 pandemic and may take additional actions based on their requirements and recommendations. Since late fiscal 2021, our order and quoting activities have increased, creating a strong backlog and positive outlook; however, there is no assurance that this trend will continue in future quarters.
Supply chain disruptions continue as a result of several factors including the pandemic, shipping container shortages, labor shortages, and changes in global demand. We are specifically impacted by the global shortage of semiconductors and related electronic components. We have experienced increased input costs in many areas including material, commodity, freight, and tariff costs and increased personnel spend throughout the 2022 fiscal year. We have responded to input cost increases by increasing pricing and we began quoting at the new price levels in the third quarter of fiscal 2022. We will continue to monitor our supply chains and our marketplaces and adapt our pricing methodologies as we see appropriate.
Although we cannot predict the length or severity of these conditions, we expect continued disruptions in obtaining material, commodities, labor, and freight availability and an increase in inflation as the world economies react to and recover from the pandemic. We also expect impacts to the global economic conditions in reaction to the evolving war and geopolitical environment. 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, all likely creating a consumption of cash. We are also planning additional cash use for capital spending to grow our manufacturing capacity.
We anticipate needing to utilize a portion of our line of credit which expires in November 2022, and there can be no assurances that we will be successful in renewing the line of credit with sufficient capacity or that we will otherwise be able to obtain sufficient cash. However, based on our initial discussions with lenders and other alternatives we have available to us, such as increasing prices of our goods and services, reducing capital expenditures, reducing operating expenses, negotiating longer payment terms to our suppliers, and obtaining other forms of debt or equity financing, we believe it is probable our existing cash balances and future actions will be sufficient to fund our normal business operations over the next twelve months from the date of this Report.
All of these conditions will cause volatility in our cash flow, pricing, order volumes, lead-times, competitiveness, revenue cycles, and production costs and it is reasonably likely these conditions will negatively affect our financial conditions of operations and cashflows throughout the remainder of fiscal 2022 and have some negative impact into fiscal 2023. However, the full impact to our financial condition, results of operations and cash flows cannot be determined at this time.
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 May 1, 2021.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED January 29, 2022 and January 30, 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 highlights fluctuation 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 January 29, 2022 was $353 million as compared to $195 million as of January 30, 2021 and $282 million at October 30, 2021, which was the end of our second quarter of fiscal 2022. We expect to fulfill the backlog as of January 29, 2022 within the next 24 months. The timing and our ability to fulfill backlog may be impacted by project delays resulting from the COVID-19 pandemic and supply chain issues.
Net Sales
The following table shows information regarding net sales for the three months ended January 29, 2022 and January 30, 2021:
| Three Months Ended |
||||||||||||||||
| January 29, |
January 30, |
Dollar |
Percent |
|||||||||||||
| (in thousands) |
2022 |
2021 |
Change |
Change |
||||||||||||
| Net sales: |
||||||||||||||||
| Commercial |
$ | 40,095 | $ | 30,085 | $ | 10,010 | 33.3 | % | ||||||||
| Live Events |
39,057 | 23,330 | 15,727 | 67.4 | ||||||||||||
| High School Park and Recreation |
23,721 | 14,644 | 9,077 | 62.0 | ||||||||||||
| Transportation |
15,823 | 11,769 | 4,054 | 34.4 | ||||||||||||
| International |
20,862 | 14,311 | 6,551 | 45.8 | ||||||||||||
| $ | 139,558 | $ | 94,139 | $ | 45,419 | 48.2 | % | |||||||||
| Orders: |
||||||||||||||||
| Commercial |
$ | 47,012 | $ | 34,806 | $ | 12,206 | 35.1 | % | ||||||||
| Live Events |
79,478 | 11,075 | 68,403 | 617.6 | ||||||||||||
| High School Park and Recreation |
35,884 | 16,366 | 19,518 | 119.3 | ||||||||||||
| Transportation |
20,810 | 12,991 | 7,819 | 60.2 | ||||||||||||
| International |
31,605 | 11,650 | 19,955 | 171.3 | ||||||||||||
| $ | 214,789 | $ | 86,888 | $ | 127,901 | 147.2 | % | |||||||||
For the fiscal 2022 third quarter, net sales were $139.6 million, an increase of $45.4 million from the prior year's third quarter. The year-over-year growth was driven by increased orders. Material supply shortages 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 calendar year.
