Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 28, 2017
 
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___.
Commission File Number: 0-23246

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11919610&doc=12

Daktronics, Inc.
(Exact Name of Registrant as Specified in its Charter)

South Dakota
 
46-0306862
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
201 Daktronics Drive
Brookings, SD
 
 
57006
(Address of Principal Executive Offices)
 
(Zip Code)

(605) 692-0200
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of the registrant’s common stock outstanding as of November 27, 2017 was 44,474,171.





DAKTRONICS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended October 28, 2017

Table of Contents

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







Table of contents


PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

 
 
October 28,
2017
 
April 29,
2017
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
39,699

 
$
32,623

Restricted cash
 
27

 
216

Marketable securities
 
21,787

 
32,713

Accounts receivable, net
 
108,719

 
78,846

Inventories, net
 
70,436

 
66,486

Costs and estimated earnings in excess of billings
 
31,302

 
36,403

Current maturities of long-term receivables
 
1,964

 
2,274

Prepaid expenses and other assets
 
7,566

 
7,553

Income tax receivables
 
1,725

 
611

Total current assets
 
283,225

 
257,725

 
 
 
 
 
Long-term receivables, less current maturities
 
2,208

 
2,616

Goodwill
 
8,190

 
7,812

Intangibles, net
 
4,338

 
4,705

Investment in affiliates and other assets
 
4,730

 
4,534

Deferred income taxes
 
11,287

 
11,292

 
 
30,753

 
30,959

PROPERTY AND EQUIPMENT:
 
 

 
 

Land
 
2,134

 
2,099

Buildings
 
66,863

 
65,935

Machinery and equipment
 
86,875

 
84,189

Office furniture and equipment
 
5,642

 
5,604

Computer software and hardware
 
53,316

 
51,523

Equipment held for rental
 
287

 
374

Demonstration equipment
 
7,143

 
7,109

Transportation equipment
 
7,508

 
7,108

Property and equipment, net
 
229,768

 
223,941

Less accumulated depreciation
 
164,549

 
157,192

 
 
65,219

 
66,749

TOTAL ASSETS
 
$
379,197

 
$
355,433

 
 
 
 
 
See notes to consolidated financial statements.
 
 

 
 


1

Table of contents


DAKTRONICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
(in thousands, except share data)

 
 
October 28,
2017
 
April 29,
2017
 
 
(unaudited)
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 

Accounts payable
 
$
49,005

 
$
51,499

Accrued expenses
 
27,399

 
25,033

Warranty obligations
 
15,400

 
13,578

Billings in excess of costs and estimated earnings
 
16,561

 
10,897

Customer deposits (billed or collected)
 
14,349

 
14,498

Deferred revenue (billed or collected)
 
14,046

 
12,137

Current portion of other long-term obligations
 
913

 
1,409

Income taxes payable
 
1,334

 
1,544

Total current liabilities
 
139,007

 
130,595

 
 
 
 
 
Long-term warranty obligations
 
15,740

 
14,321

Long-term deferred revenue (billed or collected)
 
6,835

 
5,434

Other long-term obligations
 
2,333

 
2,848

Long-term income tax payable
 
3,306

 
3,113

Deferred income taxes
 
937

 
836

Total long-term liabilities
 
29,151

 
26,552

TOTAL LIABILITIES
 
168,158

 
157,147

 
 
 
 
 
SHAREHOLDERS' EQUITY:
 
 

 
 

Common Stock, no par value, authorized 120,000,000 shares; 44,671,548 and 44,372,357 shares issued and outstanding at October 28, 2017 and April 29, 2017, respectively
 
53,862

 
52,530

Additional paid-in capital
 
39,034

 
38,004

Retained earnings
 
123,330

 
113,967

Treasury Stock, at cost, 303,957 shares at October 28, 2017 and April 29, 2017, respectively
 
(1,834
)
 
(1,834
)
Accumulated other comprehensive loss
 
(3,353
)
 
(4,381
)
TOTAL SHAREHOLDERS' EQUITY
 
211,039

 
198,286

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
379,197

 
$
355,433

 
 
 
 
 
See notes to consolidated financial statements.
 
 

 
 
















2

Table of contents


DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

 
Three Months Ended
 
Six Months Ended
 
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Net sales
$
169,309

 
$
169,992

 
$
342,037

 
$
327,138

Cost of goods sold
126,705

 
125,684

 
254,787

 
243,763

Gross profit
42,604

 
44,308

 
87,250

 
83,375

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

Selling expense
15,350

 
15,891

 
30,289

 
31,150

General and administrative
8,868

 
8,625

 
17,803

 
17,408

Product design and development
8,948

 
7,126

 
17,995

 
14,169

 
33,166

 
31,642

 
66,087

 
62,727

Operating income
9,438

 
12,666

 
21,163

 
20,648

 
 
 
 
 
 
 
 
Nonoperating income (expense):
 

 
 

 
 

 
 

Interest income
151

 
171

 
362

 
376

Interest expense
(47
)
 
(76
)
 
(133
)
 
(118
)
Other (expense) income, net
(87
)
 
149

 
58

 
55

 
 
 
 
 
 
 
 
Income before income taxes
9,455

 
12,910

 
21,450

 
20,961

Income tax expense
2,323

 
3,889

 
5,889

 
6,401

Net income
$
7,132

 
$
9,021

 
$
15,561

 
$
14,560

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
44,412

 
43,988

 
44,345

 
44,051

Diluted
44,679

 
44,098

 
44,696

 
44,168

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 

 
 

Basic
$
0.16

 
$
0.21

 
$
0.35

 
$
0.33

Diluted
$
0.16

 
$
0.20

 
$
0.35

 
$
0.33

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.07

 
$
0.07

 
$
0.14

 
$
0.17

 
 
 
 
 
 
 
 
See notes to consolidated financial statements.
 
 
 

 
 

 
 


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Table of contents


DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

 
 
Three Months Ended
 
Six Months Ended
 
 
October 28, 2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
 
 
 
 
 
 
 
 
 
Net income
 
$
7,132

 
$
9,021

 
$
15,561

 
$
14,560

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Cumulative translation adjustments
 
(20
)
 
(509
)
 
1,061

 
(1,440
)
Unrealized loss on available-for-sale securities, net of tax
 
(26
)
 
(2
)
 
(33
)
 
(4
)
Total other comprehensive income (loss), net of tax
 
(46
)
 
(511
)
 
1,028

 
(1,444
)
Comprehensive income
 
$
7,086

 
$
8,510

 
$
16,589

 
$
13,116

 
 
 
 
 
 
 
 
 
See notes to consolidated financial statements.
 
