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A $463 million backlog of new orders, including for the Clippers’ new Intuit Dome along with varied clients like the Patriots’ Gillette Stadium and N.C. State’s Carter-Finley Stadium, has things looking up financially for Daktronics in 2023.Courtesy of Los Angeles Clippers
When Daktronics announced on Dec. 7 that it would be delaying its latest quarterly financial filing by a week, concern grew over the LED video display company’s financial solidity, and its stock price fell by half.
The quarterly filing eventually released last week showed a company with limited liquidity mainly because of inflation, ongoing supply chain issues and the company’s lack of varied and flexible financing sources.
Daktronics CEO Reece Kurtenbach wrote in the financial filing that “in our 54-year history, we have not been faced with the perfect storm that the last two years represent.”
Daktronics’ substantial investment in expanding its manufacturing capabilities at factories in South Dakota and Minnesota, and its snapping up of available inventory at a higher rate than normal to restore some predictability to order fulfillment, depleted the company’s liquidity during the past year-plus from $61.6 million to now $7.7 million heading into the third quarter of the 2023 fiscal year. Following generally accepted U.S. accounting standards (GAAP), Daktronics, which had close to $611 million in revenue in FY22, was required to note in its filing that its financial state raises “substantial doubt about our ability to continue as a going concern.”
The going concern declaration, however much of a technicality it was, triggered the movement of a $13 million deferred tax bill from Daktronics’ balance sheet to its income statement, raising further alarm. But the bill, which doesn’t have to be paid right now, can be moved back to the balance sheet once the company’s cash flow increases and the going concern declaration is removed. Kurtenbach said the movement of the tax bill to the income statement was “not something we had considered in advance,” largely because the company had no previous experience with a going concern designation.
The Daktronics File
Headquarters: Brookings, S.D.
Employees: approximately 2,500
CEO: Reece Kurtenbach
Manufacturing facilities: (Owned) Brookings, S.D.; Redwood, Minn.; Ennistymon, Ireland. (Leased) Sioux Falls, S.D.; Shanghai, China.
Total square feet of manufacturing space: 1.41 million
Market capitalization: $109.3 million (as of Dec. 15, 2022)
Annual revenue: $611 million (end of FY22)
Major projects underway or in order backlog: Crypto.com Arena, Gillette Stadium, Intuit Dome, Empower Field at Mile High, Carter-Finley Stadium.
But speaking to Sports Business Journal last week, Kurtenbach said that “the current situation is more of a bump in the road for us, and not a dire, company-ending situation. Why we’re in the situation we’re in is the demand for what we do is going through the roof. It’s hard to service all of the demand that’s out there.”
A $463 million product order backlog, which includes major jobs for the L.A. Clippers, Real Madrid and the New England Patriots, supports that assertion. The backlog is equivalent to roughly 75% of the net sales Daktronics recorded in FY22. The company’s quarterly filing said its inventory levels should peak in the third quarter of FY23, then decline to normal levels as orders are filled and the company purchases less product.
“We need to continue to support our customers, as we’ve done for 50-plus years, by increasing the capacity, our ability to deliver product and bring on inventory to make our delivery streams much more deterministic, much more predictable, and much more reliable,” said Kurtenbach. “That’s what we would have done anyway, and I still believe that’s a viable strategy going forward.”
The company is investing in its own U.S. manufacturing so it can complete more jobs like San Diego State’s recently opened Snapdragon Stadium.getty images
Portions of the global supply chain are back in relative order, but that’s not the case for semiconductors or integrated circuits, which are crucial to Daktronics’ business. Most of those products and materials pass through Asia, if they don’t originate there, on their way to the U.S., and the COVID situation in China has sustained supply well beyond the time frame many experts projected. Daktronics’ own Shanghai factory has been closed regularly during the past two years. About 15% of Daktronics’ market is outside of the U.S.; between 10% and 15% of its production comes from factories in Shanghai and another in Ireland.
Hiring difficulties, shipping inconsistencies and inflation have contributed further to the formidable slew of challenges.
Daktronics responded to the problems by spending much of its free cash on snapping up available inventory at higher rates to restore order fulfillment predictability for customers, and by investing more than $16 million in the first half of FY23 to increase its American-based manufacturing capabilities (almost four times what it spent in the same stretch during FY22). That investment included about $15 million for a new metal shop that expands Daktronics’ ability to do indoor projects, like the Clippers’ Intuit Dome halo board, the largest such double-sided board ever built for an arena.
The outlay significantly reduced the company’s financial wiggle room.
“It worked, it’s been very helpful to do that,” Kurtenbach said. “But it took cash to be able to do that.”
Long term, the investment in domestic manufacturing capabilities will leave Daktronics in a stronger position, critical given there are few signs that global volatility — weather, geopolitical, industrial, economic — will abate in the coming years.
“That’s exactly what I’m recommending folks should do,” said LMA Consulting Group president Lisa Anderson, a manufacturing and supply chain consultant and expert. “There are still issues certainly with chips. It has improved, it’s not as bad as in the throes of [the pandemic], and there is capacity coming online in the U.S., but it is still tight, so it’s not smooth sailing.”
Clemson’s Death Valley is another client for Daktronics’ state-of-the-art scoreboards.getty images
Daktronics’ financial filing said the company had moved internally from a period of cash investment to one of cash generation and that it was paying close attention to operating margin improvement through recent price increases, product mix adjustments and prudent management of operating expenses.
Clearing some of the backlog will make an immediate impact; contracts vary, but Daktronics generally gets paid once it installs a product. The company, which provided 37 video boards for Qatari World Cup soccer stadiums, is working on projects for the Philadelphia Phillies, Minnesota Twins, New England Patriots, Green Bay Packers, Real Madrid, the LA Clippers and N.C. State football, to name a handful. The current backlog is easily double the $202 million backlog in FY19.
Sports venue demand remains strong as teams transition from HD systems to 4K systems or build new venues from scratch. LED displays are also moving beyond the seating bowl out into the concourses of stadiums and arenas, increasing the number of displays that venues need. Last year was Daktronics’ highest-ever fiscal year for orders and, through six months of FY23, the company is on pace to beat that. Net sales during the second quarter of FY23 increased 9% from the previous quarter to $187.4 million, while orders worth $182.8 million were booked, a 11.7% jump from the first quarter of FY23. Kurtenbach said that because of capacity constraints, the company has passed on more job opportunities than ever before.
Beyond clearing the backlog, Kurtenbach acknowledged that Daktronics needed to diversify its financing sources. Operations and supply chain expert Jim Gitney, founder and CEO of consultancy Group50, said that companies in Daktronics’ position can pursue multiple avenues to diversify their financing options, including asset-based loans — Daktronics has substantial assets against which it could borrow — or borrowing against the order backlog. The company could also issue more stock, though that might further hurt its already low share price. They are crucial decisions to make.
“If you do it wrong, it can have significant negative impact on the company in the years to come,” said Gitney.
In late October, Daktronics amended its credit facility with U.S. Bank, increasing its line of credit by $10 million to $45 million until Jan 31, 2023, at which time the facility returns to $35 million with a maturity date of April 29, 2025. The $10 million increase is subject to renewal every 90 days, which should cover Daktronics long enough to ameliorate its GAAP issues and dump the “going concern” language.
“We’ve expanded our financing but not fast enough to meet the rules of GAAP, so we’re working very quickly to resolve that,” said Kurtenbach.