Order volume increased across all business units in the third quarter of fiscal 2022, reflecting the continued recovery from the impact of the global pandemic among our customers. The pandemic recovery in regions around the world has varied. Some countries have eased travel restrictions and we have seen business in those locations increase. However, other countries still continue to deal with the ongoing challenges of the pandemic.
Gross Profit and Contribution Margin
| Three Months Ended |
||||||||||||||||
| January 29, 2022 |
January 30, 2021 |
|||||||||||||||
| As a Percent |
As a Percent |
|||||||||||||||
| (in thousands) |
Amount |
of Net Sales |
Amount |
of Net Sales |
||||||||||||
| Gross Profit: |
||||||||||||||||
| Commercial |
$ | 8,239 | 20.5 | % | $ | 8,410 | 28.0 | % | ||||||||
| Live Events |
3,094 | 7.9 | 4,256 | 18.2 | ||||||||||||
| High School Park and Recreation |
6,958 | 29.3 | 6,437 | 44.0 | ||||||||||||
| Transportation |
4,108 | 26.0 | 3,845 | 32.7 | ||||||||||||
| International |
(91 | ) | (0.4 | ) | 993 | 6.9 | ||||||||||
| $ | 22,308 | 16.0 | % | $ | 23,941 | 25.4 | % | |||||||||
The decline in gross profit percentage is primarily related to the ongoing supply chain disruptions and inflationary challenges in input and personnel related cost, the difference in sales mix between periods, a warranty charge in fiscal 2022 third quarter, and other factors experienced during fiscal 2021 which had a positive impact on fiscal 2021 margins. The factors impacting the gross profit in the third quarter of fiscal 2021 included a positive $2.1 million or 14.4% gross profit impact litigation claim reversal in High School Park and Recreation and adjustments to operations because of the COVID-19 pandemic. During the third quarter of fiscal 2021, we lowered overall staffing and temporarily furloughed employees to achieve lower operating costs to align with the uncertainties faced at that time created by the COVID-19 pandemic. Since the beginning of fiscal 2022, we have increased manufacturing and service staffing levels to achieve current and expected future sales levels.
Total warranty costs as a percent of sales for the three months ended January 29, 2022 compared to the same period one year ago increased to 2.4 percent from 1.6 percent.
| Three Months Ended |
||||||||||||||||||||||||
| January 29, 2022 |
January 30, 2021 |
|||||||||||||||||||||||
| As a Percent |
Dollar |
Percent |
As a Percent |
|||||||||||||||||||||
| (in thousands) |
Amount |
of Net Sales |
Change |
Change |
Amount |
of Net Sales |
||||||||||||||||||
| Contribution Margin: |
||||||||||||||||||||||||
| Commercial |
$ | 4,321 | 10.8 | % | $ | (740 | ) | (14.6 | )% | $ | 5,061 | 16.8 | % | |||||||||||
| Live Events |
547 | 1.4 | (1,515 | ) | (73.5 | ) | 2,062 | 8.8 | ||||||||||||||||
| High School Park and Recreation |
3,938 | 16.6 | (338 | ) | (7.9 | ) | 4,276 | 29.2 | ||||||||||||||||
| Transportation |
3,237 | 20.5 | 25 | 0.8 | 3,212 | 27.3 | ||||||||||||||||||
| International |
(2,470 | ) | (11.8 | ) | 204 | (7.6 | ) | (2,674 | ) | (18.7 | ) | |||||||||||||
| $ | 9,573 | 6.9 | % | $ | (2,364 | ) | (19.8 | )% | $ | 11,937 | 12.7 | % | ||||||||||||
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), customer relationship management/marketing systems, bad debt expenses, third-party commissions, and other expenses.
Contribution margin is impacted by the previously discussed sales and gross margin for each business unit and other factors experienced during fiscal 2021. During fiscal 2021, each business unit's contribution margin was impacted by a decrease in personnel related expenses and continued reductions in travel and entertainment, marketing, and convention related expenses due to limited ability to travel or fewer number of conventions because of COVID-19 restrictions. These savings were partly offset by a $1.3 million increase in bad debt expenses. During fiscal 2021, we had lowered overall staffing and furloughed employees to achieve lower operating costs to align with the uncertainties created by the COVID-19 pandemic. Since the beginning of fiscal 2022, we have adjusted our sales and marketing activities and staffing levels to achieve current and expected future sales levels.
