DAKTRONICS, INC. FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (including exhibits and any information incorporated by reference herein) contains both historical and forward-looking statements that involve risks, uncertainties and assumptions. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21B of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for the future. These statements appear in a number of places in this Report and include all statements that are not historical statements of fact regarding the intent, belief or current expectations with respect to, among other things: (i.) our competition; (ii.) our financing plans and ability to maintain adequate liquidity; (iii.) trends affecting our financial condition or results of operations; (iv.) our growth and operating strategies; (v.) the declaration and payment of dividends; (vi.) the timing and magnitude of future contracts; (vii.) raw material shortages and lead times; (viii.) fluctuations in margins; (ix.) the seasonality of our business; (x.) the introduction of new products and technology; (xi.) the amount and frequency of warranty claims; (xii.) our ability to manage the impact that new or adjusted tariffs may have on the cost of raw materials and components and our ability to sell product internationally; (xiii.) the resolution of litigation contingencies; (xiv.) the timing and magnitude of any acquisitions or dispositions; (xv.) the impact of governmental laws, regulations, and orders, including as a result of the COVID-19 pandemic caused by the coronavirus; and (xvi.) disruptions to our business caused by geopolitical events, military actions, work stoppages, natural disasters, or international health emergencies, such as the COVID-19 pandemic. The words "may," "would," "could," "should," "will," "expect," "estimate," "anticipate," "believe," "intend," "plan" and similar expressions and variations thereof are intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond our ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein, including those discussed in our filings with theSecurities and Exchange Commission , including our Annual Report on Form 10-K for the fiscal year endedMay 2, 2020 in the section entitled "Part I, Item 1A. Risk Factors" and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," and those factors discussed in detail in our other filings with theSecurities and Exchange Commission . The following discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles inthe United States ("GAAP"). This discussion should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements included in this Report. The preparation of these condensed financial statements requires us to make estimates and judgments affecting the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate our estimates, including those related to total costs on long-term construction-type contracts, costs to be incurred for product warranties and extended maintenance contracts, bad debts, excess and obsolete inventory, income taxes, share-based compensation, goodwill impairment and contingencies. Our estimates are based on historical experience and on various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates. 19
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Table of contents OVERVIEW We design, manufacture and sell a wide range of display systems to customers throughout the world. 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 ofthe United States andCanada . Disclosures related to our business segments are provided in "Note 5. Segment Reporting" of the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Report. Our net sales and profitability historically have fluctuated due to the impact of uniquely configured orders, such as display systems for professional sports facilities, colleges and universities, and spectacular projects in the commercial area, as well as the seasonality of the sports market. Uniquely configured orders can include several displays, controllers, and subcontracted structure builds, each of which can occur on varied schedules per the customer's needs. Our third fiscal quarter sales and profit levels are lighter than other quarters due to the seasonality of our sports business, construction cycles, and the reduced number of production days due to holidays in the quarter. Our gross margins tend to fluctuate more on uniquely configured orders than on limited configured orders. Uniquely configured orders involving competitive bidding and substantial subcontracting work for product installation generally have lower gross margins. Although we follow the over time method of recognizing revenues for uniquely configured orders, we nevertheless have experienced fluctuations in operating results and expect our future results of operations will be subject to similar fluctuations. Our remaining performance obligations ("backlog") consist of contractually binding sales agreements or purchase orders for integrated electronic display systems and related products and service. Orders are included in backlog when we are in receipt of an executed contract and any required deposits or security. As a result, 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. Backlog can fluctuate due to large order bookings and the timing and seasonality of net sales. Because order backlog fluctuates and may be subject to extended delivery schedules, orders may be canceled and have varied estimated profitability. Our backlog is not necessarily indicative of future net sales or net income. Backlog is not a measure defined by GAAP, and our methodology for determining backlog may vary from the methodology used by other companies in determining their backlog amounts.
