New Daktronics Financials Suggest Business Viability Issue In Rear-View Mirror

March 9, 2023 by Dave Haynes

LED display manufacturer Daktronics appears to have got past supply chain and cash flow challenges that forced the company late last year to note in SEC filings that its business viability was in question.

The SEC filings in December caused shares on the NASDAQ to plummet, and forced the company to delay its earnings release.

Now the South Dakota-based company has pushed out its fiscal 2023 third quarter results, which show a jump of 32.5% sales year on year and gross profits of 22.6% However, the company now has a product order backlog valued at $429 million. There is also no mention of the “going concern” thing that raised alarm bells among investors and the display business.

“I am grateful to our customers who continue to turn to Daktronics for our industry leading products and systems, despite the unusually long lead times caused by supply chain constraints over the last two years. At the same time, I am proud of how our employees delivered for our customers while facing historically high demand and an unprecedented operating environment,” says Reece Kurtenbach, the CEO and President. “Our deliberate actions to carefully align our production planning, inventory, and labor force to our strong customer demand are proving successful, as evidenced by our record sales and improved gross profit margins, operating income and cash flow during the third quarter. As we disclosed at the end of the last reported quarter, we have a robust order pipeline and backlog and improving revenue conversion.”

The Q3 FY2023 financial highlights:

• Record third quarter net sales of $185.0 million, a 32.5 percent increase from the third quarter of fiscal 2022
• Product order backlog was $429.1 million compared to backlog of $353.3 million in the year-earlier period
• Gross profit as a percentage of net sales improved from 16.0 percent to 22.6 percent compared to prior year
• Operating income was $7.1 million and adjusted operating income was $11.7 million, versus an adjusted operating loss of $5.7 million in the third quarter of fiscal 2022
• Overall margin improvements were driven by:
  • Strategic pricing increases;
  • Improved supply chain, production and inventory management; and
  • Programs to improve company-wide expense management.

Business and Liquidity Improvement Update
During the quarter we made significant progress across all initiatives of our liquidity enhancement program. We improved our financial flexibility with the extension of a $10.0 million maturity on our credit facility and adjustments to generate more cash and increase profits. Our ability to reduce order cycle times was aided by the easing of pandemic-related supply chain disruptions, enabling us to work through our built-up inventory, which we expect will return to more normalized levels over the next year.

Over the course of the quarter, we made several important business improvements including:

• Adjustments to pricing and product mix to improve gross margins;
• Working capital improvements through accelerated accounts receivables collections;
• Increases to production capacity and improvements to operational efficiency;
• Careful management of expenses while prioritizing high-return investments into the business, including hiring production and customer service staff to support our growth; and
• Taking decisive measures to ensure the Company has the financial flexibility needed to meet continued strong customer demand.

The Board’s independent Strategy and Financing Review Committee retained financial advisors to help examine the Company’s long-term capital requirements and is currently working with management to evaluate financing alternatives. Resolving any concern about the Company’s capital position remains a priority.

Outlook
We expect the markets for the advanced technology and systems we design, engineer, manufacture and service to grow over the long-term. Technology trends and our customers’ desire to inform, entertain, and persuade consumers through the dynamic displays and control software we offer will continue to drive demand for our products. In the near-term, we believe our increased production capacity and stability of operations will enable us to efficiently convert our backlog to sales while shrinking our production lead times, giving us a better opportunity to capture additional market share. We continue to intensely monitor our production capabilities, inflation’s impact on material prices and labor, and supply conditions in the ever-evolving geopolitical and global economic environment to ensure we quickly adjust our resources and product pricing to expand our margins and increase our profitability.