 
 
 
 
 
 
 


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Table of contents


DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
Six Months Ended
 
October 28,
2017
 
October 29,
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
15,561

 
$
14,560

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 

 
 

Depreciation and amortization
8,902

 
9,242

Impairment of intangible assets

 
830

(Gain) loss on sale of property, equipment and other assets
(1,221
)
 
33

Share-based compensation
1,341

 
1,484

Equity in loss of affiliate
191

 

Provision for doubtful accounts
(21
)
 
962

Deferred income taxes, net
81

 
(48
)
Change in operating assets and liabilities
(15,496
)
 
(12,049
)
Net cash provided by operating activities
9,338

 
15,014

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchases of property and equipment
(7,735
)
 
(4,625
)
Proceeds from sale of property, equipment and other assets
2,000

 
72

Purchases of marketable securities

 
(4,583
)
Proceeds from sales or maturities of marketable securities
10,802

 
11,328

Purchases of equity investment
(607
)
 
(562
)
Net cash provided by investing activities
4,460

 
1,630

 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Payments on notes payable

 
(6
)
Proceeds from exercise of stock options
511

 
102

Principal payments on long-term obligations
(1,027
)
 
(904
)
Dividends paid
(6,197
)
 
(7,482
)
Payments for common shares repurchased

 
(1,825
)
Tax payments related to RSU issuances
(311
)
 
(213
)
Net cash used in financing activities
(7,024
)
 
(10,328
)
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES
113

 
(591
)
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
6,887

 
5,725

 
 
 
 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
 

 
 

Beginning of period
32,839

 
28,526

End of period
$
39,726

 
$
34,251

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash payments for:
 

 
 

Interest
$
134

 
$
153

Income taxes, net of refunds
6,934

 
1,170

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 

 
 

Demonstration equipment transferred to inventory
48

 
218

Purchase of property and equipment included in accounts payable
1,312

 
295

Contributions of common stock under the ESPP
820

 

 
 
 
 
See notes to consolidated financial statements.
 

 
 


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Table of contents


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)

Note 1. Basis of Presentation and Summary of Critical Accounting Policies

In the opinion of management, the accompanying unaudited 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 U.S. generally accepted accounting principles ("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 footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.  The balance sheet at April 29, 2017 has been derived from the audited financial statements at that date, but it does not include all of the information and footnotes required by GAAP for complete financial statements.  These financial statements should be read in conjunction with our financial statements and notes thereto for the year ended April 29, 2017, which are contained in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission.  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- to 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 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 28, 2017 and October 29, 2016 contained operating results for 26-weeks.

Investments in affiliates over which we have significant influence are accounted for under the equity method of accounting. Investments in affiliates over which we do not have the ability to exert significant influence over the affiliate's operating and financing activities are accounted for under the cost method of accounting. We have evaluated our relationships with our affiliates and have determined that these entities are not variable interest entities.

The aggregate amount of investments accounted for under the equity method was $3,093 and $2,678 at October 28, 2017 and April 29, 2017, respectively. The equity method requires us to report our share of losses up to our equity investment amount. Cash paid for investments in affiliates is included in the "Purchases of equity investment" line item in our consolidated statements of cash flows. Our proportional share of the respective affiliate’s earnings or losses is included in the "Other (expense) income, net" line item in our consolidated statements of operations. For the six months ended October 28, 2017, our share of the losses of our affiliates was $191.

The aggregate amount of investments accounted for under the cost method was $42 at October 28, 2017 and April 29, 2017, respectively. There have not been any identified events or changes in circumstances that may have a significant adverse effect on their fair value, and it is not practical to estimate their fair value.

Recent Accounting Pronouncements

Accounting Standards Adopted

In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments, which reduces the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. We early adopted ASU 2016-15 during the second quarter of fiscal 2018. Adoption of ASU 2016-15 did not have a material impact on our current period consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash, which requires that the statements of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. Accordingly, restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the statements of cash flows. We early-adopted ASU 2016-18 during the second quarter of fiscal 2018 and applied its provisions retrospectively. Other than the change in presentation within the statements of cash flows, the adoption of ASU 2016-18 did not have an impact on the Company's consolidated financial statements.

Accounting Standards Not Yet Adopted


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In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350), which simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual, or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. A goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for interim and annual periods beginning after December 15, 2019, and will require adoption on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the effect that adopting ASU 2017-04 will have on our consolidated results of operations, cash flows, and financial position.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other than Inventory, which is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current U.S. GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party, which is an exception to the principle of comprehensive recognition of current and deferred income taxes in U.S. GAAP. This update eliminates the exception by requiring entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the effect that adopting ASU 2016-16 will have on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which provides guidance regarding the measurement and recognition of credit impairment for certain financial assets. ASU 2016-13 is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effect that adopting ASU 2016-13 will have on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (that is, lessees and lessors). ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. ASU 2016-02 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the effect that adopting ASU 2016-02 will have on our consolidated results of operations, cash flows, and financial position.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition model that requires a company to recognize revenue from the transfer of goods or services to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The FASB has also issued ASUs 2016-08, 2016-10, 2016-12, and 2016-20 to clarify guidance with respect to principal versus agent considerations and the identification of performance obligations and licensing, to issue guidance on certain narrow areas, and to add practical expedients. We will adopt ASU 2014-09 and related guidance during the first quarter of fiscal 2019. We have commenced a process to evaluate the impact of ASU 2014-09 on our contracts, including identifying potential differences that would result from applying the requirements of ASU 2014-09. In fiscal 2017, we made progress in reviewing our various types of revenue arrangements, and completed our preliminary assessment of all performance obligations. We have drafted accounting policies and are evaluating the disclosure requirements of ASU 2014-09 on our business processes, controls and systems. We plan to finalize our assessment during the fourth quarter of fiscal 2018 and provide training to those impacted in the organization. As a result of the review performed to date, we do not anticipate that the adoption will significantly change the timing or amount of revenue recognized, based upon our current assessment of ‘point in time’ and ‘over time’ revenue recognition. Therefore, we do not anticipate that the adoption of ASU 2014-09 will materially impact our consolidated results of operations and financial statements, other than the additional disclosure requirements.

Note 2. Earnings Per Share ("EPS")

Basic EPS is computed by dividing income attributable to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution which may occur if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock which share in our earnings.


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The following is a reconciliation of the net income and common share amounts used in the calculation of basic and diluted EPS for the three and six months ended October 28, 2017 and October 29, 2016
 
 Net income
 
 Shares
 
 Per share income
For the three months ended October 28, 2017
 
 
 
 
 
Basic earnings per share
$
7,132

 
44,412

 
$
0.16

    Dilution associated with stock compensation plans

 
267

 

Diluted earnings per share
$
7,132

 
44,679

 
$
0.16

For the three months ended October 29, 2016
 
 
 
 
 
Basic earnings per share
$
9,021

 
43,988

 
$
0.21

    Dilution associated with stock compensation plans

 
110

 
(0.01
)
Diluted earnings per share
$
9,021

 
44,098

 
$
0.20

For the six months ended October 28, 2017
 
 
 
 
 
Basic earnings per share
$
15,561

 
44,345

 
$
0.35

    Dilution associated with stock compensation plans

 
351

 

Diluted earnings per share
$
15,561

 
44,696

 
$
0.35

For the six months ended October 29, 2016
 
 
 
 
 
Basic earnings per share
$
14,560

 
44,051

 
$
0.33

    Dilution associated with stock compensation plans

 
117

 

Diluted earnings per share
$
14,560

 
44,168

 
$
0.33

 
Options outstanding to purchase 1,303 shares of common stock with a weighted average exercise price of $13.08 for the three months ended October 28, 2017 and 2,162 shares of common stock with a weighted average exercise price of $14.56 for the three months ended October 29, 2016 were not included in the computation of diluted (loss) earnings per share because the effects would be anti-dilutive.

