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 27, 2018
 
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=12567188&doc=13

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 every Interactive Data File required to be submitted 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 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
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 21, 2018 was 44,860,543.




DAKTRONICS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended October 27, 2018

Table of Contents

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







Table of contents


PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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

 
 
October 27,
2018
 
April 28,
2018
ASSETS
 
 
 
 
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
35,557

 
$
29,727

Restricted cash
 
26

 
28

Marketable securities
 
31,721

 
34,522

Accounts receivable, net
 
92,194

 
77,387

Inventories
 
69,529

 
75,335

Contract assets
 
30,633

 
30,968

Current maturities of long-term receivables
 
1,305

 
1,752

Prepaid expenses and other current assets
 
8,172

 
9,029

Income tax receivables
 
6,015

 
5,385

Total current assets
 
275,152

 
264,133

 
 
 
 
 
Property and equipment, net
 
69,470

 
68,059

Long-term receivables, less current maturities
 
1,348

 
1,641

Goodwill
 
8,053

 
8,264

Intangibles, net
 
6,101

 
3,682

Investment in affiliates and other assets
 
5,623

 
5,091

Deferred income taxes
 
7,939

 
7,930

Total non-current assets
 
98,534

 
94,667

TOTAL ASSETS
 
$
373,686

 
$
358,800

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 

Accounts payable
 
$
46,764

 
$
48,845

Contract liabilities
 
47,198

 
39,379

Accrued expenses
 
29,717

 
27,445

Warranty obligations
 
13,009

 
13,891

Current portion of other long-term obligations
 
1,106

 
1,088

Income taxes payable
 
272

 
660

Total current liabilities
 
138,066

 
131,308

 
 
 
 
 
Long-term warranty obligations
 
15,709

 
16,062

Long-term contract liabilities
 
8,520

 
7,475

Other long-term obligations, less current portion
 
2,420

 
2,285

Long-term income taxes payable
 
3,623

 
3,440

Deferred income taxes
 
611

 
614

Total long-term liabilities
 
30,883

 
29,876

 
 
 
 
 

1

Table of contents


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

 
 
October 27,
2018
 
April 28,
2018
SHAREHOLDERS' EQUITY:
 
 

 
 

Common Stock, no par value, authorized 115,000,000 shares; 45,031,769 and 44,779,534 shares issued and outstanding at October 27, 2018 and April 28, 2018, respectively
 
55,608

 
54,731

Additional paid-in capital
 
41,345

 
40,328

Retained earnings
 
114,033

 
107,105

Treasury Stock, at cost, 303,957 shares at October 27, 2018 and April 28, 2018, respectively
 
(1,834
)
 
(1,834
)
Accumulated other comprehensive loss
 
(4,415
)
 
(2,714
)
TOTAL SHAREHOLDERS' EQUITY
 
204,737

 
197,616

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
373,686

 
$
358,800

 
 
 
 
 
See notes to condensed consolidated financial statements.
 
 

 
 


2

Table of contents


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

 
Three Months Ended
 
Six Months Ended
 
October 27,
2018
 
October 28,
2017
 
October 27,
2018
 
October 28,
2017
Net sales
$
172,692

 
$
169,309

 
$
326,880

 
$
342,037

Cost of sales
129,935

 
126,705

 
245,876

 
254,787

Gross profit
42,757

 
42,604

 
81,004

 
87,250

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

Selling
16,125

 
15,350

 
32,503

 
30,289

General and administrative
8,574

 
8,868

 
17,111

 
17,803

Product design and development
9,039

 
8,948

 
18,331

 
17,995

 
33,738

 
33,166

 
67,945

 
66,087

Operating income
9,019

 
9,438

 
13,059

 
21,163

 
 
 
 
 
 
 
 
Nonoperating income (expense):
 

 
 

 
 

 
 

Interest income
188

 
151

 
385

 
362

Interest expense
(2
)
 
(47
)
 
(41
)
 
(133
)
Other (expense) income, net
(66
)
 
(87
)
 
(220
)
 
58

 
 
 
 
 
 
 
 
Income before income taxes
9,139

 
9,455

 
13,183

 
21,450

Income tax expense
533

 
2,323

 
3

 
5,889

Net income
$
8,606

 
$
7,132

 
$
13,180

 
$
15,561

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
44,780

 
44,412

 
44,717

 
44,345

Diluted
44,950

 
44,679

 
44,994

 
44,696

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 

 
 

Basic
$
0.19

 
$
0.16

 
$
0.29

 
$
0.35

Diluted
$
0.19

 
$
0.16

 
$
0.29

 
$
0.35

 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements.
 
