NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share data)
(unaudited)
Note 1. Basis of Presentation
Daktronics, Inc. and its subsidiaries (the “Company”, “Daktronics”, “we”, “our”, or “us”) are an industry leader in designing and manufacturing electronic scoreboards, programmable display systems and large screen video displays for sporting, commercial and transportation applications.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present our financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions affecting the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.
Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The balance sheet at April 30, 2022 has been derived from the audited financial statements at that date, but it does not include all the information and disclosures required by GAAP for complete financial statements. These financial statements should be read in conjunction with our financial statements and notes thereto for the fiscal year ended April 30, 2022, which are contained in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission ("SEC"). The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.
Daktronics, Inc. operates on a 52- or 53-week fiscal year, with our fiscal year ending on the Saturday closest to April 30 of each year. When April 30 falls on a Wednesday, the fiscal year ends on the preceding Saturday. Within each fiscal year, each quarter is comprised of 13-week periods following the beginning of each fiscal year. In each 53-week fiscal 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 six months ended October 29, 2022 and October 30, 2021 contained operating results for 26 weeks.
Cash and cash equivalents and restricted cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the totals of the same amounts shown in the condensed consolidated statements of cash flows. Restricted cash consists of cash and cash equivalents held in bank deposit accounts to secure issuances of foreign bank guarantees.
| | | | | | | | | | | |
| October 29, 2022 | | October 30, 2021 |
Cash and cash equivalents | $ | 6,431 | | | $ | 59,727 | |
Restricted cash | 712 | | | 1,877 | |
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | 7,143 | | | $ | 61,604 | |
Liquidity and Going Concern
The accompanying condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
We continue to experience volatility in our business driven by global economic conditions and supply chain disruptions. All of these conditions have caused volatility in our cash flow, pricing, order volumes, lead-times, competitiveness, revenue cycles, and production costs. We believe it is likely these conditions will continue to have negative impacts in fiscal 2023. To improve operations and cash flows, we have increased prices of our goods and services. We have also increased investment in inventory levels to add production stability. To adapt, we used cash and line of credit borrowings to source inventory to add stability to our production processes to fulfill backlog. We also continue to invest in property
and equipment to expand our capacity and add automation. Our ability to fund inventory levels, operations and capital expenditures in the future will be dependent on our ability to generate cash flow from operations in these conditions, to maintain or improve margins, and to use funds from our credit facility. Our credit facility expires in April 2025, and it requires us to comply with certain covenants.
Although supply chain disruptions have started to ease and we expect our inventory levels to decline, we cannot be certain we will not experience future disruptions or need additional liquidity to fund inventory levels, operations, and capital expenditures. We will need additional liquidity to meet our obligations as they come due in the 12 months following the date of this Report and we cannot be assured that such liquidity will be available or the form of such liquidity, such as equity raises or debt financing. These conditions raise substantial doubt about our ability to continue as a going concern. In response to these conditions, we are pursuing additional liquidity through various means, including but not limited to obtaining financing secured by a mortgage on our facilities, a sales-leaseback transaction, leasing property and equipment, and continued focus on reducing working capital. Since these plans are not finalized and are subject to market conditions and restrictions from our existing financing agreements that are not within our control, they cannot be deemed probable. As a result, we have concluded that our plans do not alleviate substantial doubt about our ability to continue as a going concern.
Refer to Note 7 for additional considerations related to our financing agreements.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Recent Accounting Pronouncements
There have been no material changes to our significant accounting policies and estimates as described in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022.
Accounting Standards Adopted
There were no standards adopted since the last quarterly report.
Accounting Standards Not Yet Adopted
There are no significant ASUs issued that the Company has not yet adopted as of October 29, 2022.
