Daktronics (DAKT) Risk Analysis

Expanding our international footprint is an important part of our growth strategy; however, operating across multiple countries exposes us to risks that may not present in our domestic operations. We manufacture certain products and source components in multiple international locations, including China, and a portion of these products and components are imported into the United States and other markets, which increases our exposure to tariffs, trade restrictions, and other cross-border regulatory risks. These risks include complex and evolving regulatory environments, political and economic instability, exposure to foreign currency fluctuations, differing labor laws and employment practices, and challenges related to infrastructure, logistics, and supply chain reliability. We may also face increased costs or delays due to tariffs, trade restrictions, customs regulations, or changes in international trade agreements and policies. In addition, international operations, including our manufacturing expansion in Mexico, often require significant upfront investment in market development, personnel, and facilities, which may not yield immediate returns. Legal systems, intellectual property protections, and enforcement mechanisms may be less predictable or less robust in some jurisdictions, increasing our exposure to potential disputes or infringement. These and other factors may impact our ability to operate efficiently and profitably in international markets. Although we attempt to manage these risks, there can be no assurance that our efforts will be successful or that international operations will not have a material adverse effect on our business.

Doing business on a worldwide basis requires us to comply with the laws and regulations of the United States government and various foreign jurisdictions. These laws and regulations place restrictions on our operations, trade practices, partners, customers, and investments. In particular, we and our operations are subject to United States and foreign anti-corruption and trade control laws and regulations, such as the United States Foreign Corrupt Practices Act (the "FCPA"); the United Kingdom Bribery Act (the "Bribery Act"); and export controls and economic sanctions programs, including those administered by the United States Treasury Department's Office of Foreign Assets Control ("OFAC"), the State Department's Directorate of Defense Trade Controls (the "DDTC"), and the Bureau of Industry and Security of the United States Department of Commerce. As part of our business, we deal with state-owned business enterprises, the employees of which are considered to be foreign officials for purposes of the FCPA's prohibition on United States companies from engaging in bribery, providing anything of value, or making other prohibited payments to foreign officials for the purpose of obtaining or retaining business, and other similar regulations in other areas of the world. In addition, the provisions of the Bribery Act apply to the bribery of foreign officials and to transactions with individuals that a government does not employ. The FCPA also requires us to maintain specific record-keeping standards and adequate internal accounting controls. In addition, we are subject to similar requirements in other countries. Some of the international locations in which we do business lack a developed legal system and have higher than normal levels of corruption. Our expansion outside of the United States and our development of new partnerships and joint venture relations worldwide could increase the risk of violation of the FCPA, OFAC, the Bribery Act or similar laws and regulations. As an exporter, we must comply with various laws and regulations relating to the export of products and technology from the United States and other countries having jurisdiction over our operations and trade sanctions against embargoed countries and destinations administered by OFAC. Before shipping certain items, we must obtain an export license or verify that license exemptions are available. Any failures to comply with these laws and regulations could result in fines, adverse publicity, and restrictions on our ability to export our products. Repeat failures could carry more significant penalties. Anti-bribery, corruption, and trade laws and regulations, and the enforcement thereof, are increasing in frequency, complexity, and severity on a global basis. Violations of anti-corruption, anti-bribery, and trade control laws and sanctions regulations are punishable by civil penalties, including fines; the denial of export privileges; injunctions; asset seizures; debarment from government contracts and revocations or restrictions of licenses; as well as criminal fines and imprisonment, and could harm our reputation, create negative stockholder sentiment, and affect our share value. We have established policies and procedures with the intention of providing reasonable assurance of compliance with these laws and regulations and trained our employees to comply with these laws and regulations. However, our employees, contractors, agents, and licensees involved in our international operations may take actions in violations of such policies. If our employees, agents, distributors, suppliers, and other third parties with whom we do business violate anti-bribery, anti-corruption, or similar laws and regulations, we may incur severe fines, penalties, and reputational damage even if we were not aware of such violation. Additionally, there can be no assurance that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage or provide a defense to any alleged violation. In particular, we may be held liable for the actions that our partners take inside or outside of the United States even though we are not aware of such actions or our partners may not be subject to these laws. Such a violation, even if our policies prohibit it, could have an adverse effect on our reputation, business, financial condition, and results of operations. In addition, various state and municipal governments, universities, and other investors maintain prohibitions or restrictions on investments in companies that do business with sanctioned countries, persons, and entities, which could adversely affect our reputation, business, financial condition, and results of operations.