 
 

 
 

 
 


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Table of contents


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

 
 
Three Months Ended
 
Six Months Ended
 
 
October 27, 2018
 
October 28,
2017
 
October 27,
2018
 
October 28,
2017
 
 
 
 
 
 
 
 
 
Net income
 
$
8,606

 
$
7,132

 
$
13,180

 
$
15,561

 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Cumulative translation adjustments
 
(555
)
 
(20
)
 
(1,694
)
 
1,061

Unrealized gain (loss) on available-for-sale securities, net of tax
 
6

 
(26
)
 
(7
)
 
(33
)
Total other comprehensive (loss) income, net of tax
 
(549
)
 
(46
)
 
(1,701
)
 
1,028

Comprehensive income
 
$
8,057

 
$
7,086

 
$
11,479

 
$
16,589

 
 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements.
 
 
 
 
 
 
 
 


4

Table of contents


DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)

 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Total
Balance as of April 28, 2018
$
54,731

 
$
40,328

 
$
107,105

 
$
(1,834
)
 
$
(2,714
)
 
$
197,616

Net income

 

 
4,574

 

 

 
4,574

Cumulative translation adjustments

 

 

 

 
(1,139
)
 
(1,139
)
Unrealized (loss) gain on available-for-sale securities, net of tax

 

 

 

 
(13
)
 
(13
)
Share-based compensation

 
651

 

 

 

 
651

Exercise of stock options
57

 

 

 

 

 
57

Employee savings plan activity
820

 

 

 

 

 
820

Dividends declared ($0.07 per share)

 

 
(3,121
)
 

 

 
(3,121
)
Balance as of July 28, 2018
55,608

 
40,979

 
108,558

 
(1,834
)
 
(3,866
)
 
199,445

Net income

 

 
8,606

 

 

 
8,606

Cumulative translation adjustments

 

 

 

 
(555
)
 
(555
)
Unrealized (loss) gain on available-for-sale securities, net of tax

 

 

 

 
6

 
6

Share-based compensation

 
612

 

 

 

 
612

Tax payments related to RSU issuances

 
(246
)
 

 

 

 
(246
)
Dividends declared ($0.07 per share)

 

 
(3,131
)
 

 

 
(3,131
)
Balance as of October 27, 2018
$
55,608

 
$
41,345

 
$
114,033

 
$
(1,834
)
 
$
(4,415
)
 
$
204,737

 
 
 
 
 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements.

 
 
 
 
 
 
 
 
 
 
 


5

Table of contents


DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)
(in thousands)
(unaudited)

 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Total
Balance as of April 29, 2017
$
52,530

 
$
38,004

 
$
113,967

 
$
(1,834
)
 
$
(4,381
)
 
$
198,286

Net income

 

 
8,429

 

 

 
8,429

Cumulative translation adjustments

 

 

 

 
1,081

 
1,081

Unrealized (loss) gain on available-for-sale securities, net of tax

 

 

 

 
(7
)
 
(7
)
Share-based compensation

 
673

 

 

 

 
673

Exercise of stock options
211

 

 

 

 

 
211

Employee savings plan activity
820

 

 

 

 

 
820

Dividends declared ($0.07 per share)

 

 
(3,094
)
 

 

 
(3,094
)
Balance as of July 29, 2017
53,561

 
38,677

 
119,302

 
(1,834
)
 
(3,307
)
 
206,399

Net income

 

 
7,132

 

 

 
7,132

Cumulative translation adjustments

 

 

 

 
(20
)
 
(20
)
Unrealized (loss) gain on available-for-sale securities, net of tax

 

 

 

 
(26
)
 
(26
)
Share-based compensation

 
668

 

 

 

 
668

Exercise of stock options
301

 

 

 

 

 
301

Tax payments related to RSU issuances

 
(311
)
 

 

 

 
(311
)
Dividends declared ($0.07 per share)

 

 
(3,104
)
 

 

 
(3,104
)
Balance as of October 28, 2017
$
53,862

 
$
39,034

 
$
123,330

 
$
(1,834
)
 
$
(3,353
)
 
$
211,039

 
 
 
 
 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements.