Options outstanding to purchase 1,312 shares of common stock with a weighted average exercise price of $13.08 for the six months ended October 28, 2017 and 2,655 shares of common stock with a weighted average exercise price of $13.41 for the six months ended October 29, 2016 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

Note 3. Share Repurchase Program

On June 17, 2016, our Board of Directors approved a stock repurchase program under which Daktronics, Inc. may purchase up to $40,000 of its outstanding shares of common stock. Under this program, we may repurchase shares from time to time in open market transactions and in privately negotiated transactions based on business, market, applicable legal requirements and other considerations. The repurchase program does not require the repurchase of a specific number of shares and may be terminated at any time. During the first and second quarter of fiscal 2018, we had no repurchases of shares of our outstanding common stock. During the first quarter of fiscal 2017, we repurchased 284 shares of common stock at a total cost of $1,825, and there were no other purchases during fiscal 2017. As of October 28, 2017, we had $38,175 of remaining capacity under our current share repurchase program.

Note 4. Segment Disclosure

We have organized our business into five segments which meet the definition of reportable segments under Accounting Standards Codification ("ASC") 280-10, Segment Reporting: Commercial, Live Events, High School Park and Recreation, Transportation, and International. These segments are based on the type of customer or geography and are the same as our business units.
 
Our Commercial business unit primarily consists of sales of our video display systems, digital billboards, Galaxy® and Fuelight product lines to resellers (primarily sign companies), Out-of-Home ("OOH") companies, national retailers, quick-serve restaurants, casinos and petroleum retailers.  Our Live Events business unit primarily consists of sales of integrated scoring and video display systems to college and professional sports facilities and convention centers and sales of our mobile display technology to video rental organizations and other live events type venues.  Our High School Park and Recreation business unit primarily consists of sales of scoring systems, Galaxy® displays and video display systems to primary and secondary education facilities.  Our Transportation business unit primarily consists of sales of our Vanguard® and Galaxy® product lines to governmental transportation departments, airlines and other transportation related customers.  Our International business unit consists of sales of all product lines outside the United States and Canada. In our International business unit, we focus on product lines related to integrated scoring and video display systems for sports and commercial applications, OOH advertising products, and European transportation related products.


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Our segment reporting presents results through gross profit less selling costs. Gross profit is net sales less cost of goods sold. Cost of goods sold consists primarily of inventory, 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. Selling expenses consist primarily of salaries, other employee-related costs, travel and entertainment expenses, facilities-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 demos, and supplies. Segment profit excludes general and administration expense, product development expense, interest income and expense, non-operating income and income tax expense.  Assets are not allocated to the segments.  Depreciation and amortization are allocated to each segment based on various financial measures; however, some depreciation and amortization are corporate in nature and remain unallocated.  Our segments follow the same accounting policies as those described in Note 1 of our Annual Report on Form 10-K for the fiscal year ended April 29, 2017.  Unabsorbed manufacturing costs are allocated to the business unit benefiting most from that manufacturing location's production capabilities. Unabsorbed costs of domestic field sales and services infrastructure, including most field administrative staff, are allocated to the Commercial, Live Events, High School Park and Recreation, and Transportation business units based on cost of sales.  Shared manufacturing, buildings and utilities, and procurement costs are allocated based on payroll dollars, square footage and various other financial measures.

We do not maintain information on sales by products; therefore, disclosure of such information is not practical.


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The following table sets forth certain financial information for each of our five operating segments for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Net sales:
 
 
 
 
 
 
 
    Commercial
$
34,377

 
$
39,923

 
$
67,240

 
$
76,177

    Live Events
68,653

 
55,363

 
146,265

 
115,996

    High School Park and Recreation
29,660

 
28,707

 
58,139

 
56,324

    Transportation
16,476

 
16,101

 
35,388

 
30,387

    International
20,143

 
29,898

 
35,005

 
48,254

 
169,309

 
169,992

 
342,037

 
327,138

 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
    Commercial
5,271

 
10,552

 
13,539

 
19,707

    Live Events
16,255

 
11,625

 
33,309

 
23,801

    High School Park and Recreation
10,553

 
9,242

 
20,904

 
18,702

    Transportation
6,181

 
5,799

 
13,126

 
10,641

    International
4,344

 
7,090

 
6,372

 
10,524

 
42,604

 
44,308

 
87,250

 
83,375

 
 
 
 
 
 
 
 
Selling expense:
 
 
 
 
 
 
 
    Commercial
4,669

 
4,715

 
9,363

 
9,374

    Live Events
3,401

 
2,967

 
6,719

 
6,269

    High School Park and Recreation
2,743

 
2,491

 
5,347

 
4,951

    Transportation
1,102

 
1,268

 
2,139

 
2,509

    International
3,435

 
4,450

 
6,721

 
8,047

 
15,350

 
15,891

 
30,289

 
31,150

 
 
 
 
 
 
 
 
Non-allocated operating expenses:
 
 
 
 
 
 
 
    General and administrative
8,868

 
8,625

 
17,803

 
17,408

    Product design and development
8,948

 
7,126

 
17,995

 
14,169

Operating income
9,438

 
12,666

 
21,163

 
20,648

 
 
 
 
 
 
 
 
Nonoperating income (expense):
 
 
 
 
 
 
 
    Interest income
151

 
171

 
362

 
376

    Interest expense
(47
)
 
(76
)
 
(133
)
 
(118
)
Other (expense) income, net
(87
)
 
149

 
58

 
55

 
 
 
 
 
 
 
 
Income before income taxes
9,455

 
12,910

 
21,450

 
20,961

Income tax expense
2,323

 
3,889

 
5,889

 
6,401

Net income
$
7,132

 
$
9,021

 
$
15,561

 
$
14,560

 
 
 
 
 
 
 
 
Depreciation, amortization and impairment:
 
 
 
 
 
 
 
    Commercial
$
1,544

 
$
1,594

 
$
3,078

 
$
3,161

    Live Events
1,196

 
1,273

 
2,434

 
2,553

    High School Park and Recreation
422

 
451

 
844

 
889

    Transportation
285

 
324

 
579

 
646

    International
270

 
1,162

 
551

 
1,491

    Unallocated corporate depreciation
725

 
668

 
1,416

 
1,332

 
$
4,442

 
$
5,472

 
$
8,902

 
$
10,072

 

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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 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Net sales:
 
 
 
 
 
 
 
United States
$
143,856

 
$
134,574

 
$
297,858

 
$
269,592

Outside U.S.
25,453

 
35,418

 
44,179

 
57,546

 
$
169,309

 
$
169,992

 
$
342,037

 
$
327,138

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 28,
2017
 
April 29,
2017
 
 
 
 
Property and equipment, net of accumulated depreciation:
 
 
 
 
 
 


United States
$
59,458

 
$
62,425

 
 
 


Outside U.S.
5,761

 
4,324

 
 
 
 
 
$
65,219

 
$
66,749

 
 
 


 
We have numerous customers worldwide for sales of our products and services; therefore, we are not economically dependent on a limited number of customers for the sale of our products and services except with respect to our dependence on two major digital billboard customers in our Commercial business unit. 