We are involved from time to time in a variety of litigation, investigations, inquiries or similar matters arising in our business. Litigation, investigations, and regulatory proceedings are subject to inherent uncertainties, and unfavorable rulings and outcomes can and do occur. Pending or future claims against us could result in professional liability, product liability, criminal liability, warranty obligations, indemnity claims, or other liabilities to the extent we are not insured against a loss or our insurance fails to provide adequate coverage. Also, a well-publicized actual or perceived threat of litigation could adversely affect our reputation and reduce the demand for our products. See "Note 17. Commitments and Contingencies" of the Notes to our Consolidated Financial Statements included in this Form 10-K for further information on litigation obligations.

We are subject to the income tax laws of the United States and its various state and local governments, as well as several foreign tax jurisdictions. Our future income taxes could be materially adversely affected by changes in the amount or mix of earnings among countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax rates or the interpretation of tax rules and regulations in jurisdictions in which we do business, changes in tax laws, or the outcome of income tax audits and any related litigation. The United States Tax Cuts and Jobs Act of 2017 is one such example of legislation that has impacted our effective tax rate. Further changes in tax laws in the United States and foreign jurisdictions could arise, including additional tax reform in the United States and evolving international tax frameworks, such as those developed by the Organization for Economic Co-operation and Development ("OECD"). These developments include the implementation of global minimum tax regimes and related guidance across multiple jurisdictions, which may differ in scope, timing, and application. These changes may result in increased complexity, compliance burdens, and uncertainty with respect to our global tax position. Both U.S. tax reform and international tax developments may materially affect long-standing tax positions and principles, including the taxation of foreign earnings and cross-border transactions. These changes could increase tax uncertainty and may adversely affect our business, financial condition, and results of operations.

Our domestic and foreign operations, sales, earnings, and strategies for profitable growth can be adversely affected by global conditions and compliance with international laws, regulations, and governmental actions. These conditions include political developments; economic changes; unfavorable trade policies; changes in foreign and domestic laws, regulations, or governmental requirements; changes in treaty and trade relationships; the imposition of government restrictions or emergency measures that differ among jurisdictions; and changes in monetary and fiscal policies. Additional risks include changes in economic or political conditions; the pricing and marketing of our products; local labor conditions and regulations; reduced protection of intellectual property rights; changes in regulatory or legal environments; lack of well-developed legal systems; foreign currency restrictions and exchange rate fluctuations; and burdensome taxes, tariffs, and other trade regulations or barriers. Other exposures and uncertainties include changing social conditions and attitudes, terrorism, political instability, and armed conflicts. We also face operational challenges in managing our global footprint, including staffing and managing multiple locations and addressing logistical and communication challenges. The likelihood and impact of these risks vary by country, are outside of our control, and are difficult to predict.

We operate manufacturing operations in three locations in the United States, Brookings, South Dakota, Sioux Falls, South Dakota, and Redwood Falls, Minnesota, and we have production facilities in Ireland and China. Additionally, we plan to open a new manufacturing facility in Saltillo, Mexico during fiscal 2027. Unexpected events could result in damage to, and a complete or partial closure of, one or more of our manufacturing facilities, which could make it difficult to manufacture and deliver products to our customers, thereby adversely affecting our business, operating results, or financial condition. Additionally, such events could disrupt our data centers or cloud-based infrastructure, or result in cybersecurity incidents, potentially rendering critical computing processes and systems temporarily unavailable, which may impair our ability to operate effectively. The occurrence of one or more unexpected events in the United States or in other countries may impact the operations of our suppliers and customers, may disrupt our operations and could create additional uncertainties, forcing customers to reduce, delay, or cancel already planned projects or cause our suppliers not to perform, resulting in parts and component shortages, or disrupt transportation and logistic networks.