 
 
 
 
 
 
 
 
 
 
 


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Table of contents


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

 
Six Months Ended
 
October 27,
2018
 
October 28,
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
13,180

 
$
15,561

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
9,300

 
8,902

Gain on sale of property, equipment and other assets
(93
)
 
(1,221
)
Share-based compensation
1,263

 
1,341

Contingent consideration adjustment
(956
)
 

Equity in loss of affiliate
265

 
191

Provision for doubtful accounts
51

 
(21
)
Deferred income taxes, net
(85
)
 
81

Change in operating assets and liabilities
(368
)
 
(15,496
)
Net cash provided by operating activities
22,557

 
9,338

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchases of property and equipment
(9,833
)
 
(7,735
)
Proceeds from sales of property, equipment and other assets
182

 
2,000

Purchases of marketable securities
(9,209
)
 

Proceeds from sales or maturities of marketable securities
12,034

 
10,802

Purchases of equity investment
(854
)
 
(607
)
Acquisitions, net of cash acquired
(2,250
)
 

Net cash (used in) provided by investing activities
(9,930
)
 
4,460

 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from exercise of stock options
57

 
511

Principal payments on long-term obligations
(431
)
 
(1,027
)
Dividends paid
(6,252
)
 
(6,197
)
Tax payments related to RSU issuances
(246
)
 
(311
)
Net cash used in financing activities
(6,872
)
 
(7,024
)
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
73

 
113

NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
5,828

 
6,887

 
 
 
 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
 

 
 

Beginning of period
29,755

 
32,839

End of period
$
35,583

 
$
39,726

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash payments for:
 

 
 

Interest
$
84

 
$
134

Income taxes, net of refunds
954

 
6,934

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 

 
 

Demonstration equipment transferred to inventory
$
97

 
$
48

Purchase of property and equipment included in accounts payable
2,348

 
1,312

Contributions of common stock under the ESPP
820

 
820

 
 
 
 
See notes to condensed consolidated financial statements.
 

 
 


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

Note 1. Basis of Presentation

Daktronics, Inc. and its subsidiaries (the “Company”, “Daktronics”, “we”, “our”, or “us”) are the world's industry leader in designing and manufacturing electronic scoreboards, programmable display systems and large screen video displays for sporting, commercial and transportation applications.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present our financial position, results of operations and cash flows for the periods presented.  The preparation of financial statements in conformity with generally accepted accounting principles in the United States ("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 GAAP have been condensed or omitted.  The balance sheet at April 28, 2018, has been derived from the audited financial statements at that date, but it does not include all 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 28, 2018, which are contained in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission ("SEC").  The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

Certain prior year amounts in the condensed consolidated balance sheet have been reclassified to conform to the current year's presentation due to the adoption of Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). Billings in excess of costs and estimated earnings, customer deposits, and deferred revenue are combined to present contract liabilities. Costs and estimated earnings in excess of billings now represent contract assets. These reclassifications had no effect on reported net income, comprehensive income, cash flows, total assets or total liabilities.

Daktronics, Inc. operates on a 52- or 53-week fiscal year, with our fiscal year ending on the Saturday closest to April 30 of each year. When April 30 falls on a Wednesday, the fiscal year ends on the preceding Saturday. Within each fiscal year, each quarter is comprised of 13-week periods following the beginning of each fiscal year. In each 53-week 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 27, 2018 and October 28, 2017, contained operating results for 26 weeks.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheet that sum to the total of the same amounts shown in the condensed consolidated statement of cash flows:
 
October 27,
2018
 
October 28,
2017
Cash and cash equivalents
$
35,557

 
$
39,699

Restricted cash
26

 
27

Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows
$
35,583

 
$
39,726


Recent Accounting Pronouncements

New Accounting Standards Adopted

In October 2016, the Financial Accounting Standards Board ("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 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 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. We adopted ASU 2016-16 during the first quarter of fiscal 2019. The adoption of ASU 2016-16 did not have an impact on our condensed consolidated financial statements.


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In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Subsequently, the FASB also issued ASUs 2016-08, 2016-10, 2016-12, and 2016-20 to give further guidance to revenue recognition matters. ASU 2014-09 and related guidance supersedes revenue recognition requirements under FASB Accounting Standards Codification ("ASC") Topic 605 and related industry specific revenue recognition guidance. This new standard defines a comprehensive revenue recognition model, requiring 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. It defines a five-step process to achieve this core principle and allows companies to use more judgment and make more estimates than under current guidance and requires additional disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. It provides guidance on transition requirements.

We adopted ASU 2014-09 and its related guidance under the modified retrospective method during the first quarter of fiscal 2019 by applying the guidance to all open contracts at the adoption date. We completed our evaluation of our revenue arrangements under the new standard and determined that the adoption did not materially change the timing or amount of revenue recognized, primarily based upon our assessment of "point in time" and "over time" revenue recognition. No adjustment to beginning retained earnings was recorded, and we have made additional disclosures related to revenue from contracts with customers as required by the new standard upon adoption. See "Note 4. Revenue Recognition" for more information.