Note 5. Marketable Securities

We have a cash management program which provides for the investment of cash balances not used in current operations.  We classify our investments in marketable securities as available-for-sale in accordance with the provisions of ASC 320, Investments – Debt and Equity Securities.  Marketable securities classified as available-for-sale are reported at fair value with unrealized gains or losses, net of tax, reported in accumulated other comprehensive loss.  As it relates to fixed income marketable securities, it is not likely we will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of October 28, 2017, we anticipate we will recover the entire amortized cost basis of such fixed income securities, and we have determined no other-than-temporary impairments associated with credit losses were required to be recognized. The cost of securities sold is based on the specific identification method. Where quoted market prices are not available, we use the market price of similar types of securities traded in the market to estimate fair value.  

As of October 28, 2017 and April 29, 2017, our available-for-sale securities consisted of the following:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Balance as of October 28, 2017
 
 
 
 
 
 
 
Certificates of deposit
$
9,419

 
$

 
$

 
$
9,419

U.S. Government sponsored entities
6,667

 

 
(36
)
 
6,631

Municipal bonds
5,732

 
5

 

 
5,737

 
$
21,818

 
$
5

 
$
(36
)
 
$
21,787

Balance as of April 29, 2017
 

 
 

 
 

 
 

Certificates of deposit
$
12,487

 
$

 
$

 
$
12,487

U.S. Government securities
400

 

 

 
400

U.S. Government sponsored entities
12,260

 

 
(22
)
 
12,238

Municipal bonds
7,574

 
14

 

 
7,588

 
$
32,721

 
$
14

 
$
(22
)
 
$
32,713


Realized gains or losses on investments are recorded in our consolidated statements of operations as other income (expense), net. Upon the sale of a security classified as available-for-sale, the security’s specific unrealized gain (loss) is reclassified out of "accumulated other comprehensive loss" into earnings based on the specific identification method. In the six months ended October 28, 2017 and October 29, 2016, the reclassifications from accumulated other comprehensive loss to earnings were immaterial.


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All available-for-sale securities are classified as current assets, as they are readily available to support our current operating needs. The contractual maturities of available-for-sale debt securities as of October 28, 2017 were as follows:
 
Less than 12 months
 
1-5 Years
 
Total
Certificates of deposit
$
6,194

 
$
3,225

 
$
9,419

U.S. Government sponsored entities
998

 
5,633

 
6,631

Municipal bonds
2,726

 
3,011

 
5,737

 
$
9,918

 
$
11,869

 
$
21,787


Note 6. Business Combinations

ADFLOW Acquisition

We have a contingent liability related to a prior year acquisition of ADFLOW Networks, Inc. ("ADFLOW"), on March 15, 2016. For more information related to the ADFLOW acquisition, see "Note 4. Business Combinations" of our Annual Report on Form 10-K for the fiscal year ended April 29, 2017. The fair value of such contingent consideration is estimated as of the acquisition date, and subsequently at the end of each reporting period, using forecasted cash flows. Projecting future cash flows requires us to make significant estimates and assumptions regarding future events, conditions, or revenues being achieved under the subject contingent agreement as well as the appropriate discount rate. Such valuation techniques include one or more significant inputs that are not observable. "See Note 13. Fair Value Measurement" for more information.

Note 7. Sale of Non-Digital Division

In September 2017, we sold our non-digital division assets, primarily consisting of inventory, non-digital manufacturing equipment, patented and unpatented technology and know-how, customer lists, and backlog, net of warranty obligations and accounts payable with a net book value of $517. We recorded a gain of $1,267 on the disposal, which is included in cost of goods sold in the International business unit.

Note 8. Goodwill

The changes in the carrying amount of goodwill related to each reportable segment for the six months ended October 28, 2017 were as follows: 
 
Live Events
 
Commercial
 
Transportation
 
International
 
Total
Balance as of April 29, 2017
$
2,274

 
$
3,199

 
$
45

 
$
2,294

 
$
7,812

Foreign currency translation
22

 
153

 
23

 
180

 
378

Balance as of October 28, 2017
$
2,296

 
$
3,352

 
$
68

 
$
2,474

 
$
8,190

 
We perform an analysis of goodwill on an annual basis, and it is tested for impairment more frequently if events or changes in circumstances indicate that an asset might be impaired. We complete this annual analysis during our third quarter of each fiscal year, based on the goodwill amount as of the first business day of our third fiscal quarter.  The result of our analysis indicated no goodwill impairment existed as of October 30, 2016, which was the first business day of our third quarter of fiscal 2017. We are currently in the process of completing this annual analysis based on the goodwill amount as of the first business day of our third quarter of fiscal 2018.

Note 9. Inventories

Inventories consisted of the following: 
 
October 28,
2017
 
April 29,
2017
Raw materials
$
26,650

 
$
24,801

Work-in-process
10,887

 
7,366

Finished goods
32,899

 
34,319

 
$
70,436

 
$
66,486

 

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Note 10. Receivables

Accounts receivable are reported net of an allowance for doubtful accounts of $2,529 and $2,610 at October 28, 2017 and April 29, 2017, respectively. Included in accounts receivable as of October 28, 2017 and April 29, 2017 was $1,454 and $1,857, respectively, of retainage on construction-type contracts, all of which is expected to be collected within one year.

In connection with certain sales transactions, we have entered into sales contracts with installment payments exceeding twelve months and sales-type leases.  The present value of these contracts and leases is recorded as a receivable as the revenue is recognized in accordance with U.S. GAAP, and profit is recognized to the extent the present value is in excess of cost.  We generally retain a security interest in the equipment or in the cash flow generated by the equipment until the contract is paid.  The present value of long-term contracts and lease receivables, including accrued interest and current maturities, was $4,172 and $4,890 as of October 28, 2017 and April 29, 2017, respectively.  Contract and lease receivables bearing annual interest rates of 4.8 to 10.0 percent are due in varying annual installments through 2024.  The face amount of long-term receivables was $4,213 and $5,201 as of October 28, 2017 and April 29, 2017, respectively.

Note 11. 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. We establish accruals for those contingencies when the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. We do not record an accrual when the likelihood of loss being incurred is probable, but the amount cannot be reasonably estimated, or when the loss is believed to be only reasonably possible or remote, although disclosures will be made for material matters as required by ASC 450-20, Contingencies - Loss Contingencies. Our assessment of whether a loss is reasonably possible or probable is based on our assessment and consultation with legal counsel regarding the ultimate outcome of the matter following all appeals.