Reconciliation from non-GAAP contribution margin to operating loss GAAP measure is as follows:
| Three Months Ended |
||||||||||||||||||||||||
| January 29, 2022 |
January 30, 2021 |
|||||||||||||||||||||||
| As a Percent |
Dollar |
Percent |
As a Percent |
|||||||||||||||||||||
| (in thousands) |
Amount |
of Net Sales |
Change |
Change |
Amount |
of Net Sales |
||||||||||||||||||
| Contribution margin |
$ | 9,573 | 6.9 | % | $ | (2,364 | ) | (19.8 | )% | $ | 11,937 | 12.7 | % | |||||||||||
| General and administrative |
8,328 | 6.0 | 1,939 | 30.3 | 6,389 | 6.8 | ||||||||||||||||||
| Product design and development |
6,925 | 5.0 | 1,141 | 19.7 | 5,784 | 6.1 | ||||||||||||||||||
| Operating (loss) income |
$ | (5,680 | ) | (4.1 | )% | $ | (5,444 | ) | 2306.8 | % | $ | (236 | ) | (0.3 | )% | |||||||||
Since the beginning of fiscal 2022, we have adjusted our staffing levels to current and expected future business activity levels. Through the third quarter of fiscal 2021, we lowered overall staffing and temporarily furloughed employees to achieve lower operating costs to align with the uncertainties faced at that time created by the COVID-19 pandemic.
General and administrative expenses in the third quarter of fiscal 2022 increased as compared to the same period one year ago primarily due to increases in personnel related expenses.
Product design and development expenses in the third quarter of fiscal 2022 increased as compared to the same period one year ago primarily due to an increase in personnel related expenses.
Decreased contribution margin and increased spend in general and administrative and product development led to a larger operating loss for the third quarter of fiscal 2022 compared to the prior year third quarter.
Other Income and Expenses
| Three Months Ended |
||||||||||||||||||||||||
| January 29, 2022 |
January 30, 2021 |
|||||||||||||||||||||||
| As a Percent |
Dollar |
Percent |
As a Percent |
|||||||||||||||||||||
| (in thousands) |
Amount |
of Net Sales |
Change |
Change |
Amount |
of Net Sales |
||||||||||||||||||
| Interest (expense) income, net |
$ | 56 | 0.0 | % | $ | 96 | (240.0 | )% | $ | (40 | ) | (0.0 | )% | |||||||||||
| Other (expense) income, net |
$ | (793 | ) | (0.6 | )% | $ | 120 | (13.1 | )% | $ | (913 | ) | (1.0 | )% | ||||||||||
Interest (expense) income, net: The change in interest income and expense, net for the third quarter of fiscal 2022 compared to the same period one year ago was primarily due to the reduction of interest expense, as we have no outstanding amounts due on the line of credit this year as compared to $15.0 million last year.
Other (expense) income, net: The change in other income and expense, net for the third quarter of fiscal 2022 as compared to the same period one year ago was primarily due to losses recorded for equity method affiliates and foreign currency volatility.
Income Taxes
We have recorded an effective tax rate of 32.2 percent for the third quarter of fiscal 2022 as compared to 82.0 percent for the third quarter of fiscal 2021. The decrease in tax rate is primarily driven by an increase in estimated permanent tax costs such as BEAT and GILTI proportionate to a decrease in estimated pre-tax earnings in the third quarter of fiscal 2022 compared to discrete tax benefits recorded proportionate to the book loss recognized in the third quarter of fiscal 2021.