GENERAL
Our mission is to be the world leader at informing and entertaining audiences through dynamic audio-visual communication systems. We organize into business units to focus on customer loyalty over time to earn new and replacement business because our products have a finite lifetime. See "Note 5. Segment Reporting" of the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Report for further information. Our strategies include the creation of a comprehensive line of innovative solutions and systems and our ability to create and leverage platform designs and technologies. These strategies align us to effectively deliver value to our varied customers and their market needs, while serving our stakeholders over the long-term. We focus on creating local capabilities for sales, service, and manufacturing in geographies with expected digital market opportunities. We believe consistently generating profitable growth will provide value to our stakeholders (customers, employees, shareholders, suppliers, and communities).
We measure our success using a variety of measures including: • our percentage of market share by comparing our estimated revenue to the
total estimated global digital display revenue,
• our order growth compared to the overall digital market order change,
• financial metrics such as annual order volume and profit change as
compared to our previous financial results,
• customer retention and expansion rates, and
• our ability to generate profits over the long-term to provide a
shareholder return.
Certain factors impact our ability to succeed in these strategies and impact our
business units to varying degrees. For example, the overall cost to manufacture
and the selling prices of our products have decreased over the years and are
expected to continue to decrease in the future. Our competitors outside the U.S.
are impacted differently by the global trade environment allowing them to avoid
tariff costs or reduce prices. As a result, additional competitors have entered
the market, and each year we must sell more product to generate the same or
greater level of net sales as in previous fiscal years. However, the decline of
digital solution pricing over the years and increased user adoption and
applications have increased the size of the global market.
Competitor offerings, actions and reactions also can vary and change over time
or in certain customer situations. Projects with multimillion-dollar revenue
potential attracts competition, and competitors can use marketing or other
tactics to win business.
Each business unit's long-term performance can be impacted by economic
conditions in different ways and to different degrees. The effects of an adverse
economy are generally less severe on our sports related business as compared to
our other businesses, although in
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severe economic downturns with social changes causing decreases in sporting event revenues, the sports business can also be seriously impacted.
Outlook: The COVID-19 pandemic has created disruptions since its initial
outbreak, first impacting our
Throughout the first quarter of fiscal 2021, employees are working from home where possible, and we have limited travel for the time being. When unable to work safely or within the various regulations in certain geographies and locations and because demand decreased, our sales, manufacturing and field service teams have reduced capacity and furloughed employees. Our sales teams have continued to engage our customers to promote our value, mostly virtually, across our diverse markets and geographies. However, our customers reduced their spend on audio-visual systems and related services during the first quarter as they work through the economic and business implications of COVID-19. We took corresponding actions to reduce all operating expenses to align with expected order and sales declines expected through the year. These expense reductions vary in permanency and may change throughout the fiscal year.
Our supply chain team has remained alert to potential short supply situations and shipping disruptions, and, if necessary, we are utilizing alternative sources and shipping methods.
We expect the COVID-19 pandemic to have an adverse impact on our revenue and our results of operations, the size and duration of which we are currently unable to predict. The global impact of COVID-19 continues to rapidly evolve. The extent to which COVID-19 will impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate severity and spread of the disease, the duration of the pandemic, travel restrictions and social distancing requirements inthe United States and other countries, the pace and extent of the economic recovery, and any change in trends and practices in how people gather. Given the speed and frequency of continuously evolving developments with respect to this pandemic, we cannot reasonably estimate the magnitude of the impact to our business. As we continue through fiscal 2021, our operating results are going to be challenged due this crisis. We continue to manage our cost structure to meet the uncertain demand, while taking additional cost reductions actions as needed. Our customers' businesses are subject to the fluctuations in global economic cycles and conditions and other business risk factors which may impact their ability to operate their businesses. The performance and financial condition of our customers may cause us to alter our business terms or to cease doing business with a particular customer. Further, the potential impact of the COVID-19 pandemic on their businesses could adversely impact our customers' ability to pay us for work performed and increase our future estimate of credit losses.