As of October 28, 2017 and April 29, 2017, we did not believe there was a reasonable probability that any material loss for these various claims or legal actions, including reviews, inspections or other legal proceedings, if any, would be incurred. Accordingly, no material accrual or disclosure of a potential range of loss has been made related to these matters. In the opinion of management, the ultimate liability of all unresolved legal proceedings is not expected to have a material effect on our financial position, liquidity or capital resources.

Warranties:  We offer a standard parts coverage warranty for periods varying from one to five years for most of our products.  We also offer additional types of warranties to include on-site labor, routine maintenance and event support.  In addition, the terms of warranties on some installations can vary from one to 10 years.  The specific terms and conditions of these warranties vary primarily depending on the type of the product sold.  We estimate the costs which may be incurred under the contractual warranty obligations and record a liability in the amount of such estimated costs at the time the revenue is recognized.  Factors affecting our estimate of the cost of our warranty obligations include historical experience and expectations of future conditions.  We continually assess the adequacy of our recorded warranty accruals and, to the extent we experience any changes in warranty claim activity or costs associated with servicing those claims, our accrued warranty obligation is adjusted accordingly.

During fiscal 2016, we discovered a warranty issue caused by a mechanical device failure within a module for displays primarily in our OOH applications built prior to fiscal 2013. The device failure causes a visual defect in the display. Over the past three years, we have deployed preventative maintenance to sites impacted and repaired the defective devices in our repair center. When certain site locations have exceeded an acceptable failure rate, we have refurbished the display to meet customers’ expectations under contractual obligations. During fiscal 2017, 2016, and 2015 we recognized warranty expense for probable and reasonably estimated costs to remediate this issue of $1,766, $9,174, and $1,168, respectively. We recognized warranty expense related to this issue of $3,439 during the six months ended October 28, 2017. This increased expense level is not the result of a new issue, but is primarily based on our decision to preserve our market leadership. We elected to expand the refurbishments for customer relationship purposes. As of October 28, 2017, we had $4,380 remaining in accrued warranty obligations for the estimate of probable future claims related to this issue. Although many of our contractual warranty arrangements are nearing expiration for products with this issue, we may incur additional discretionary costs to maintain customer relationships or for higher than expected failure rates. Accordingly, it is possible that the ultimate cost to resolve this matter may increase and be materially different from the amount of the current estimate and accrual.


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Table of contents


Changes in our warranty obligation for the six months ended October 28, 2017 consisted of the following:
 
 
 
Amount
Beginning accrued warranty obligations
 
 
$
27,899

      Warranties issued during the period
 
 
6,958

      Settlements made during the period
 
 
(8,260
)
      Changes in accrued warranty obligations for pre-existing warranties during the period, including expirations
 
 
4,543

Ending accrued warranty obligations
 
 
$
31,140

 
Performance guarantees:  We have entered into standby letters of credit and surety bonds with financial institutions relating to the guarantee of our future performance on contracts, primarily construction type contracts.  As of October 28, 2017, we had outstanding letters of credit and surety bonds in the amount of $8,841 and $10,333, 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, which are generally one year.

Leases:  We lease vehicles, office space and equipment for various global sales and service locations, including manufacturing space in the United States and China. Some of these leases, including the lease for manufacturing facilities in Sioux Falls, South Dakota, include provisions for extensions or purchase.  The lease for the facilities in Sioux Falls, South Dakota, can be extended for an additional five years past its current term, which ends March 31, 2022, and it contains an option to purchase the property subject to the lease from March 31, 2017 to March 31, 2022 for $9,000, which approximates fair value.  If the lease is extended, the purchase option increases to $9,090 for the year ending March 31, 2023 and $9,180 for the year ending March 31, 2024.  Rental expense for operating leases was $1,715 and $1,614 for the six months ended October 28, 2017 and October 29, 2016, respectively.  

Future minimum payments under noncancelable operating leases, excluding executory costs such as management and maintenance fees, with initial or remaining terms of one year or more consisted of the following at October 28, 2017:
Fiscal years ending
 
Amount
2018
 
$
1,482

2019
 
2,369

2020
 
1,899

2021
 
1,640

2022
 
1,334

Thereafter
 
404

 
 
$
9,128


Purchase commitments:  From time to time, we commit to purchase inventory, advertising, cloud-based information systems, information technology maintenance and support services, and various other products and services over periods that extend beyond one year.  As of October 28, 2017, we were obligated under the following conditional and unconditional purchase commitments, which included $350 in conditional purchase commitments:
Fiscal years ending
 
Amount
2018
 
$
1,682

2019
 
2,345

2020
 
1,668

2021
 
253

2022
 
143

Thereafter
 
380

 
 
$
6,471


Note 12. Income Taxes

We are subject to U.S. Federal income tax as well as income taxes of multiple state and foreign jurisdictions.  Due to various factors and operating in multiple state and foreign jurisdictions, our effective tax rate is subject to fluctuation. As a result of the completion of examinations by the Internal Revenue Service on prior years and the expiration of statutes of limitations, our fiscal years 2014, 2015, and 2016 are the remaining years open under statutes of limitations.  Certain subsidiaries are also subject to income tax in several foreign jurisdictions which have open tax years varying by jurisdiction beginning in fiscal 2007.


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Table of contents


As of October 28, 2017, we had $3,306 of unrecognized tax benefits which would reduce our effective tax rate if recognized.  

Note 13. Fair Value Measurement

ASC 820, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.  It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The fair value hierarchy within ASC 820 distinguishes between the following three levels of inputs which may be utilized when measuring fair value.

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than quoted prices included within Level 1 for the assets or liabilities, either directly or indirectly (for example, quoted market prices for similar assets and liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated input).

Level 3 - Unobservable inputs supported by little or no market activity based on our own assumptions used to measure assets and liabilities.