Note 2. Investments in Affiliates
The aggregate amount of our investments accounted for under the equity method was $18,040 and $16,916 as of October 29, 2022 and April 30, 2022, respectively. Our proportional share of the respective affiliates' earnings or losses is included in the "Other expense, net" line item in our condensed consolidated statements of operations. For the three and six months ended October 29, 2022, our share of the losses of our affiliates was $811 and $1,701 as compared to $819 and $1,565 for the three and six months ended October 30, 2021. We purchased services for research and development activities from our equity method investees. The total of these related party transactions for the six months ended October 29, 2022 and October 30, 2021 was $672 and $898, respectively, which is included in the "Product design and development" line item in our condensed consolidated statements of operations, and for the six months ended October 29, 2022, $52 remains unpaid and is included in the "Accounts payable" line item in our condensed consolidated balance sheets. During the six months ended October 29, 2022, we invested $2,882 of convertible notes ("Notes"), which are included in the "Investment in affiliates and other assets" line item in our condensed consolidated balance sheets. During the six months ended October 29, 2022, we converted $2,824 from Notes to stock ownership.
Note 3. Earnings Per Share ("EPS")
The following is a reconciliation of the net (loss) income and common share amounts used in the calculation of basic and diluted EPS for the three and six months ended October 29, 2022 and October 30, 2021:
| | | | | | | | | | | | | | | | | |
| Net (loss) income | | Shares | | Per share (loss) income |
For the three months ended October 29, 2022 | | | | | |
Basic and diluted (loss) earnings per share | $ | (12,984) | | | 45,317 | | | $ | (0.29) | |
| | | | | |
Diluted (loss) earnings per share | $ | (12,984) | | | 45,317 | | | $ | (0.29) | |
For the three months ended October 30, 2021 | | | | | |
Basic earnings per share | $ | 2,374 | | | 45,350 | | | $ | 0.05 | |
Dilution associated with stock compensation plans | — | | | 149 | | | — | |
Diluted earnings per share | $ | 2,374 | | | 45,499 | | | $ | 0.05 | |
For the six months ended October 29, 2022 | | | | | |
Basic and diluted (loss) earnings per share | $ | (18,310) | | | 45,258 | | | $ | (0.40) | |
| | | | | |
Diluted (loss) earnings per share | $ | (18,310) | | | 45,258 | | | $ | (0.40) | |
For the six months ended October 30, 2021 | | | | | |
Basic earnings per share | $ | 6,059 | | | 45,271 | | | $ | 0.13 | |
Dilution associated with stock compensation plans | — | | | 219 | | | — | |
Diluted earnings per share | $ | 6,059 | | | 45,490 | | | $ | 0.13 | |
Options outstanding to purchase 2,063 shares of common stock with a weighted average exercise price of $7.51 for the three months ended October 29, 2022 and 1,943 shares of common stock with a weighted average exercise price of $9.22 for the three months ended October 30, 2021 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
Options outstanding to purchase 2,082 shares of common stock with a weighted average exercise price of $7.82 for the six months ended October 29, 2022 and 1,877 shares of common stock with a weighted average exercise price of $9.37 for the six months ended October 30, 2021 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
Note 4. Revenue Recognition
Disaggregation of revenue
The following table presents our disaggregation of revenue by segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 29, 2022 |
Commercial | | Live Events | | High School Park and Recreation | | Transportation | | International | | Total |
Type of performance obligation | | | | | | | | | | | |
Unique configuration | $ | 5,582 | | | $ | 52,862 | | | $ | 7,856 | | | $ | 11,398 | | | $ | 6,123 | | | $ | 83,821 | |