In addition to the COVID-19 impacts noted above, the outlook and unique key growth drivers and challenges by our business units include:
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Commercial Business Unit: In the near-term, our customerswho rely on advertising revenues for Out-of-Home ("OOH") advertising orwho are reliant on customer foot-traffic to drive sales have been adversely impacted by stay-at-home or quarantine orders which started inMarch 2020 with varied or no published expiration. These customers are expected to delay their discretionary capital spending through the COVID-19 economic recovery. Business using our displays for self-promotion or on-premise advertising may have reduced budgets for the foreseeable future or choose to utilize displays as part of their recovery, both actions creating an impact to the Commercial near-term outlook. We cannot reasonably estimate the magnitude or length of time our Commercial business will be adversely impacted.
Over the long-term, we believe growth in the Commercial business unit will result from a number of factors, including:
• Standard display product market growth due to market adoption and lower
product costs, which drive marketplace expansion. Standard display
products are used to attract or communicate with customers and potential
customers of retail, commercial, and other establishments. Pricing and
economic conditions are the principal factors that impact our success in
this business unit. We utilize a reseller network to distribute our
standard products.
• National accounts standard display market opportunities due to customers'
desire to communicate their message, advertising and content consistently
across the country. Increased demand is possible from national retailers,
quick serve restaurants, petroleum retailers, and other nationwide
organizations.
• Additional standard display offerings using micro-light emitting diode
("LED") designs.
• Increasing use of LED technologies replacing signage previously usingliquid crystal display ("LCD") technology by existing and new customers.
• Increasing interest in spectaculars, which include very large and
sometimes highly customized displays as part of entertainment venues such
as casinos, shopping centers, cruise ships and Times Square type
locations.
• Dynamic messaging systems demand growth due to market adoption and
expanded use of this technology.
• The use of architectural lighting products for commercial buildings, which
real estate owners use to add accents or effects to an entire side or
circumference of a building to communicate messages or to decorate the
building.
• The continued deployment of digital billboards as OOH advertisingcompanies continue developing new sites and replacing digital billboards
reaching end of life. This is dependent on no adverse changes occurring in
the digital billboard regulatory environment restricting future billboard
deployments, as well as maintaining our current market share in a business
that is concentrated in a few large OOH companies.
• Replacement cycles within each of these areas.
Live Events Business Unit: In the near-term, our customers
Over the long-term, we believe growth in the Live Events business unit will result from a number of factors, including:
• Facilities spending more on larger display systems to enhance the game-day
and event experience for attendees.
• Lower product costs, driving an expansion of the marketplace.
• Our product and service offerings, including additional micro-LED
offerings which remain the most integrated and comprehensive offerings in
the industry.
• The competitive nature of sports teams, which strive to out-perform their
competitors with display systems.
• The desire for high-definition video displays, which typically drives
larger displays or higher resolution displays, both of which increase the
average transaction size.
• Dynamic messaging system needs throughout a sports facility.
• Increasing use of LED technologies replacing signage previously using LCD
technology in and surrounding live events facilities.
• Replacement cycles within each of these areas.
High School Park and Recreation Business Unit: In the near-term, our customerswho rely on advertising revenue for sports installations orwho may be impacted by governmental tax revenue availability may choose to delay spending on projects because of the COVID-19 pandemic.
Over the long-term, we believe growth in the
• Increased demand for video systems in high schools as school districts
realize the revenue generating potential of these displays compared to
traditional scoreboards and these systems' ability to provide or enhance
academic curriculum offerings for students.
• Increased demand for different types of displays and dynamic messaging
systems, such as message centers at schools to communicate to students,
parents and the broader community.
• Lower system costs driving the use of more sophisticated displays in
school athletic facilities, such as large integrated video systems.
• Expanding control system options tailored for the markets' needs.