RESULTS OF OPERATIONS
COMPARISON OF THE Nine MONTHS ENDED January 29, 2022 and January 30, 2021
Net Sales
The following table shows information regarding net sales for the nine months ended January 29, 2022 and January 30, 2021:
| Nine Months Ended |
||||||||||||||||
| January 29, |
January 30, |
Dollar |
Percent |
|||||||||||||
| (in thousands) |
2022 |
2021 |
Change |
Change |
||||||||||||
| Net sales: |
||||||||||||||||
| Commercial |
$ | 107,339 | $ | 94,947 | $ | 12,392 | 13.1 | % | ||||||||
| Live Events |
150,840 | 112,626 | 38,214 | 33.9 | ||||||||||||
| High School Park and Recreation |
84,362 | 71,165 | 13,197 | 18.5 | ||||||||||||
| Transportation |
42,434 | 41,590 | 844 | 2.0 | ||||||||||||
| International |
63,792 | 44,822 | 18,970 | 42.3 | ||||||||||||
| $ | 448,767 | $ | 365,150 | $ | 83,617 | 22.9 | % | |||||||||
| Orders: |
||||||||||||||||
| Commercial |
$ | 143,699 | $ | 92,929 | $ | 50,770 | 54.6 | % | ||||||||
| Live Events |
169,665 | 93,619 | 76,046 | 81.2 | ||||||||||||
| High School Park and Recreation |
107,246 | 64,582 | 42,664 | 66.1 | ||||||||||||
| Transportation |
56,854 | 37,713 | 19,141 | 50.8 | ||||||||||||
| International |
82,778 | 55,864 | 26,914 | 48.2 | ||||||||||||
| $ | 560,242 | $ | 344,707 | $ | 215,535 | 62.5 | % | |||||||||
Sales and orders increased, as demand was up across all markets in the nine months ended January 29, 2022 compared to the prior year nine-month periods. During the nine months ended January 30, 2021, sales and orders in all business units were negatively impacted as a result of the economic downturn caused by the COVID-19 pandemic.
Net sales during thenine months ended January 29, 2022 increased due to the conversion of the higher order volume for reasons noted below to sales during the first nine months of the year, including several large multimillion-dollar orders ("large orders") in both Live Events and International. Material supply and labor shortages are creating an increase in lead times, extending the timing of converting some orders to sales in the near-term.
Orders during the first nine months ended January 29, 2022 continued to improve, reflecting the continued economic recovery from the impact of the global pandemic among our customers.
Gross Profit and Contribution Margin
| Nine Months Ended |
||||||||||||||||
| January 29, 2022 |
January 30, 2021 |
|||||||||||||||
| As a Percent |
As a Percent |
|||||||||||||||
| (in thousands) |
Amount |
of Net Sales |
Amount |
of Net Sales |
||||||||||||
| Gross Profit: |
||||||||||||||||
| Commercial |
$ | 22,862 | 21.3 | % | $ | 24,730 | 26.0 | % | ||||||||
| Live Events |
17,261 | 11.4 | 20,910 | 18.6 | ||||||||||||
| High School Park and Recreation |
27,216 | 32.3 | 25,410 | 35.7 | ||||||||||||
| Transportation |
12,263 | 28.9 | 14,300 | 34.4 | ||||||||||||
| International |
7,158 | 11.2 | 7,666 | 17.1 | ||||||||||||
| $ | 86,760 | 19.3 | % | $ | 93,016 | 25.5 | % |
|||||||||
The decline in gross profit percentage is primarily related to the ongoing supply chain disruptions and inflationary challenges in materials, freight and personnel related costs; the difference in sales mix between periods; and other factors experienced during fiscal 2021 which had a positive impact on fiscal 2021 margins. The factors impacting the gross profit in fiscal 2021 included the positive $2.1 million litigation claim reversal in High School Park and Recreation and $1.6 million of COVID relief governmental subsidies offset by $2.8 million of severance costs to reduce our workforce to adjust to the impacts of the COVID-19 pandemic.
During the uncertainties created by the COVID-19 pandemic during fiscal 2021, we lowered overall staffing and temporarily furloughed employees. Since the beginning of fiscal 2022, we have increased our manufacturing and services personnel levels to achieve current and expected future sales levels.
During the first nine months of fiscal 2021, we earned a higher rate of gross profit on our service agreements due to reduced stand ready services conducted during the year because of the pandemic. During the first nine months of fiscal year 2022, we had more large project sales which generally have lower gross profit because of their competitive nature.