During fiscal 2025 and fiscal 2026, our business, operations, and financial results were impacted by changes in United States import tariff policies and the resulting responses from other countries. Our complex manufacturing processes in the United States, which generate approximately 80 percent of our manufactured output, rely on components and inputs sourced from over 40 countries. China has historically been a significant source of semiconductor-related components, including LEDs, printed circuit boards, and other integrated circuits. In addition, certain jurisdictions, including Canada, have imposed or may impose retaliatory tariffs on United States-origin goods, increasing the cost of exporting our products into those markets. United States tariff rates on these imports have ranged from approximately 10 percent to significantly higher levels, with certain proposed or applied rates substantially exceeding these levels. While certain U.S. tariffs have been struck down by the courts, the United States has subsequently announced additional new tariffs on virtually all nonexempt imports, and the U.S. tariff rate remains elevated. Shifts in tariffs, trade agreements, import and export restrictions, trade sanctions, sector-specific trade barriers, and other governmental trade actions, whether enacted by the United States or other countries, especially those instituted in significant markets or markets where our significant customers or suppliers are located, and the associated uncertainty of long-term trade policies, could impact our sales volume, sales price, and production and other costs. Changes in trade policies may also cause disruptions to material sourcing and availability, global supply chains and logistics, and access to end markets. Additionally, changes in U.S. trade policy and associated responses from trading partners may create shifts in global market dynamics, disrupt the long-term planning process for governments and private enterprises, and result in continued global financial market volatility. The impact of these changes in trade policies and the resulting trade and market uncertainty could have a negative impact on our results of operations. Following the invalidation of certain tariff actions, the Company has submitted, and will continue to submit, tariff recovery claims through the U.S. Customs and Border Protection ("CBP") Commercial Accounting Program and Enforcement process seeking a refund of tariffs paid pursuant to the International Emergency Economic Powers Act ("IEEPA"). The amount, timing, and realization of any refund or credit remains uncertain and subject to CBP review. In addition to direct tariff costs, our suppliers have incurred tariff-related costs in their own supply chains and the uncertainty of the tariff landscape continues to make these tariff-related costs volatile. Many of our supplies have passed these tariff-related costs to us and these costs may increase in the future. Alternative suppliers may charge higher prices or may not have sufficient capacity or reliability, which could further increase our costs or disrupt supply. While we seek to mitigate these impacts through pricing actions, changes in manufacturing locations, supplier diversification, and product redesign, we may not be able to fully offset increased costs or implement such changes on a timely basis. Tariffs and trade policies are expected to continue to evolve, and the United States, other countries, and international trade bodies may institute new tariffs or more restrictive trade policies or remedies. As a result, we may face additional uncertainties and adverse impacts on our business, financial condition, and results of operations. In addition, competitors may benefit from manufacturing or sourcing strategies, including near-shoring or alternative supply chain structures, or may qualify for tariff exemptions or more favorable trade treatment that are not available to us, which could place us at a competitive disadvantage. Impacts on our business include, but are not limited to: (i) increased raw material and component costs due to tariffs or supply constraints; (ii) disruptions in the availability of components; (iii) challenges in planning and optimizing our global supply chain, leading to increased operating costs and reduced profitability; (iv) delays or reductions in customer orders due to economic uncertainty or tariff-related pricing impacts; and (v) the need to increase prices, which may reduce demand or adversely affect our competitive position.

We rely on a variety of intellectual property used in our products and services. We may not be able to successfully preserve our intellectual property rights in the future, and these rights could be invalidated, circumvented, or challenged. In particular, the laws of certain countries in which our products are sold do not protect our products and intellectual property to the same extent as the laws of the United States. If litigation is necessary in the future to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others, such litigation could result in substantial costs and diversion of resources even if we ultimately prevail. In addition, intellectual property rights of others have an impact on our ability to offer some of our products and services for specific uses or at competitive prices. Competitors' patents or other intellectual property may limit our ability to offer products or services to our customers. Any infringement or claimed infringement by us of the intellectual property rights of others could result in litigation and adversely affect our ability to continue to provide, or could increase the cost of providing, products and services, even if we are successful in defending against any such claim.