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Transportation Business Unit: In the near term, customers in the mass-transit and airport part of the market are expected to delay spending as a result of the limited use of this infrastructure during the COVID-19 pandemic. In the long-term, roadway projects may be impacted due to reduced tax revenues. That impact will increase as the duration of the reduction in infrastructure usage continues. Over the long-term, we believe growth in the Transportation business unit will result from increasing applications and acceptance of electronic displays to manage transportation systems, including roadway, airport, parking, transit and other applications. Effective use ofthe United States transportation infrastructure requires intelligent transportation systems. This growth is highly dependent on government spending, primarily by state and federal governments, along with the continuing acceptance of private/public partnerships as an alternative funding source. Growth is also expected in dynamic messaging systems for advertising and wayfinding use in public transport and airport terminals due to expanded market usage and displays, with LED technology replacing prior LCD installations and additional display offerings using micro-LEDs. International Business Unit: In the near-term, our customerswho rely on advertising, retail, event revenues and governmental tax revenue availability are expected to delay spending on projects due to the COVID-19 pandemic. Changes to the ways people gather may change the long-term usage of our systems. Over the long-term, we believe growth in the International business unit will result from achieving greater penetration in various geographies and building products more suited to individual markets. We continue to broaden our product offerings into the transportation segment inEurope and theMiddle East . We also focus on sports facility, spectacular-type, OOH advertising products, and architectural lighting market opportunities and the factors listed in each of the other business units to the extent they apply outside ofthe United States andCanada . Additional opportunities exist with expanded market usage of LED technology due to price considerations, usage of LED technology replacing prior LCD installations and additional display offerings using micro-LEDs.
RESULTS OF OPERATIONS
Daktronics, Inc. operates on a 52- or 53-week fiscal year, with our fiscal year ending on the Saturday closest toApril 30 of each year. WhenApril 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 fiscal year endedMay 1, 2021 will consist of 52 weeks and the fiscal year endedMay 2, 2020 was a 53-week year; therefore, the three months endedAugust 1, 2020 contains operating results for 13 weeks while the three months endedAugust 3, 2019 contains operating results for 14 weeks.
COMPARISON OF THE THREE MONTHS ENDED
Net Sales Three Months Ended August 1, August 3, (in thousands) 2020 2019 Dollar Change Percent Change Net sales: Commercial$ 34,506 $ 44,035 $ (9,529 ) (21.6 )% Live Events 51,474 59,306 (7,832 ) (13.2 ) High School Park and Recreation 28,943 30,465 (1,522 ) (5.0 ) Transportation 14,498 19,018 (4,520 ) (23.8 ) International 14,223 27,432 (13,209 ) (48.2 )$ 143,644 $ 180,256 $ (36,612 ) (20.3 )% Orders: Commercial$ 25,533 $ 38,648 $ (13,115 ) (33.9 )% Live Events 41,860 66,969 (25,109 ) (37.5 ) High School Park and Recreation 28,099 30,552 (2,453 ) (8.0 ) Transportation 13,089 22,215 (9,126 ) (41.1 ) International 13,572 29,079 (15,507 ) (53.3 )$ 122,153 $ 187,463 $ (65,310 ) (34.8 )% Sales and orders in all business units were impacted as a result of the economic downturn caused by the COVID-19 pandemic as well as the three months endedAugust 3, 2019 included 14 weeks compared to the more common 13 weeks. The three months endedAugust 1, 2020 contained 13 weeks. 23
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For net sales, during the first three months endedAugust 1, 2020 , we achieved a$11.1 million per week average run rate as compared to$12.9 million per week during the first three months endedAugust 3, 2019 , or an approximate 14% decrease. The change in sales primarily relates to fluctuations in the timing of order bookings, and related conversion to sales. For orders, during the first three months endedAugust 1, 2020 , we achieved a$9.4 million per week average run rate as compared to$13.4 million per week during the first three months endedAugust 3, 2019 , or an approximate 30% decrease. The change in orders primarily relates to timing of large contract orders which cause lumpiness, and due to lower market activity in light of the COVID-19 pandemic. Product Order Backlog The product order backlog as ofAugust 1, 2020 was$192 million as compared to$207 million as ofAugust 3, 2019 and$212 million at the end of the fourth quarter of fiscal 2020. Historically, our product order backlog varies due to the seasonality of our business, the timing of large projects, and customer delivery schedules for these orders. The