Total warranty cost as a percent of sales for the nine months ended January 29, 2022 compared to the same period one year ago increased to 1.6 percent from 1.5 percent.
| Nine Months Ended |
||||||||||||||||||||||||
| January 29, 2022 |
January 30, 2021 |
|||||||||||||||||||||||
| As a Percent |
Dollar |
Percent |
As a Percent |
|||||||||||||||||||||
| (in thousands) |
Amount |
of Net Sales |
Change |
Change |
Amount |
of Net Sales |
||||||||||||||||||
| Contribution Margin: |
||||||||||||||||||||||||
| Commercial |
$ | 11,247 | 10.5 | % | $ | (3,036 | ) | (21.3 | )% | $ | 14,283 | 15.0 | % | |||||||||||
| Live Events |
10,199 | 6.8 | (3,882 | ) | (27.6 | ) | 14,081 | 12.5 | ||||||||||||||||
| High School Park and Recreation |
18,539 | 22.0 | 397 | 2.2 | 18,142 | 25.5 | ||||||||||||||||||
| Transportation |
9,601 | 22.6 | (2,438 | ) | (20.3 | ) | 12,039 | 28.9 | ||||||||||||||||
| International |
162 | 0.3 | 1,905 | (109.3 | ) | (1,743 | ) | (3.9 | ) | |||||||||||||||
| $ | 49,748 | 11.1 | % | $ | (7,054 | ) | (12.4 | )% | $ | 56,802 | 15.6 | % | ||||||||||||
Contribution margin in the nine months ended January 29, 2022 was impacted by the previously discussed sales levels and impacts within gross profit.
Since the beginning of fiscal 2022, we have adjusted our sales and marketing activities and staffing levels to achieve current and expected future sales levels. During fiscal 2021, each business unit's contribution margin was impacted by a decrease in personnel related expenses and continued reductions in travel and entertainment, marketing, and convention related expenses due to limited ability to travel or fewer number of conventions because of COVID-19 restrictions. These fiscal 2021 savings were partly offset by a $1.5 million increase in bad debt expenses. During fiscal 2021, we had lowered overall staffing and furloughed employees to achieve lower operating costs to align with the uncertainties created by the COVID-19 pandemic.
Reconciliation from non-GAAP contribution margin to operating income GAAP measure is as follows:
| Nine Months Ended |
||||||||||||||||||||||||
| January 29, 2022 |
January 30, 2021 |
|||||||||||||||||||||||
| As a Percent |
Dollar |
Percent |
As a Percent |
|||||||||||||||||||||
| (in thousands) |
Amount |
of Net Sales |
Change |
Change |
Amount |
of Net Sales |
||||||||||||||||||
| Contribution margin |
$ | 49,748 | 11.1 | % | $ | (7,054 | ) | (12.4 | )% | $ | 56,802 | 15.6 | % | |||||||||||
| General and administrative |
24,100 | 5.4 | 3,323 | 16.0 | 20,777 | 5.7 | ||||||||||||||||||
| Product design and development |
21,283 | 4.7 | 1,230 | 6.1 | 20,053 | 5.5 | ||||||||||||||||||
| Operating income |
$ | 4,365 | 1.0 | % | $ | (11,607 | ) | (72.7 | )% | $ | 15,972 | 4.4 | % | |||||||||||
Through the third quarter of fiscal 2021, we lowered overall staffing and temporarily furloughed employees to achieve lower operating costs to align with the uncertainties faced at that time created by the COVID-19 pandemic. Since the beginning of fiscal 2022, we have adjusted our staffing levels to current and expected future business activity levels.
General and administrative expenses for the nine months ended January 29, 2022 increased as compared to the same period one year ago primarily due to increases in personnel related expenses.
Product design and development expenses in the nine months ended January 29, 2022 stayed relatively steady as compared to the same period one year ago.
Operating income was lower than the previous year due to a lower contribution margin and an increase in personnel expense to match the increase in orders discussed above.
Other Income and Expenses
| Nine Months Ended |
||||||||||||||||||||||||
| January 29, 2022 |
January 30, 2021 |
|||||||||||||||||||||||
| As a Percent |
Dollar |
Percent |
As a Percent |
|||||||||||||||||||||
| (in thousands) |
Amount |
of Net Sales |
Change |
Change |
Amount |
of Net Sales |
||||||||||||||||||
| Interest (expense) income, net |
$ | 134 | 0.0 | % | $ | 180 | (391.3 | )% | $ | (46 | ) | (0.0 | )% | |||||||||||
| Other (expense) income, net |
$ | (2,613 | ) | (0.6 | )% | $ | (236 | ) | 9.9 | % | $ | (2,377 | ) | (0.7 | )% | |||||||||
Interest (expense) income, net: The change in interest income and expense, net for the nine months ended January 29, 2022 compared to the same period one year ago was primarily due to the reduction of interest expense, as we have no outstanding drawings on the line of credit this year as compared to $15.0 million last year.