Limited configuration | 26,768 | | | 9,675 | | | 32,975 | | | 4,542 | | | 14,285 | | | 88,245 | |
Service and other | 4,697 | | | 6,702 | | | 1,175 | | | 739 | | | 2,060 | | | 15,373 | |
| $ | 37,047 | | | $ | 69,239 | | | $ | 42,006 | | | $ | 16,679 | | | $ | 22,468 | | | $ | 187,439 | |
Timing of revenue recognition | | | | | | | | | | | |
Goods/services transferred at a point in time | $ | 28,078 | | | $ | 11,682 | | | $ | 31,129 | | | $ | 4,749 | | | $ | 15,019 | | | $ | 90,657 | |
Goods/services transferred over time | 8,969 | | | 57,557 | | | 10,877 | | | 11,930 | | | 7,449 | | | 96,782 | |
| $ | 37,047 | | | $ | 69,239 | | | $ | 42,006 | | | $ | 16,679 | | | $ | 22,468 | | | $ | 187,439 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended October 29, 2022 |
Commercial | | Live Events | | High School Park and Recreation | | Transportation | | International | | Total |
Type of performance obligation | | | | | | | | | | | |
Unique configuration | $ | 10,269 | | | $ | 95,030 | | | $ | 14,448 | | | $ | 23,884 | | | $ | 12,624 | | | $ | 156,255 | |
Limited configuration | 58,544 | | | 18,155 | | | 61,258 | | | 10,641 | | | 25,786 | | | 174,384 | |
Service and other | 8,352 | | | 12,437 | | | 2,109 | | | 1,694 | | | 4,128 | | | 28,720 | |
| $ | 77,165 | | | $ | 125,622 | | | $ | 77,815 | | | $ | 36,219 | | | $ | 42,538 | | | $ | 359,359 | |
Timing of revenue recognition | | | | | | | | | | | |
Goods/services transferred at a point in time | $ | 60,635 | | | $ | 20,904 | | | $ | 58,219 | | | $ | 11,131 | | | $ | 26,895 | | | $ | 177,784 | |
Goods/services transferred over time | 16,530 | | | 104,718 | | | 19,596 | | | 25,088 | | | 15,643 | | | 181,575 | |
| $ | 77,165 | | | $ | 125,622 | | | $ | 77,815 | | | $ | 36,219 | | | $ | 42,538 | | | $ | 359,359 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 30, 2021 |
Commercial | | Live Events | | High School Park and Recreation | | Transportation | | International | | Total |
Type of performance obligation | | | | | | | | | | | |
Unique configuration | $ | 4,559 | | | $ | 43,528 | | | $ | 6,908 | | | $ | 8,976 | | | $ | 11,562 | | | $ | 75,533 | |
Limited configuration | 25,977 | | | 8,825 | | | 24,916 | | | 4,552 | | | 10,466 | | | 74,736 | |
Service and other | 3,927 | | | 7,043 | | | 923 | | | 525 | | | 1,790 | | | 14,208 | |
| $ | 34,463 | | | $ | 59,396 | | | $ | 32,747 | | | $ | 14,053 | | | $ | 23,818 | | | $ | 164,477 | |
Timing of revenue recognition | | | | | | | | | | | |
Goods/services transferred at a point in time | $ | 26,362 | | | $ | 11,508 | | | $ | 23,115 | | | $ | 4,634 | | | $ | 10,815 | | | $ | 76,434 | |
Goods/services transferred over time | 8,101 | | | 47,888 | | | 9,632 | | | 9,419 | | | 13,003 | | | 88,043 | |
| $ | 34,463 | | | $ | 59,396 | | | $ | 32,747 | | | $ | 14,053 | | | $ | 23,818 | | | $ | 164,477 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended October 30, 2021 |
Commercial | | Live Events | | High School Park and Recreation | | Transportation | | International | | Total |
Type of performance obligation | | | | | | | | | | | |
Unique configuration | $ | 8,146 | | | $ | 85,036 | | | $ | 11,074 | | | $ | 15,517 | | | $ | 17,445 | | | $ | 137,218 | |
Limited configuration | 51,884 | | | 14,667 | | | 47,873 | | | 9,904 | | | 22,011 | | | 146,339 | |
Service and other | 7,214 | | | 12,080 | | | 1,694 | | | 1,190 | | | 3,474 | | | 25,652 | |
| $ | 67,244 | | | $ | 111,783 | | | $ | 60,641 | | | $ | 26,611 | | | $ | 42,930 | | | $ | 309,209 | |
Timing of revenue recognition | | | | | | | | | | | |
Goods/services transferred at a point in time | $ | 52,741 | | | $ | 18,337 | | | $ | 45,056 | | | $ | 10,205 | | | $ | 22,834 | | | $ | 149,173 | |
Goods/services transferred over time | 14,503 | | | 93,446 | | | 15,585 | | | 16,406 | | | 20,096 | | | 160,036 | |
| $ | 67,244 | | | $ | 111,783 | | | $ | 60,641 | | | $ | 26,611 | | | $ | 42,930 | | | $ | 309,209 | |
See "Note 5. Segment Reporting" for a disaggregation of revenue by geography.