New Accounting Standards Not Yet Adopted

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate under the U.S. Tax Cuts and Jobs Act (the "Tax Act"). ASU 2018-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted that can be made on a prospective or retrospective basis. We are currently evaluating the effect that adopting ASU 2018-02 will have on our condensed consolidated financial statements and related disclosures.

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. We are currently evaluating the effect that adopting ASU 2017-04 will have on our condensed 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, and will require adoption on a modified retrospective basis. We are currently evaluating the effect that adopting ASU 2016-13 will have on our condensed 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 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. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), and ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provide (i) narrow amendments to clarify how to apply certain aspects of the new lease standard, (ii) entities with an additional transition method to adopt the new standard, and (iii) lessors with a practical expedient for separating components of a contract. All ASUs are effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and will require adoption on a modified retrospective basis.

We plan to adopt this new standard in the first quarter of fiscal 2020.  We are still reviewing the new standard and recent updates published by FASB.  Our preliminary assumptions suggest we will likely adopt certain practical expedients, including the lookback option, and not change historical conclusions related to (1) contracts that contain leases, (2) existing lease classification, and (3) initial direct costs.  We are continuing to evaluate the effect that adopting these ASUs will have on our condensed consolidated financial statements and related disclosures but at this time do not think the adoption will have a material impact on our financial statements.

Note 2. Investments in Affiliates

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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 $4,236 and $3,647 at October 27, 2018 and April 28, 2018, 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 condensed consolidated statements of cash flows. Our proportional share of the respective affiliates' earnings or losses is included in the "Other (expense) income, net" line item in our condensed consolidated statements of operations. For the six months ended October 27, 2018 and October 28, 2017, our share of the losses of our affiliates was $265 and $191, respectively.

The aggregate amount of investments accounted for under the cost method was $42 at October 27, 2018 and April 28, 2018, 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.

Note 3. 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.

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 27, 2018 and October 28, 2017
 
 Net income
 
 Shares
 
 Per share income
For the three months ended October 27, 2018
 
 
 
 
 
Basic earnings per share
$
8,606

 
44,780

 
$
0.19

    Dilution associated with stock compensation plans

 
170

 

Diluted earnings per share
$
8,606

 
44,950

 
$
0.19

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 six months ended October 27, 2018
 
 
 
 
 
Basic earnings per share
$
13,180

 
44,717

 
$
0.29

    Dilution associated with stock compensation plans

 
277

 

Diluted earnings per share
$
13,180

 
44,994

 
$
0.29

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

 
Options outstanding to purchase 2,377 shares of common stock with a weighted average exercise price of $9.94 for the three months ended October 27, 2018 and 1,303 shares of common stock with a weighted average exercise price of $13.08 for the three months ended October 28, 2017 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

Options outstanding to purchase 2,129 shares of common stock with a weighted average exercise price of $10.15 for the six months ended October 27, 2018 and 1,312 shares of common stock with a weighted average exercise price of $13.08 for the six months ended October 28, 2017 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

Note 4. Revenue Recognition

Our accounting policies and estimates as a result of adopting ASU 2014-09, Revenue from Contracts with Customers (Topic 606), are as follows:


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Contracts are identified and follow the revenue recognition policies when: we have evidence all parties to the contract have approved the contract and are committed to perform their respective obligations, we can identify each party’s rights regarding the goods or services to be transferred, we can identify the payment terms for the goods or services to be transferred, the contract has commercial substance, and it is probable we will collect substantially all of the consideration to which we would be entitled in exchange for the goods or services.

Precontract costs are generally expensed as incurred, unless they are directly associated with an anticipated contract and recoverability from that contract is probable. Precontract costs directly associated with anticipated contracts expected to be recoverable include $359 and $217 as of October 27, 2018 and April 28, 2018, respectively. These are included in Inventories on the Consolidated Balance Sheet.

At contract inception, we identify performance obligations by reviewing the agreement for material distinct goods and services. Goods and services are distinct when the customer can benefit from them on their own and our promises to transfer these items are identifiable from other promises within the contract. When we are contracted to provide a single promise (an integrated system), we often treat it as a single performance obligation as we are providing goods and services with the same patterns of transfer, that are highly integrated or interdependent, that are modified or customized by other goods or services promised, or that provide a combined outcome for which the customer has contracted. When less interdependency or integration is necessary, or the customer can benefit from distinct items, we separate the contract into multiple performance obligations. We account for those warranties that extend beyond typical terms and include other services ("service-type warranty") as a separate performance obligation.