product order backlog as ofAugust 1, 2020 increased in theHigh School Park and Recreation and Transportation business units and decreased in the Commercial, Live Events, and International business units fromAugust 3, 2019 . Gross Profit Three Months Ended August 1, 2020 August 3, 2019 As a Percent As a Percent (in thousands) Amount of Net Sales Amount of Net Sales Commercial$ 7,742 22.4 %$ 9,218 20.9 % Live Events 9,354 18.2 12,737 21.5 High School Park and Recreation 10,476 36.2 10,187 33.4 Transportation 5,143 35.5 6,754 35.5 International 3,046 21.4 6,609 24.1$ 35,761 24.9 %$ 45,505 25.2 % Gross profit is net sales less cost of sales. Cost of sales consists primarily of inventory, logistics related costs including tariffs and duties, consumables, salaries, other employee-related costs, facilities-related costs for manufacturing locations, machinery and equipment maintenance and depreciation, site sub-contractors, warranty costs, and other service delivery expenses. The decrease in our gross profit percentage for the three months endedAugust 1, 2020 compared to the same period one year ago was mostly related to lower sales volumes over relatively fixed infrastructure costs. We continued to see the global spread of the coronavirus pandemic (COVID-19) impact order volumes and took various steps to solidify our financial position and reduce expenses. During the first quarter of fiscal 2021, we completed a special voluntary retirement and voluntary exit offering with 60 employees and we conducted a reduction in force of 108 employees to adjust our capacity and reduce on-going expenses due to the uncertainties created by the COVID-19 pandemic. The approximate cost of these programs included in the "Costs of sales" line item in our condensed consolidated statements of operations was$1.2 million , which was offset by$0.6 million of governmental wage subsidies. We earned a higher rate of gross profit on our service agreements due to reduced stand ready services conducted during the quarter. This was due to lower on-site demand as events were not being held. We believe this higher gross profit level will not be sustained in future quarters. Total warranty as a percent of sales for the three months endedAugust 1, 2020 compared to the same period one year ago remained relatively flat. The following describes the overall impact by business unit for the three months endedAugust 1, 2020 compared to the same period one year ago: The gross profit percent increased in theHigh School Park and Recreation business unit primarily due to product mix, which was partially offset by lower sales volumes over relatively fixed infrastructure costs. The gross profit percent increased in the Commercial business unit primarily due to lower warranty expense and product mix. The gross profit percent decreased in the Live Events business unit primarily due to lower sales volumes over relatively fixed infrastructure costs, which was partially offset by lower warranty expense. The gross profit percent decreased in the International business unit primarily due to higher warranty expense and lower sales volumes over relatively fixed infrastructure costs, which was partially offset by governmental wage subsidy. The gross profit percent remained relatively flat in the Transportation business unit compared to the same period one year ago. 24
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Contribution Margin
Three Months Ended
August 1, 2020 August 3, 2019
As a Percent As a Percent
(in thousands) Amount of Net Sales Percent Change Amount of Net Sales
Commercial $ 4,441 12.9 % 8.7 % $ 4,084 9.3 %
Live Events 7,138 13.9 (19.5 ) 8,872 15.0
High School Park and Recreation 7,915 27.3 20.1 6,592 21.6
Transportation 4,381 30.2 (19.6 ) 5,452 28.7
International 330 2.3 (85.1 ) 2,208 8.0
$ 24,205 16.9 % (11.0 )% $ 27,208 15.1 %
Contribution margin consists of gross profit less selling expenses. Selling
expenses consist primarily of salaries, other employee-related costs, travel and
entertainment expenses, facility-related costs for sales and service offices,
bad debt expenses, third-party commissions and expenditures for marketing
efforts, including the costs of collateral materials, conventions and trade
shows, product demonstrations, customer relationship management systems, and
supplies.
All areas of selling expenses were impacted as a result of the economic downturn
caused by the COVID-19 pandemic as well as the three months ended August 3, 2019
included 14 weeks compared to the more common 13 weeks. The three months ended
August 1, 2020 contained 13 weeks. Contribution margin is impacted by the
previously discussed sales and gross margin for each business unit. Each
business unit's contribution margin was impacted by a decrease in selling
expenses in the first quarter of fiscal 2021 compared to the same quarter a year
ago due to a decrease in personnel related expenses offset by severance costs
for reductions in force, as well as reductions in travel and entertainment and
in marketing and convention related expenses.