Contract balances
Contract assets represent revenue recognized in excess of amounts billed and include unbilled receivables. Unbilled receivables, which represent an unconditional right to payment subject only to the passage of time, are reclassified to accounts receivable when they are billed according to the contract terms. Contract liabilities represent amounts billed to the customers in excess of revenue recognized to date.
The following table reflects the changes in our contract assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | | |
| October 29, 2022 | | April 30, 2022 | | Dollar Change | | Percent Change |
Contract assets | $ | 39,330 | | | $ | 41,687 | | | $ | (2,357) | | | (5.7) | % |
Contract liabilities - current | 90,403 | | | 90,393 | | | 10 | | | — | |
Contract liabilities - noncurrent | 12,303 | | | 10,998 | | | 1,305 | | | 11.9 | |
The changes in our contract assets and contract liabilities from April 30, 2022 to October 29, 2022 were due to the timing of billing schedules and revenue recognition, which can vary significantly depending on the contractual payment terms and the seasonality of the sports markets. We had no impairments of contract assets for the six months ended October 29, 2022.
For service-type warranty contracts, we allocate revenue to this performance obligation, recognize the revenue over time, and recognize costs as incurred. Earned and unearned revenues for these contracts are included in the "Contract assets" and "Contract liabilities". Changes in unearned service-type warranty contracts, net were as follows:
| | | | | |
| October 29, 2022 |
Balance at beginning of period | $ | 26,346 | |
New contracts sold | 25,860 | |
Less: reductions for revenue recognized | (21,381) | |
Foreign currency translation and other | (270) | |
Balance at end of period | $ | 30,555 | |
Contracts in progress identified as loss contracts as of October 29, 2022 were $482 and as of April 30, 2022 were immaterial. Loss provisions are recorded in the "Accrued expenses" line item in our condensed consolidated balance sheets.
During the six months ended October 29, 2022, we recognized revenue of $65,533 related to our contract liabilities as of April 30, 2022.
Remaining performance obligations
As of October 29, 2022, the aggregate amount of the transaction price allocated to the remaining performance obligations was $524,251. Remaining performance obligations related to product and service agreements at October 29, 2022 were $463,084 and $61,167, respectively. We expect approximately $467,498 of our remaining performance obligations to be recognized over the next 12 months, with the remainder recognized thereafter. Although remaining performance obligations reflect business that is considered to be legally binding, cancellations, deferrals or scope adjustments may occur. Any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations, and project deferrals are reflected or excluded in the remaining performance obligation balance, as appropriate.
