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.