Other (expense) income, net: The change in other income and expense, net for the nine months ended January 29, 2022 as compared to the same period one year ago was primarily due to losses recorded for equity method affiliates and foreign currency volatility.
Income Taxes
We have recorded an effective tax rate of 9.4 percent for the nine months ended January 29, 2022, as compared to an effective tax rate of 21.3 percent for the nine months ended January 30, 2021. The difference in tax rates is primarily driven by an increase in permanent tax costs such as BEAT and GILTI proportionate to a decrease in estimated pre-tax earnings in the third quarter of fiscal 2022 compared to no change in the estimated tax rate from the second quarter to the third quarter of fiscal 2021. Additionally, a return to provision expense was recorded for the third quarter impacting the overall effective rate compared to a return to provision benefit recorded in fiscal 2021.
LIQUIDITY AND CAPITAL RESOURCES
| Nine Months Ended |
||||||||||||
| January 29, |
January 30, |
Dollar |
||||||||||
| (in thousands) |
2022 |
2021 |
Change |
|||||||||
| Net cash (used in) provided by: |
||||||||||||
| Operating activities |
$ | (25,464 | ) | $ | 48,221 | $ | (73,685 | ) | ||||
| Investing activities |
(19,926 | ) | (6,811 | ) | (13,115 | ) | ||||||
| Financing activities |
(3,391 | ) | (556 | ) | (2,835 | ) | ||||||
| Effect of exchange rate changes on cash |
98 | (505 | ) | 603 | ||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash |
$ | (48,683 | ) | $ | 40,349 | $ | (89,032 | ) | ||||
Cash decreased by $48.7 million for the first nine months of fiscal 2022 primarily due to the use of cash for increases in accounts receivable, contract assets, and inventory required to support the increased order volume and holding more inventory as a strategy during this time of supply chain disruptions. The decrease in cash was also due to investing in capital assets for increased capacity, loans to affiliates, purchase of marketable securities, and purchase of shares through the share repurchase program. Cash increased by $40.3 million in the first nine months of fiscal 2021 because of cash conservation measures during the pandemic, including: reductions in operating asset levels, decreases in capital expenditures, and the suspension of our dividend and share repurchase program.
Net cash (used in) provided by operating activities: Net cash used in operating activities was $25.5 million for the first nine months of fiscal 2022 compared to net cash provided by operating activities of $48.2 million in the first nine months of fiscal 2021. The $73.7 million difference between net cash used in fiscal 2022 compared to net cash provided in fiscal 2021 by operating activities was primarily the result of changes in net operating assets and liabilities.
The changes in net operating assets and liabilities consisted of the following:
| Nine Months Ended |
||||||||
| January 29, |
January 30, |
|||||||
| 2022 |
2021 |
|||||||
| (Increase) decrease: |
||||||||
| Accounts receivable |
$ | (29,015 | ) | $ | 9,089 | |||
| Long-term receivables |
205 | 2,318 | ||||||
| Inventories |
(37,116 | ) | 15,757 | |||||
| Contract assets |
(7,534 | ) | 5,558 | |||||
| Prepaid expenses and other current assets |
(5,465 | ) | 2,342 | |||||
| Income tax receivables |
(1,696 | ) | 492 | |||||
| Investment in affiliates and other assets |
(29 | ) | 594 | |||||
| Increase (decrease): |
||||||||
| Accounts payable |
21,429 | (14,355 | ) | |||||
| Contract liabilities |
15,781 | 1,480 | ||||||
| Accrued expenses |
3,177 | (7,557 | ) | |||||
| Warranty obligations |
916 | 998 | ||||||
| Long-term warranty obligations |
298 | (166 | ) | |||||
| Income taxes payable |
(239 | ) | 1,185 | |||||
| Long-term marketing obligations and other payables |
(1,712 | ) | 2,380 | |||||
| $ | (41,000 | ) | $ | 20,115 | ||||
Net cash used in investing activities: Net cash used in investing activities totaled $19.9 million in the first nine months of fiscal 2022 compared to net cash used in investing activities of $6.8 million in the first nine months of fiscal 2021. Purchases of property and equipment totaled $10.0 million in the first nine months of fiscal 2022 compared to $6.9 million in the first nine months of fiscal 2021. We used $4.0 million for purchases of marketable securities in the first nine months of fiscal 2022 as compared to $1.0 million proceeds from sales or maturities of marketable securities in the first nine months of fiscal 2021. Purchases of and loans to affiliates accounted for by the equity investment method totaled $6.7 million in the first nine months of fiscal 2022 as compared to $1.3 million in the first nine months of fiscal 2021.