Note 5. Segment Reporting
The following table sets forth certain financial information for each of our five reporting segments for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
October 29, 2022 | | October 30, 2021 | | October 29, 2022 | | October 30, 2021 |
Net sales: | | | | | | | |
Commercial | $ | 37,047 | | | $ | 34,463 | | | $ | 77,165 | | | $ | 67,244 | |
Live Events | 69,239 | | | 59,396 | | | 125,622 | | | 111,783 | |
High School Park and Recreation | 42,006 | | | 32,747 | | | 77,815 | | | 60,641 | |
Transportation | 16,679 | | | 14,053 | | | 36,219 | | | 26,611 | |
International | 22,468 | | | 23,818 | | | 42,538 | | | 42,930 | |
| 187,439 | | | 164,477 | | | 359,359 | | | 309,209 | |
| | | | | | | |
Gross profit: | | | | | | | |
Commercial | 6,197 | | | 7,445 | | | 11,018 | | | 14,623 | |
Live Events | 7,983 | | | 5,585 | | | 11,769 | | | 14,167 | |
High School Park and Recreation | 11,811 | | | 10,749 | | | 21,788 | | | 20,258 | |
Transportation | 4,084 | | | 4,404 | | | 9,922 | | | 8,155 | |
International | 1,629 | | | 4,081 | | | 3,001 | | | 7,249 | |
| 31,704 | | | 32,264 | | | 57,498 | | | 64,452 | |
| | | | | | | |
Operating expenses: | | | | | | | |
Selling | 14,525 | | | 12,482 | | | 28,958 | | | 24,277 | |
General and administrative | 8,687 | | | 8,201 | | | 18,128 | | | 15,772 | |
Product design and development | 6,966 | | | 7,196 | | | 14,405 | | | 14,358 | |
| 30,178 | | | 27,879 | | | 61,491 | | | 54,407 | |
Operating income (loss) | 1,526 | | | 4,385 | | | (3,993) | | | 10,045 | |
| | | | | | | |
Nonoperating (expense) income: | | | | | | | |
Interest (expense) income, net | (263) | | | (59) | | | (323) | | | 78 | |
Other expense, net | (208) | | | (952) | | | (955) | | | (1,820) | |
Income (loss) before income taxes | $ | 1,055 | | | $ | 3,374 | | | $ | (5,271) | | | $ | 8,303 | |
| | | | | | | |
Depreciation and amortization: | | | | | | | |
Commercial | $ | 834 | | | $ | 601 | | | $ | 1,637 | | | $ | 1,303 | |
Live Events | 1,627 | | | 1,248 | | | 3,193 | | | 2,585 | |
High School Park and Recreation | 383 | | | 340 | | | 722 | | | 778 | |
Transportation | 128 | | | 127 | | | 253 | | | 266 | |
International | 566 | | | 752 | | | 1,111 | | | 1,478 | |
Unallocated corporate depreciation | 662 | | | 669 | | | 1,309 | | | 1,379 | |
| $ | 4,200 | | | $ | 3,737 | | | $ | 8,225 | | | $ | 7,789 | |
No single geographic area comprises a material amount of our net sales or property and equipment, net of accumulated depreciation, other than the United States. The following table presents information about net sales and property and equipment, net of accumulated depreciation, in the United States and elsewhere:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
October 29, 2022 | | October 30, 2021 | | October 29, 2022 | | October 30, 2021 |
Net sales: | | | | | | | |
United States | $ | 163,142 | | | $ | 138,821 | | | $ | 312,580 | | | $ | 262,303 | |
Outside United States | 24,297 | | | 25,656 | | | 46,779 | | | 46,906 | |
| $ | 187,439 | | | $ | 164,477 | | | $ | 359,359 | | | $ | 309,209 | |
| | | | | | | | | | | |
| October 29, 2022 | | April 30, 2022 |
Property and equipment, net of accumulated depreciation: | | | |
United States | $ | 66,150 | | | $ | 58,643 | |
Outside United States | 8,121 | | | 8,122 | |
| $ | 74,271 | | | $ | 66,765 | |
We have numerous customers worldwide for sales of our products and services, and no customer accounted for 10 percent or more of net sales for the three and six months ended October 29, 2022 and October 30, 2021; therefore, we are not economically dependent on a limited number of customers for the sale of our products and services.
We have numerous raw material and component suppliers, and no supplier accounts for 10 percent or more of our cost of sales; however, we have a complex global supply chain subject to geopolitical and transportation risks and a number of single-source suppliers that could limit our supply or cause delays in obtaining raw materials and components needed in manufacturing.