Other Operating Expenses
Three Months Ended
August 1, 2020 August 3, 2019
As a As a
Percent of Percent of
(in thousands) Amount Net Sales Percent Change Amount Net Sales
General and administrative $ 7,124 5.0 % (21.7 )% $ 9,093 5.0 %
Product design and development $ 7,532 5.2 % (28.3 )%
All areas of operating expenses were impacted as a result of the economic
downturn caused by the COVID-19 pandemic as well as the three months ended
General and administrative expenses consist primarily of salaries, other employee-related costs, professional fees, shareholder relations costs, facilities and equipment-related costs for administrative departments, training costs, and the cost of supplies.
General and administrative expenses in the first quarter of fiscal 2021 decreased as compared to the same period one year ago primarily due to a decrease in personnel related expenses offset by severance costs for reductions in force.
Product design and development expenses consist primarily of salaries, other
employee-related costs, professional services, facilities costs and
equipment-related costs and supplies. Product design and development investments
in the near term are focused on developing or improving our video technology
over a wide range of pixel pitches for both indoor and outdoor applications.
These new or improved technologies are focused on varied pixel density for image
quality and use, expanded product line offerings for our various markets and
geographies, improved quality and reliability, and improved cost points. We plan
to make continued investments in our software and controller capabilities
throughout our various product offerings. Through our design efforts, we focus
on standardizing display components and control systems for both single site and
network displays.
Our costs for product design and development represent an allocated amount of
costs based on time charges, professional services, material costs and the
overhead of our engineering departments. Generally, a significant portion of our
engineering time is spent on product design and development, while the rest is
allocated to large contract work and included in cost of sales.
Product design and development expenses in the first quarter of fiscal 2021
decreased as compared to the same period one year ago primarily due to decreased
labor costs and professional services assigned to product design and development
projects as a result of our response to COVID-19.
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Other Income and Expenses
Three Months Ended
August 1, 2020 August 3, 2019
As a As a
Percent of Percent of(in thousands) Amount Net Sales Percent Change Amount Net Sales Interest income, net$ 12 - % (94.9 )%$ 234 0.1 % Other (expense) income, net$ (627 ) (0.4 )% (424.9 )%$ 193 0.1 % Interest income, net: We generate interest income through short-term cash investments, marketable securities, and product sales on an installment basis or in exchange for the rights to sell and retain advertising revenues from displays, which result in long-term receivables. Interest expense is comprised primarily of interest costs on long-term obligations. The change in interest income, net for the first quarter of fiscal 2021 compared to the same period one year ago was primarily due to the change in investment levels caused by the volatility of working capital needs and interest payments from our existing line of credit. Other (expense) income, net: The change in other income and expense, net for the first quarter of fiscal 2021 as compared to the same period one year ago was primarily due to foreign currency volatility and the losses recorded from equity method affiliates. Income Taxes We calculate the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to "ordinary" income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. Due to various factors, including operations in multiple jurisdictions worldwide, our effective tax rate is subject to fluctuation. We have recorded an effective tax rate of 16.4 percent for the first quarter of fiscal 2021 as compared to an effective tax rate of 12.6 percent for the first quarter of fiscal 2020. The quarterly effective tax rate was primarily driven by the benefit of estimated tax credits proportionate to estimated pre-tax earnings similar to the previous period.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended
August 1, August 3,
(in thousands) 2020 2019 Percent Change
Net cash provided by (used in):
Operating activities $ 8,545 $ (18,218 ) (146.9 )%
Investing activities (3,561 ) 8,272 (143.0 )
Financing activities (210 ) (4,658 ) (95.5 )
Effect of exchange rate changes on cash (481 ) (37 ) 1,200.0
Net increase in cash, cash equivalents and
restricted cash $ 4,293 $ (14,641 ) (129.3 )%
Cash increased by
Net cash provided by (used in) operating activities: Operating cash flows
consist primarily of net income adjusted for non-cash items, including
depreciation and amortization, stock-based compensation, deferred income taxes,
and the effect of changes in operating assets and liabilities. Overall, changes
in net operating assets and liabilities can be impacted by the timing of cash
flows on large orders, which can cause significant short-term and seasonal
fluctuations in inventory, accounts receivables, accounts payable, contract
assets and liabilities, and various other operating assets and liabilities.