Net cash used in financing activities: Net cash used in financing activities was $3.4 million for the nine months ended January 29, 2022 compared to $0.6 million in the same period one year ago primarily due to payments for shares repurchased.
Other Liquidity and Capital Resources Discussion: The timing and amounts of working capital changes, dividend payments, stock repurchases, and capital spending impact our liquidity.
Working capital was $113.9 million and $118.4 million as of January 29, 2022 and May 1, 2021, respectively. The changes in working capital, particularly changes in accounts receivable, accounts payable, inventory, contract assets and liabilities, and the sports market and construction seasonality can have a significant impact on the amount of net cash provided by operating activities largely due to the timing of payments and receipts. On multimillion-dollar orders, the time between order acceptance and project completion may extend up to or exceed 12 months depending on the amount of custom work and a customer’s delivery needs. We often receive down payments or progress payments on these orders. We expect to use cash in operations as our business returns and exceeds pre-pandemic levels.
We had $8.9 million of retainage on long-term contracts included in receivables and contract assets as of January 29, 2022, which has an impact on our liquidity. We expect to collect these amounts within one year. We have historically financed our cash needs through a combination of cash flow from operations and borrowings under bank credit agreements.
The Board of Directors suspended dividends and share repurchases during fiscal 2020 as part of our cash conservations measures through the pandemic. The timing of the future reinstatement of dividends is at the discretion of the Board of Directors. Future dividends are also impacted by the limitations imposed in our credit facility, as further described in "Note 7. Financing Agreements" in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021. The share repurchase program was reinstated on December 2, 2021.
Shares may be repurchased from time to time in open market purchases, private transactions or other transactions. The timing, volume and nature of share repurchases will be at the sole discretion of management and will be dependent on market conditions, applicable securities laws and other factors, and may be suspended or discontinued at any time. During the nine months ended January 29, 2022, we repurchased 600 shares of common stock at a total cost of $3,000.
We are sometimes required to obtain bank guarantees or other financial instruments for display installations and utilize a global bank to provide such instruments. If we are unable to complete the installation work, our customer would draw on the banking arrangement, and the bank would subrogate its loss to Daktronics' restricted cash accounts. As of January 29, 2022, we had $0.7 million of such instruments outstanding.
We are sometimes required to obtain performance bonds for display installations, and we have a bonding line available through a surety company for an aggregate of $150.0 million in bonded work outstanding. If we were unable to complete the installation work, and our customer would call upon the bond for payment, the surety company would subrogate its loss to Daktronics. As of January 29, 2022, we had $39.2 million of bonded work outstanding against this line.
Our business growth and profitability improvement strategies depend on investments in capital expenditures and strategic investments. We are projecting total capital expenditures to be approximately $25 million for fiscal 2022. Projected capital expenditures include manufacturing equipment for new or enhanced product production, expanded capacity, investments in quality and reliability equipment, demonstration and showroom assets, and continued information infrastructure investments. We also evaluate and may make strategic investments in new technologies, in our affiliates, or acquire companies aligned with our business strategy.
We believe the audiovisual industry fundamentals will drive long-term growth for our business; however, for the near-term outlook, we expect our customers may continue to have disruptions and may continue to reduce or increase their spend on audiovisual systems and related services as they work through the economic and business implications of COVID-19, supply chain challenges, and emerging war and geopolitical situations. Ongoing supply chain disruptions and inflationary challenges in materials, freight and personnel related costs also impact our profitability and cash flows. We have increased pricing when we are able in effort to offset the increase in input costs.