Note 6. Goodwill
The changes in the carrying amount of goodwill related to each reportable segment for the six months ended October 29, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Live Events | | Commercial | | Transportation | | International | | Total |
Balance as of April 30, 2022 | $ | 2,296 | | | $ | 3,349 | | | $ | 68 | | | $ | 2,214 | | | $ | 7,927 | |
Foreign currency translation | (20) | | | (146) | | | (20) | | | (104) | | | (290) | |
Balance as of October 29, 2022 | $ | 2,276 | | | $ | 3,203 | | | $ | 48 | | | $ | 2,110 | | | $ | 7,637 | |
We perform an analysis of goodwill on an annual basis and test for impairment more frequently if events or changes in circumstances indicate that an asset might be impaired. Our annual analysis is performed during our third quarter of each fiscal year based on the goodwill amount as of the first business day of our third fiscal quarter. We performed our annual impairment test on October 31, 2021 and concluded no goodwill impairment existed. Our market capitalization has decreased since the completion of the October 31, 2021 evaluation which caused a trigger analysis to test goodwill impairment due to supply chain and labor supply uncertainty. After evaluating our results, events and circumstances, we determined no goodwill impairment was necessary.
Note 7. Financing Agreements
As of October 29, 2022, $26,418 had been advanced under the loan portion of our line of credit, and the balance of letters of credit outstanding was approximately $6,917. As of October 29, 2022, $11,665 of the credit facility was available for borrowing. On October 31, 2022, we entered into an agreement to temporarily expand the line of credit by $10,000 through January 31, 2023. As of October 29, 2022, we were in compliance with our financial covenants. On December 9, 2022, we entered into the sixth amendment to our credit agreement. The Amendment clarifies certain definitions related to the
deferred tax asset valuation allowance and adds additional financial reporting requirements and negative covenants. It also requires Daktronics to obtain the current lender’s approval of any additional indebtedness and receive an audit report on our fiscal 2023 financial statements that does not express substantial doubt about the Company’s ability to continue as a going concern.
As of October 29, 2022, we had $616 of bank guarantees or other financial instruments for display installations issued by another bank and secured by a restricted cash deposit. If we are unable to meet the terms of the arrangement, the bank would subrogate its loss by drawing on the secured cash deposit.
Note 8. Commitments and Contingencies
Litigation: We are a party to legal proceedings and claims which arise during the ordinary course of business. We review our legal proceedings and claims, regulatory reviews and inspections, and other legal matters on an ongoing basis and follow appropriate accounting guidance when making accrual and disclosure decisions. For unresolved legal proceedings or claims, we do not believe there is a reasonable probability that any material loss will be incurred. Accordingly, no material accrual or disclosure of a potential range of loss has been made related to these matters. We do not expect the ultimate liability of these unresolved legal proceedings or claims to have a material effect on our financial position, liquidity or capital resources.
Warranties: Changes in our warranty obligation for the six months ended October 29, 2022 consisted of the following:
| | | | | |
| October 29, 2022 |
Beginning accrued warranty obligations | $ | 28,878 | |
Warranties issued during the period | 5,951 | |
Settlements made during the period | (3,923) | |
Changes in accrued warranty obligations for pre-existing warranties during the period, including expirations | (1,152) | |
Ending accrued warranty obligations | $ | 29,754 | |
Performance guarantees: We have entered into standby letters of credit, bank guarantees and surety bonds with financial institutions relating to the guarantee of our future performance on contracts, primarily construction-type contracts. As of October 29, 2022, we had outstanding letters of credit, bank guarantees and surety bonds in the amount of $6,917, $616 and $72,777, respectively. Performance guarantees are issued to certain customers to guarantee the operation and installation of the equipment and our ability to complete a contract. These performance guarantees have various terms but are generally one year. We enter into written agreements with our customers, and those agreements often contain indemnification provisions that require us to make the customer whole if certain acts or omissions by us cause the customer financial loss. We make efforts to negotiate reasonable caps and limitations on the recovery of such damages. As of October 29, 2022, we were not aware of any indemnification claim from a customer.
Note 9. Income Taxes
The provision for income taxes during interim reporting periods is calculated by applying an estimate of the annual effective tax rate. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income (or loss) for the year, projections of the proportion of income (or loss) earned and taxed in foreign jurisdictions, and permanent and temporary differences and the likelihood of recovering deferred tax assets, then adjusted for any discrete items. The accounting estimates used to compute the provision for income taxes may change as new events occur, assumptions change, or additional information is obtained.