We rely heavily on complex information systems and technologies for the successful operation of our business, the support of our offerings, and the collection and retention of business data. Any information system failure or security breach could adversely affect our operations, and we cannot guarantee that our data could be restored and the vulnerabilities remediated. Despite the security measures we have in place, our systems and those of our third-party service providers may be vulnerable to cybersecurity incidents, including ransomware, computer viruses, malicious attacks, programming errors, human error, or other similar events. The increasing use of artificial intelligence ("AI") technologies may further increase the sophistication and frequency of cybersecurity threats. Our use of AI technologies in our business processes and decision-making may introduce additional risks. These technologies may result in the unintended disclosure of confidential information if sensitive data is used as an input or otherwise exposed through their use. In addition, AI systems may generate inaccurate, incomplete, or misleading outputs. Reliance on such outputs could adversely affect our operations, decision-making, or customer relationships and could expose us to reputational harm, contractual claims, or other liabilities. Our use of AI technologies may also give rise to intellectual property or other legal risks, including potential claims related to the use of data or outputs generated by such systems. Any misappropriation, loss, or unauthorized disclosure of confidential or personally identifiable information, whether by us or by our third-party service providers, could adversely affect our business and operations. We could face significant costs, including remediation, investigation, penalties, litigation, and reputational harm, any of which could materially and adversely affect our business, financial condition, and results of operations. For further discussion of our cybersecurity programs, please the discussion set forth in this Form 10-K "Part I, Item 1C. Cybersecurity."

The electronic display industry is characterized by ongoing product improvement, innovation, and development and low-cost competition. We compete against products produced in foreign countries and the United States. Our competitors may develop lower-cost or lower-featured products, may be willing to charge lower prices to increase their market share, bring new products to the market faster, or offer new or differentiated products, services, and controller offerings. Some competitors have more capital and other resources, which may allow them to take advantage of acquisition opportunities or adapt more quickly to changes in customer requirements. Other competitors use sponsorships as a way to win business at a particular location or market. In addition, our products compete with other forms of advertising, such as television, print media, digital and mobile, and fixed display signs. To remain competitive, we must anticipate and respond quickly to provide innovative, customer-valued products and services that meet our customers' needs, enhance our existing products, introduce new products and features, and continue to price our products competitively. Relevant innovation is an important part of our growth strategy. Product development involves complex and resource-intensive processes, including research, planning, design, engineering, testing, and marketing. We may not always be able to develop or introduce new or improved products in a timely manner, or at all.

We cannot control all of the various factors that might affect our suppliers' timely and effective delivery of raw materials and components to our manufacturing facilities or the availability of freight capacity for us to deliver products to our customers. In addition to increased costs, these factors could delay delivery of products, which may result in the assessment of liquidated damages or other contractual damages that could negatively impact our results of operations. Our utilization of a complex supply chain for raw material and component imports and the global distribution of our products makes us vulnerable to many risks, including, among other things, shortages or delays because of work restrictions; supply chain implications due to war or other geopolitical impacts on supply chains; risks of damage, destruction, or confiscation of products while in transit to and from our manufacturing facilities; organized labor strikes and work stoppages, such as labor disputes or related employee worker unavailability, that could disrupt operations at ports-of-entry; transportation and other delays in shipments as a result of heightened security screening and inspection processes or other port-of-entry limitations or restrictions; unexpected or significant port congestion; lack of freight availability; and freight cost increases. In addition, we may be required to arrange for products to be delivered through airfreight, which is significantly more expensive than standard shipping by sea. We may not be able to obtain sufficient freight capacity on a timely basis and, therefore, may not be able to timely receive shipments of raw materials and components or deliver products to customers.