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 28, 2017 and April 29, 2017 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 28, 2017
 
 
 
 
 
 
 
Cash and cash equivalents
$
39,699

 
$

 
$

 
$
39,699

Restricted cash
27

 

 

 
27

Available-for-sale securities:
 

 
 

 
 
 
 
Certificates of deposit

 
9,419

 

 
9,419

U.S. Government sponsored entities

 
6,631

 

 
6,631

Municipal bonds

 
5,737

 

 
5,737

Derivatives - asset position

 
76

 

 
76

Derivatives - liability position

 
(269
)
 

 
(269
)
Contingent liability

 

 
(986
)
 
(986
)
 
$
39,726

 
$
21,594

 
$
(986
)
 
$
60,334

Balance as of April 29, 2017
 

 
 

 
 
 
 

Cash and cash equivalents
$
32,623

 
$

 
$

 
$
32,623

Restricted cash
216

 

 

 
216

Available-for-sale securities:
 

 
 

 
 
 
 
Certificates of deposit

 
12,487

 

 
12,487

U.S. Government securities
400

 

 

 
400

U.S. Government sponsored entities

 
12,238

 

 
12,238

Municipal bonds

 
7,588

 

 
7,588

Derivatives - asset position

 
64

 

 
64

Derivatives - liability position

 
(277
)
 

 
(277
)
Contingent liability

 

 
(1,891
)
 
(1,891
)
 
$
33,239

 
$
32,100

 
$
(1,891
)
 
$
63,448


A roll forward of the Level 3 contingent liability, both short- and long-term, for the six months ended October 28, 2017 is as follows:
Contingent liability as of April 29, 2017
 
$
1,891

Settlements
 
(1,009
)
Interest
 
20

Foreign currency translation
 
84

Contingent liability as of October 28, 2017
 
$
986



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Table of contents


The following methods and assumptions were used to estimate the fair value of each class of financial instrument.  There have been no changes in the valuation techniques used by us to value our financial instruments.

Cash and cash equivalents: Consists of cash on hand in bank deposits and highly liquid investments, primarily money market accounts.  The fair value was measured using quoted market prices in active markets.  The carrying amount approximates fair value.

Restricted cash: Consists of cash and cash equivalents held in bank deposit accounts to secure issuances of foreign bank guarantees.  The fair value of restricted cash was measured using quoted market prices in active markets.  The carrying amount approximates fair value.

Certificates of deposit: Consists of time deposit accounts with original maturities of less than three years and various yields.  The fair value of these securities was measured based on valuations observed in less active markets than Level 1 investments from a third-party financial institution.  The carrying amount approximates fair value.

U.S. Government securities:  Consists of U.S. Government treasury bills, notes, and bonds with original maturities of less than three years and various yields. The fair value of these securities was measured using quoted market prices in active markets.

U.S. Government sponsored entities: Consists of Fannie Mae and Federal Home Loan Bank investment grade debt securities trading with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.  The fair value of these securities was measured based on valuations observed in less active markets than Level 1 investments.  The contractual maturities of these investments vary from one month to three years.

Municipal bonds: Consist of investment grade municipal bonds trading with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.  The contractual maturities of these investments vary from two to three years.  The fair value of these bonds was measured based on valuations observed in less active markets than Level 1 investments.

Derivatives – currency forward contracts: Consists of currency forward contracts trading with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.  The fair value of these securities was measured based on a valuation from a third-party bank. See "Note 14. Derivative Financial Instruments" for more information regarding our derivatives.

Contingent liability: Consists of the fair value of a liability measured on expected future payments relating to a business acquisition if future financial performance measures are achieved.  The contingent liability was calculated by estimating the discounted present value of expected future payments for estimated performance measure attainment.  To estimate future performance measure attainment, we utilized significant unobservable inputs as of October 28, 2017 and April 29, 2017.  The unobservable inputs included management expectations and forecasts for business performance and an estimated discount rate based on current borrowing interest rates. To the extent that these assumptions changed or actual results differed from these estimates, the fair value of the contingent consideration liabilities could change.  The contingent liability is presented in other long-term obligations in our consolidated balance sheets.
 
Non-recurring measurements: The fair value measurement standard also applies to certain non-financial assets and liabilities measured at fair value on a nonrecurring basis.  Certain long-lived assets such as goodwill, intangible assets and property, plant and equipment are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

Other measurements using fair value: Some of our financial instruments, such as accounts receivable, long-term receivables, prepaid expense and other assets, costs and earnings in excess of billings and billings in excess of costs, accounts payable, warranty obligations, customer deposits, deferred revenue, and other long-term obligations, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.

Note 14. Derivative Financial Instruments

We utilize derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates on those transactions denominated in currencies other than our functional currency, which is the U.S. dollar.  We enter into currency forward contracts to manage these economic risks.  We account for all derivatives on the balance sheet within accounts receivable or accounts payable measured at fair value, and changes in fair values are recognized in earnings unless specific hedge accounting criteria are met for cash flow or net investment hedges. As of October 28, 2017 and April 29, 2017, we had not designated any of our derivative instruments as accounting hedges, and thus we recorded the changes in fair value in other income (expense), net.

The foreign currency exchange contracts in aggregated notional amounts in place to exchange U.S. dollars at October 28, 2017 and April 29, 2017 were as follows:

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Table of contents


 
October 28, 2017
 
April 29, 2017
 
U.S. Dollars
 
Foreign
Currency
 
U.S.
Dollars
 
Foreign
Currency
Foreign Currency Exchange Forward Contracts:
 
 
 
 
 
 
 
U.S. Dollars/Australian Dollars
3,993

 
5,219

 
7,984

 
10,669

U.S. Dollars/Canadian Dollars
1,127

 
1,481

 
256

 
345

U.S. Dollars/British Pounds
(140
)
 

 
4,936

 
3,959

U.S. Dollars/Singapore Dollars

 

 
605

 
844

U.S. Dollars/Euros
2,271

 
1,982

 
528

 
491

U.S. Dollars/Swiss Franc
419

 
400

 

 


As of October 28, 2017, there was an asset and liability of $76 and $269, respectively, and as of April 29, 2017, there was an asset and liability of $64 and $277, respectively, representing the fair value of foreign currency exchange forward contracts, which were determined using Level 2 inputs from a third-party bank.

Note 15. Subsequent Events

On November 30, 2017, our Board of Directors declared a regular quarterly dividend of $0.07 per share on our common stock payable on December 21, 2017 to holders of record of our common stock on December 11, 2017.




17

Table of contents


Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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; (iii.) trends affecting our financial condition or results of operations; (iv.) our growth strategy and operating strategy; (v.) the declaration and payment of dividends; (vi.) the timing and magnitude of future contracts; (vii.) parts 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; and (xii.) the timing and magnitude of any acquisitions or dispositions.  The words “may,” “would,” “could,” “should,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plans” 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 the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended April 29, 2017 in the section entitled “Item 1A. Risk Factors” and "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 the Securities and Exchange Commission.

The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). This discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in this Report. The preparation of these 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.

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 of the United States and Canada. Disclosures related to our business segments are provided in "Note 4. Segment Disclosure" of the Notes to the Consolidated Financial Statements included elsewhere in this Report.

Our net sales and profitability historically have fluctuated due to the impact of large project 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. Large project orders can include several displays, controllers, and subcontracted structure builds, each of which can occur on varied schedules per the customer's needs. Net sales and gross profit percentages also have fluctuated due to other seasonal factors, including the impact of holidays, which primarily affects our third fiscal quarter.  

Our gross margins on large custom and large standard orders tend to fluctuate more than on small standard orders.  Large product orders involving competitive bidding and substantial subcontract work for product installation generally have lower gross margins.  Although we follow the percentage of completion method of recognizing revenues for large custom orders, we nevertheless have experienced fluctuations in operating results and expect our future results of operations will be subject to similar fluctuations.