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. In addition, we are planning additional capital spending to grow our manufacturing capacity. We anticipate needing to utilize a portion of our line of credit which expires in November 2022, and there can be no assurances that we will be successful in renewing the line of credit with sufficient capacity or that we will otherwise be able to obtain sufficient cash. However, based on our initial discussions with lenders and other alternatives we have available to us, such as increasing prices of our goods and services, reducing operating expenses, negotiating longer payment terms to our suppliers, reducing capital expenditures and obtaining other forms of debt or equity financing, we believe it is probable our existing cash balances and future actions will be sufficient to fund our normal business operations over the next twelve months from the date of this Report.
Significant Accounting Policies and Estimates
We describe our significant accounting policies in "Note 1. Nature of Business and Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021. We discuss our critical accounting estimates in "Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021. There have been no material changes in our significant accounting policies or critical accounting estimates since the end of fiscal 2021.
New Accounting Pronouncements
For a summary of recently issued accounting pronouncements and the effects of those pronouncements on our financial results, refer to "Note 1. Basis of Presentation" of the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Report.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain interest rate, foreign currency, and commodity risks as disclosed in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021. There have been no material changes in our exposure to these risks during the first nine months of fiscal 2022.
Item 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as of January 29, 2022, which is the end of the period covered by this Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of January 29, 2022, our disclosure controls and procedures were effective.
Based on the evaluation described in the foregoing paragraph, our Chief Executive Officer and Chief Financial Officer concluded that during the quarter ended January 29, 2022, there was no change in our internal control over financial reporting which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Not applicable.
The discussion of our business and operations included in this Quarterly Report on Form 10-Q should be read together with the risk factors described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended May 1, 2021. They describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties, together with other factors described elsewhere in this Report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. New risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect our financial condition or financial results.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Share Repurchases
The following table provides information about share repurchases of common stock during the third quarter of fiscal 2022 there were no share repurchases during the first two quarters of fiscal 2022:
| Period |
Total number of shares purchased |
Average price paid per share (including fees) |
Total number of shares purchased as part of publicly announces plans or programs |
Approximate dollar value of shares may yet be purchased under the share repurchase program (1) |
||||||||||||
| May 2, 2021 - November 27, 2021 |
— | — | — | $ | 32,539,076 | |||||||||||
| November 28, 2021 - December 25, 2021 |
413,055 | $ | 5.04 | 413,055 | 30,457,171 | |||||||||||
| December 26, 2021 - January 29, 2022 |
187,070 | $ | 4.91 | 187,070 | 29,539,079 | |||||||||||
| Total |
600,125 | 600,125 | ||||||||||||||
(1) The share repurchases described in the above table were made pursuant to the $40.0 million share repurchase program authorized by the Board of Directors on June 17, 2016 and reinstated on December 2, 2021.
Repurchases of shares are treated as dividends under the South Dakota Business Corporation Act (which is codified as Chapter 47-1A to the South Dakota statutes), our repurchases of shares could be affected by the limitations imposed on dividends in our credit facility, as further described in "Note 7. Financing Agreements" in our Annual Report on Form 10-K for the fiscal year ended May 1, 2021.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Not applicable.
A list of exhibits required to be filed as part of this report is set forth in the Index of Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference.
Certain of the following exhibits are incorporated by reference from prior filings. The form with which each exhibit was filed and the date of filing are as indicated below; the reports described below are filed as Commission File No. 0-23246 unless otherwise indicated.
| 4.2 | First Amendment to Rights Agreement dated as of November 19, 2021 between Daktronics, Inc. and Equiniti Trust Company, as Rights Agent (Incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K of Daktronics, Inc. filed on November 19, 2021). | |
| 10.5 | Fourth Amendment to Credit Agreement dated as of March 11, 2021 by and between the Company and U.S. Bank National Association (Incorporated by reference to Exhibit 10.5 filed with our Annual Report on Form 10-K on June 11, 2021). | |
| 101.INS |
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
|
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
| (1) |
Filed herewith electronically. |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| /s/ Sheila M. Anderson |
||
| Daktronics, Inc. |
||
| Sheila M. Anderson |
||
| Chief Financial Officer |
||
| (Principal Financial Officer and |
||
| Principal Accounting Officer) |
||
| Date: |
March 10, 2022 |