Variability in contract assets and liabilities relates to the timing of billings
on construction-type contracts and revenue recognition, which can vary
significantly depending on contractual payment terms and build and installation
schedules. Balances are also impacted by the seasonality of the sports market.
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Net cash provided by (used in) operating activities was$8.5 million for the first three months of fiscal 2021 compared to net cash used in operating activities of$18.2 million in the first three months of fiscal 2020. The$26.7 million increase in cash provided by operating activities from the first three months of fiscal 2020 to the first three months of fiscal 2021 was the result of changes in net operating assets and liabilities of$26.1 million ,$0.4 million increase in net income, and$0.2 million in other non-cash items. Year-to-date cash provided from operations differed as compared to last year primarily due to order volatility, which accounted for most of the changes in accounts receivable, inventory, contract assets, accounts payable, and contract liabilities as compared to last year.
The changes in operating assets and liabilities consisted of the following:
Three Months Ended
August 1, August 3,
2020 2019
(Increase) decrease:
Accounts receivable $ (15,514 ) $ (30,973 )
Long-term receivables 693 (2,298 )
Inventories 5,826 (6,763 )
Contract assets 2,378 (9,180 )
Prepaid expenses and other current assets 2,122 (1,296 )
Income tax receivables 308 52
Investment in affiliates and other assets 211 (53 )
Increase (decrease):
Accounts payable 1,240 12,535
Contract liabilities (1,095 ) 6,341
Accrued expenses (2,026 ) 206
Warranty obligations 881 158
Long-term warranty obligations 550 823
Income taxes payable 398 461
Long-term marketing obligations and other payables (243 ) (344 )
$ (4,271 ) $ (30,331 )
Net cash (used in) provided by investing activities: Net cash used in investing
activities totaled $3.6 million in the first three months of fiscal 2021
compared to net cash provided by investing activities of $8.3 million in the
first three months of fiscal 2020. We had no proceeds from sales or maturities
of marketable securities in the first three months of fiscal 2021 as compared to
$14.5 million in the first three months of fiscal 2020. Net proceeds of
marketable securities in fiscal 2020 were utilized to cover working capital
needs for changes in operating assets and liabilities described above. Purchases
of property and equipment totaled $3.2 million in the first three months of
fiscal 2021 compared to $5.9 million in the first three months of fiscal 2020.
Purchases of and loans to an equity investment totaled $0.5 million in the first
three months of fiscal 2021 as compared to $0.5 million in the first three
months of fiscal 2020.
Net cash used in financing activities: Net cash used in financing activities was
$0.2 million for the three months ended August 1, 2020 compared to $4.7 million
in the same period one year ago. Principal payments on long-term obligations for
the first three months of fiscal 2021 were $0.2 million compared to $1.2 million
during the first three months of fiscal 2020, which was mostly related to
contingent liability payments. Dividends of $2.3 million , or $0.05 per share,
paid to Daktronics shareholders during the first three months of fiscal 2020,
while there were no dividends paid during the first three months of fiscal 2021.
During the first three months of fiscal 2020, we repurchased $1.2 million of
shares as part of the $40.0 million share repurchase plan authorized by our
Board of Directors. There were no share repurchases in the first three months of
fiscal 2021. As part of our COVID-19 response, our Board of Directors has
suspended dividends and stock repurchases for the foreseeable future.
Other Liquidity and Capital Resources Discussion: The timing and amounts of working capital changes, dividend payments, stock repurchase program, and capital spending impact our liquidity.