Under GAAP we are required to evaluate the recoverability of our deferred tax assets and establish a valuation allowance if necessary to reduce our deferred tax assets to an amount that is more likely than not to be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of such allowances. We establish or adjust valuation allowances for deferred tax assets when we estimate that it is more likely than not that we will be able to realize the value of the deferred tax assets. We evaluate all significant available positive and negative evidence as part of our analysis, including our past operating results, tax planning strategies, current and cumulative losses, and forecasts of future taxable income. The underlying assumptions we use in forecasting future taxable income requires
significant judgment and takes into account our recent performance. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences are deductible or creditable. If actual experience differs from these estimates and assumptions, the recognized deferred tax asset value may not be fully realized, resulting in an increase to income tax expense in our results of operations. Due to various factors, including our estimated of annual income, our effective tax rate is subject to fluctuation.
Our effective tax rate for the three and six months ended October 29, 2022 was a tax rate of 1330.7 and a tax rate of (247.3) percent, as compared to an effective tax rate of 29.6 and 27.0 percent tax for the three and six months ended October 30, 2021. The increase in tax rate is primarily driven by the requirement to record a full valuation allowance on deferred tax assets during the second quarter of fiscal 2023 related to GAAP accounting for income taxes and related information. See "Note 1. Basis of Presentation - Liquidity and Going Concern" of the Notes to our Condensed Consolidated Financial Statements included in this Report.
If, in the future, we determine we can support the recoverability of all or a portion of the deferred tax assets under the guidance, the tax benefits relating to any reversal of the valuation allowance on net deferred tax assets will be accounted for as a reduction of income tax expense and result in an increase in equity. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future.
We operate both domestically and internationally and, as of October 29, 2022, undistributed earnings of our foreign subsidiaries were considered to be reinvested indefinitely. Additionally, as of October 29, 2022, we had $593 of unrecognized tax benefits which would reduce our effective tax rate if recognized.
Note 10. Fair Value Measurement
The following table sets forth by Level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at October 29, 2022 and April 30, 2022 according to the valuation techniques we used to determine their fair values. There have been no transfers of assets or liabilities among the fair value hierarchies presented.
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements |
| Level 1 | | Level 2 | | Level 3 | | Total |
Balance as of October 29, 2022 | | | | | | | |
Cash and cash equivalents | $ | 6,431 | | | $ | — | | | $ | — | | | $ | 6,431 | |
Restricted cash | 712 | | | — | | | — | | | 712 | |
Available-for-sale securities: | | | | | | | |
US Government securities | — | | | — | | | — | | | — | |
US Government sponsored entities | — | | | 525 | | | — | | | 525 | |
Derivatives - asset position | — | | | 1,175 | | | — | | | 1,175 | |
| | | | | | | |
| | | | | | | |
| $ | 7,143 | | | $ | 1,700 | | | $ | — | | | $ | 8,843 | |
Balance as of April 30, 2022 | | | | | | | |
Cash and cash equivalents | $ | 17,143 | | | $ | — | | | $ | — | | | $ | 17,143 | |
Restricted cash | 865 | | | — | | | — | | | 865 | |
Available-for-sale securities: | | | | | | | |
US Government securities | 3,486 | | | — | | | — | | | 3,486 | |
US Government sponsored entities | — | | | 534 | | | — | | | 534 | |
| | | | | | | |
Derivatives - asset position | — | | | 934 | | | — | | | 934 | |
Derivatives - liability position | — | | | (311) | | | — | | | (311) | |
| | | | | | | |
| $ | 21,494 | | | $ | 1,157 | | | $ | — | | | $ | 22,651 | |
There have been no changes in the valuation techniques used by us to value our financial instruments since the end of fiscal 2022. For additional information, see our Annual Report on Form 10-K for the fiscal year ended April 30, 2022 for the methods and assumptions used to estimate the fair value of each class of financial instrument.
Note 11. Subsequent Events
On December 9, 2022, we entered into the sixth amendment to our credit agreement as described in Note 7. There were no other material subsequent events.