Our backlog consists of contractually binding sales agreements or purchase orders we expect to fill within the next 24 months. Orders, which we define as a receipt of an executed contract and any required deposits, are booked and included in backlog. As a result, certain orders for which we have received binding letters of intent or contracts will not be booked until all required contractual documents and deposits are received. In addition, order bookings can vary significantly on a quarterly basis as a result of the timing of large orders. Because order backlog may be subject to extended delivery schedules, orders may be canceled, and orders have varied estimated

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profitability, our backlog is not necessarily indicative of future net sales or net income.  Backlog can fluctuate due to large order booking timing and seasonality. 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.

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 and Summary of Critical Accounting Policies" of the Notes to the Consolidated Financial Statements included elsewhere in this Report.

GENERAL

Our mission is to be the world leader at informing and entertaining audiences through dynamic audio-visual communication systems. We measure our success through estimated market share based on estimated market demand for digital displays and generating profits over the long-term. Our success is contingent on the depth and quality of our products, including related control systems, the depth of our service offerings and our technology serving these market demands.  These qualities are important for our long-term success because our products have finite lifetimes, and we strive to win replacement business from existing customers.

Increases in user adoption, the acceptance of a variety of digital solutions, and the decline of digital solution pricing over the years has increased the size of the global market.  With this positive demand, strong competition exists across all of our business units, which causes margin constraints.  Projects with multi-million dollar revenue potential also attract competition, which generally reduces profitability.

We organize around customer segments and geographic regions as further described in "Note 4. Segment Disclosure" of the Notes to the Consolidated Financial Statements included elsewhere in this Report. Each business segment also has unique key growth drivers and challenges.

Commercial Business Unit: 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 retailers, quick serve restaurants, petroleum businesses, and other nationwide organizations.
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 marketplace expansion.
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 companies continue developing new sites and start to replace digital billboards which are reaching end of life.  This is dependent on there being no adverse changes in the digital billboard regulatory environment, which could restrict future deployments of billboards, as well as maintaining our current market share of the business concentrated in a few large OOH companies.
Replacement cycles within each of these areas.

Live Events Business Unit: 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, 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 systems needs throughout a sports facility.
Replacement cycles within each of these areas.

High School Park and Recreation Business Unit: Over the long-term, we believe growth in the High School Park and Recreation business unit will result from a number of factors, including:


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Increased demand for video systems in high schools as school districts realize the revenue generating potential of these displays versus traditional scoreboards.
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.
The use of more sophisticated displays in athletic facilities, such as aquatic venues in schools.

Transportation Business Unit: 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 of the United States transportation infrastructure requires intelligent transportation systems. This growth is highly dependent on government spending, primarily by the federal government, along with the continuing acceptance of private/public partnerships as an alternative funding source.

International Business Unit: 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 in Europe and the Middle East. We also focus on sports facility, spectacular-type, and third-party advertising market opportunities and the factors listed in each of the other business units to the extent they apply outside the United States and Canada.

Each of our business units is impacted by adverse 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 severe economic downturns, the sports business also can be seriously impacted. Our Commercial and International business units are highly dependent on economic conditions in general.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED OCTOBER 28, 2017 AND OCTOBER 29, 2016

Net Sales
 
Three Months Ended
(in thousands)
October 28,
2017
 
October 29,
2016
 
Dollar Change
 
Percent Change
Net sales:
 
 
 
 
 
 
 
    Commercial
$
34,377

 
$
39,923

 
$
(5,546
)
 
(13.9
)%
    Live Events
68,653

 
55,363

 
13,290

 
24.0

    High School Park and Recreation
29,660

 
28,707

 
953

 
3.3

    Transportation
16,476

 
16,101

 
375

 
2.3

    International
20,143

 
29,898

 
(9,755
)
 
(32.6
)
 
$
169,309

 
$
169,992

 
$
(683
)
 
(0.4
)%
Orders:
 

 
 

 
 
 
 

    Commercial
$
39,134

 
$
36,663

 
$
2,471

 
6.7
 %
    Live Events
43,730

 
31,050

 
12,680

 
40.8

    High School Park and Recreation
14,737

 
15,764

 
(1,027
)
 
(6.5
)
    Transportation
14,245

 
14,754

 
(509
)
 
(3.4
)
    International
30,414

 
18,643

 
11,771

 
63.1

 
$
142,260

 
$
116,874

 
$
25,386

 
21.7
 %

Commercial: The decrease in net sales for the three months ended October 28, 2017 compared to the same period one year ago was primarily due to lower order volumes in the on-premise niche and the timing of delivery of large projects in the spectacular niche, which were partially offset by an increase in the billboard niche shipment activity due to timing of customer demand.

The increase in orders for the three months ended October 28, 2017 compared to the same period one year ago was the net result of a large account-based order in the billboard niche, which was offset by decreases in the on-premise and spectacular niches due to a number of factors, including competitive market pricing, a delay of national account-based opportunities during the three months ended October 28, 2017 as compared to the same period last year, the natural volatility of large project timing, and limited sales coverages in certain geographies due to employee turnover.


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Live Events:  The increase in net sales for the three months ended October 28, 2017 compared to the same period one year ago was primarily due to continued demand and the timing of the demand for upgraded or new solutions for arenas, professional sports, and colleges and universities.

Orders increased for the three months ended October 28, 2017 compared to the same period one year ago due to an increased number of projects in professional baseball sport arenas.

High School Park and Recreation: The increase in net sales for the three months ended October 28, 2017 compared to the same period one year ago was primarily due to increased shipments of scoring systems and message centers as a result of increased market activity and timing of customer demand.

Orders decreased for the three months ended October 28, 2017 compared to the same period one year ago due to variability in order timing.

Transportation: Net sales for the three months ended October 28, 2017 compared to the same period one year ago remained relatively flat.

Orders for the three months ended October 28, 2017 compared to the same period one year ago decreased primarily due to variability caused by large order timing.

International:  Net sales for the three months ended October 28, 2017 compared to the same period one year ago decreased primarily due to lower volume of orders in the prior-year period.

Orders increased for the three months ended October 28, 2017 compared to the same period one year ago primarily due to the volatility of large order timing.

Backlog

The product order backlog as of October 28, 2017 was $155 million as compared to $142 million as of October 29, 2016 and $184 million at the end of the first quarter of fiscal 2018.  Historically, our backlog varies due to the seasonality of our business, the timing of large projects, and customer delivery schedules for these orders.  The backlog as of October 28, 2017 increased from October 29, 2016 in our Transportation and International business units and decreased in our Commercial, Live Events and High School Park and Recreation business units.