Working capital was$118.3 million and$106.0 million atAugust 1, 2020 andMay 2, 2020 , respectively. The changes in working capital, particularly changes in accounts receivable, accounts payable, inventory, and contract assets and liabilities, and the sports market 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 or more depending on the amount of custom work and a customer's delivery needs. We often receive down payments or progress payments on these orders. 27
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We had$5.7 million of retainage on long-term contracts included in receivables and contract assets as ofAugust 1, 2020 , which has an impact on our liquidity. We expect to collect these amounts within one year. When working capital is needed, we have historically financed our cash needs through a combination of cash flow from operations and borrowings under bank credit agreements. OnNovember 15, 2019 , we entered into an amendment to extend the maturity date of our credit agreement and a related revolving bank note fromNovember 15, 2019 toNovember 15, 2022 and to modify certain other terms and financial covenants. OnAugust 28, 2020 , we entered into the third amendment to our credit agreement and a security agreement over certain assets. The third amendment adds a liquidity covenant and revises other financial covenants. The revolving amount of the agreement and note remains at$35.0 million , including up to$15.0 million for commercial and standby letters of credit. The credit agreement and amendments require us to be in compliance with certain financial ratios and other covenants and contain customary events of default, including failure to comply with covenants, failure by us to pay or discharge material judgments and taxes, bankruptcy, failure pay loans and fees, and change of control. The occurrence of an event of default would permit the lenders to terminate their commitments and accelerate loans repayment, obtain securitized assets, and require collateralization of outstanding letters of credit. As ofAugust 1, 2020 ,$15.0 million had been advanced to us under the loan portion of the line of credit, and the balance of letters of credit outstanding was approximately$6.8 million . As ofAugust 1, 2020 , we were in compliance with all applicable bank loan covenants. 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 toDaktronics . As ofAugust 1, 2020 , we had$8.0 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 toDaktronics . AtAugust 1, 2020 , we had$35.1 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 capital expenditures to be approximately$15 million for fiscal 2021. Projected capital expenditures include manufacturing equipment for new or enhanced product production, expanded capacity, investments in quality and reliability equipment, and continued information infrastructure investments. We also evaluate and may invest in new technologies or acquire companies aligned with our business strategy. We believe our working capital available from all sources will be adequate to meet the cash requirements of our operations and strategies in the foreseeable future. If our growth extends beyond current expectations, or if we make significant strategic investments, we may need to utilize and possibly increase our credit facilities or seek other means of financing. We anticipate we will be able to obtain any needed funds under commercially reasonable terms from our current lenders or other sources, although this availability cannot be guaranteed. We believe the audio-visual industry fundamentals will drive long-term growth for our business, but the near-term outlook shows contraction and greater volatility overall. We expect our customers will continue to have disruptions in revenue caused by COVID-19 throughout the current fiscal year. While it is difficult to estimate the longevity and severity of the COVID-19 pandemic impact to the economy and to our financial position, operating results, and cash flows, we have or are taking proactive steps to solidify our financial position and mitigate any adverse consequences. These steps include: • preserving liquidity by drawing down$15 million from our existing line of credit and pursuing other sources of financing; • reducing investments in capital assets; we estimate approximately$15 million in capital expenses in fiscal year 2021;
• reducing executive pay and Board member compensation;
• utilizing tax and other government opportunities to improve liquidity;
• temporarily furloughing and permanently reducing our staffing and reducing
salaries, where necessary, to maintain a right-sized skilled workforce;
• instituting other cost reductions across the business;
• suspending stock repurchases under our share repurchase program; and
• suspending dividend declarations for the foreseeable future.
We believe these measures are necessary to help preserve our ability to borrow for liquidity needs and provide adequate working capital to weather the economic downturn caused by the COVID-19 pandemic. However, no assurance can be made that we will be able to secure such financing, if needed, on favorable terms or at all, or that these strategies will be successful. We continue to carefully monitor this crisis, its impact on market demand, and our expense structure and will take additional actions as needed.
Off-Balance Sheet Arrangements and Contractual Obligations
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There has been no material change in our off-balance sheet arrangements and contractual obligations since the end of our 2020 fiscal year onMay 2, 2020 . For additional information, see our Annual Report on Form 10-K for the fiscal year endedMay 2, 2020 .
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 endedMay 2, 2020 . 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 endedMay 2, 2020 . In the first quarter of fiscal 2021, we adopted Accounting Standards Update ("ASU") 2017-04, Intangibles-Goodwill and Other (Topic 350) and ASU 2016-13, Measurement of Credit Losses on Financial Instruments, as described in "Note 1. Basis of Presentation" of the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Report. There have been no other significant changes in our significant accounting policies or critical accounting estimates since the end of fiscal 2020.
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.
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