Gross Profit
 
Three Months Ended
 
October 28, 2017
 
 
 
October 29, 2016
 
 Amount
 
As a Percent of Net Sales
 
 
 
 Amount
 
As a Percent of Net Sales
(in thousands)
Commercial
$
5,271

 
15.3
%
 

 
$
10,552

 
26.4
%
Live Events
16,255

 
23.7

 

 
11,625

 
21.0

High School Park and Recreation
10,553

 
35.6

 

 
9,242

 
32.2

Transportation
6,181

 
37.5

 

 
5,799

 
36.0

International
4,344

 
21.6

 

 
7,090

 
23.7

 
$
42,604

 
25.2
%
 

 
$
44,308

 
26.1
%

Gross profit is net sales less cost of goods sold. Cost of goods sold consists primarily of inventory, 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 ended October 28, 2017 compared to the same period one year ago was primarily due to lower sales volumes and additional warranty charges. The following describes the overall impact by business unit:

Commercial:  The gross profit percent decreased for the three months ended October 28, 2017 compared to the same period one year ago primarily due to higher warranty expenses and lower sales volumes.

Live Events: The gross profit percent increase for the three months ended October 28, 2017 compared to the same period one year ago was due to an increased volume of sales, improved productivity and lower warranty expenses.

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High School Park and Recreation:  The gross profit percent increase for the three months ended October 28, 2017 as compared to the same period one year ago was primarily due to improved productivity as higher sales volumes were achieved on similar costs and improved contract margins.
 
Transportation:  The gross profit percent increase for the three months ended October 28, 2017 compared to the same period one year ago was primarily due to lower warranty expenses, which were partially offset by lower margins due to increased competition.

International:  The gross profit percent decrease for the three months ended October 28, 2017 compared to the same period one year ago was primarily the result of lower sales volumes over a relatively fixed cost structure and higher warranty expenses offset by the sale of our non-digital division assets for a gain of $1.2 million.

Selling Expense
 
Three Months Ended
 
October 28, 2017
 
 
 
October 29, 2016
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
(in thousands)
 
 
 
 
Commercial
$
4,669

 
13.6
%
 
(1.0
)%
 
$
4,715

 
11.8
%
Live Events
3,401

 
5.0

 
14.6

 
2,967

 
5.4

High School Park and Recreation
2,743

 
9.2

 
10.1

 
2,491

 
8.7

Transportation
1,102

 
6.7

 
(13.1
)
 
1,268

 
7.9

International
3,435

 
17.1

 
(22.8
)
 
4,450

 
14.9

 
$
15,350

 
9.1
%
 
(3.4
)%
 
$
15,891

 
9.3
%
 
Selling expenses consist primarily of salaries, other employee-related costs, travel and entertainment expenses, facilities-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 demos, and supplies.

Selling expense in our Commercial business unit for the second quarter of fiscal 2018 remained relatively flat compared to the same quarter a year ago.

Selling expense in our Live Events business unit increased in the second quarter of fiscal 2018 compared to the same quarter a year ago due to increases in marketing/advertising expenses and personnel expenses. Selling expense in our High School Park and Recreation business unit increased in the second quarter of fiscal 2018 compared to the same quarter a year ago due to increases in personnel expenses.

Selling expense in our Transportation business unit decreased in the second quarter of fiscal 2018 compared to the same quarter a year ago due to lower bad debt and marketing expenses. Selling expense in our International business unit declined in the second quarter of fiscal 2018 compared to the same quarter a year ago due to lower bad debt expense and third-party commissions and a $0.2 million intangible asset impairment that had been incurred in the second quarter of fiscal 2017 that was not incurred in the second quarter of fiscal 2018.

Other Operating Expenses
 
Three Months Ended
 
October 28, 2017
 
 
 
October 29, 2016
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
(in thousands)
General and administrative
$
8,868

 
5.2
%
 
2.8
%
 
$
8,625

 
5.1
%
Product design and development
$
8,948

 
5.3
%
 
25.6
%
 
$
7,126

 
4.2
%

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 costs of supplies.

General and administrative expenses in the second quarter of fiscal 2018 increased as compared to the same period one year ago primarily due to increases in personnel expenses and information technology software and hardware expenses, which were partially offset by a decrease in professional fees.


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Product design and development expenses consist primarily of salaries, other employee-related costs, professional services, facilities costs and equipment-related costs and supplies. Product 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 varied product offerings. Through all design efforts, we focus on standardizing display components and control systems for both single site and network displays.  

Our costs for product development represent an allocated amount of costs based on time charges, professional services, materials costs and the overhead of our engineering departments.  Generally, a significant portion of our engineering time is spent on product development, while the rest is allocated to large contract work and is included in cost of goods sold.

Product development expenses in the second quarter of fiscal 2018 increased as compared to the same period one year ago primarily due to increased labor costs and professional services assigned to product development projects relating to our strategy to accelerate the deployment of products and solutions to our markets. To deliver value to our customers and serve the markets' expectations, we plan to increase the level of expenditures for new or enhanced customer solutions as compared to prior years throughout fiscal 2018.

Other Income and Expenses 
 
Three Months Ended
 
October 28, 2017
 
 
 
October 29, 2016
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
(in thousands)
Interest income, net
$
104

 
0.1
 %
 
9.5
 %
 
$
95

 
0.1
%
Other (expense) income, net
$
(87
)
 
(0.1
)%
 
(158.4
)%
 
$
149

 
0.1
%
 
Interest income (expense), 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 marketing obligations.

Interest income, net in the second quarter of fiscal 2018 compared to the same period one year ago remained relatively flat. As a result of the volatility of working capital needs and changes in investing and financing activities, along with changes in the interest rate environment, it is difficult to project changes in interest income.

Other (expense) income, net:  The change in other income and expense, net for the second quarter of fiscal 2018 as compared to the same period one year ago was primarily due to foreign currency volatility and the losses recorded from an equity method affiliate.

Income Taxes

Our effective tax rate was 24.6 percent for the second quarter of fiscal 2018 as compared to an effective tax rate of 30.1 percent for the second quarter of fiscal 2017. The primary factors impacting our effective rate were an increase in our expected research and development tax credit during fiscal 2018 due to an increase in activity within product development as compared to fiscal 2017 and the reversal of a portion of a foreign valuation allowance to offset the non-digital asset sale gain.

COMPARISON OF THE SIX MONTHS ENDED OCTOBER 28, 2017 AND OCTOBER 29, 2016

Net Sales

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Six Months Ended
(in thousands)
October 28,
2017
 
October 29,
2016
 
Dollar Change
 
Percent Change
Net sales:
 
 
 
 
 
 
 
    Commercial
$
67,240

 
$
76,177

 
$
(8,937
)
 
(11.7
)%
    Live Events
146,265

 
115,996

 
30,269

 
26.1

    High School Park and Recreation
58,139

 
56,324

 
1,815

 
3.2

    Transportation
35,388

 
30,387

 
5,001

 
16.5

    International
35,005

 
48,254

 
(13,249
)
 
(27.5
)
 
$
342,037

 
$
327,138

 
$
14,899

 
4.6
 %
Orders:
 
 
 
 
 
 
 

    Commercial
$
69,071

 
$
81,731

 
$
(12,660
)
 
(15.5
)%
    Live Events
105,335

 
83,930

 
21,405

 
25.5

    High School Park and Recreation
46,917

 
46,877

 
40

 
0.1