Our contracts can contain multiple components of transaction price. We evaluate each contract for these components and include fixed consideration, variable consideration, financing components, and non-cash consideration and exclude consideration payable to a customer and sales taxes in the transaction price. When we are responsible for site installations which includes subcontracted work, we maintain the responsibility and risks and consider ourselves the principal and include the consideration for these services in the transaction price. When our contract contains variable consideration, including return rights, discounts, claims, unpriced change orders, and liquidated damages, we estimate the transaction price using the expected value (i.e., the sum of the probability-weighted amount) or the most likely amount method, whichever is expected to better predict revenue for that contract situation. We also constrain the revenue to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We consider the following factors in determining revenue associated with variable consideration: (a) the contract or other evidence providing legal basis, (b) additional costs caused by unforeseen circumstances, (c) evidence supporting the claim, and (d) historical evidence and patterns of customers. We adjust the contract price for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer goods and services to a customer will exceed one year from the time the customer pays and represents financing. If the payment structures exceed a year but are structured to account for risks with a contract or correspond to payments on milestones or are scheduled for performance, we do not adjust the contract price for a financing component. See "Note 11. Receivables" for amounts recorded in long-term receivables.

When separate performance obligations are identified, we allocate the transaction price to the individual performance obligation based on the best evidence and method we judge as faithfully depicting the value of the performance obligation. We allocate revenue to each performance obligation on the relative the standalone selling price basis, when the standalone selling price is available. Many of our contracts are bundled and we do not have separate selling prices for each performance obligation, therefore, we primarily use the cost plus a margin approach to allocate the relative transaction price to identified performance obligations as it is the best representative of our pricing methods.

Revenue is recognized when we satisfy a performance obligation. We receive payments from customers based on a billing schedule as established in our contracts. Billing schedules include down payments and progress billings over time, set milestone payments specific to the project, are scheduled for performance-based payments, or are set time-based payment(s). Variability in contract assets and contract liabilities ("Net over/under billings") relates to the timing of billings and revenue recognition, which can vary significantly depending on contractual payment terms and build and installation schedules and the related timing differences in transfer of control. Balances are also impacted by the seasonality in our business.

Significant judgments and estimates are used in our revenue policies. Throughout the revenue cycle, we evaluate contractual evidence, monitor our performance, evaluate variable consideration changes, update estimated costs to complete cost-to-cost projects, and obtain evidence of deliveries or other control change evidence for appropriate and consistent revenue recognition. We maintain internal policies and procedures to provide guidance for those involved in recording revenue. We monitor for changes in our business sales practices and customer interactions to capture the appropriate types of performance obligations and adjust for any change in control terms and conditions.

Our material performance obligation types include:

Unique configuration contracts: audio-visual communication systems uniquely configured (custom) or integrated for a customer's particular location and system configuration may include all or a combination of the following: engineering services, project management services, video display(s), control solution(s), installation and integration services, scoring and messaging equipment, training, other on-site services, spare parts, software licenses, and assurance-type warranties.

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We account for these types of contracts as a combined single performance obligation with no segmentation between types of products and services. In our judgment, this accounting treatment is most appropriate because the substantial part of our promise to customers is to provide significant integration services and incorporates individual goods and services into a combined output or system, often times the system is customized or significantly modified to the customers' desired configurations and location, and the interrelated goods and services provide utility to the customers as a package.

Revenue for uniquely configured (custom) or integrated systems is recognized over time. Over time revenue recognition is appropriate because we have no alternative use for the uniquely configured system and have an enforceable right to payment for work performed. Sales and profits are recognized over time following the cost-to-cost input method measured by the percentage of costs incurred to date as compared to estimated total costs for each contract. The cost-to-cost input method is the most faithful depiction of our performance because it measures the value of the contract transferred to the customer. Costs to perform include direct and indirect costs for contract design, production, integration, installation, and assurance-type warranty reserve. Direct costs include material and components; manufacturing, project management, and engineering labor; and subcontracting expenses. Indirect costs include allocated charges for such items as facilities and equipment depreciation and general overhead. Provisions of estimated losses on uncompleted contracts are made in the period when such losses are capable of being estimated.

Contract modifications to existing contracts with customers are evaluated in accordance with the five-step revenue model. We treat contract modifications as a separate contract and new performance obligations when the additional goods or services are distinct and do not add to the unique configuration or are outside the integrated system and when the consideration reflects standalone selling prices. If the additional goods or services offered under the modification enhance the uniquely configured or integrated systems, revenue is allocated to the existing contracts' performance obligation. Modifications may cause changes in the timing of revenue recognition depending on the allocation to various performance obligations.

The time between contract order and project completion is typically less than 12 months but may extend longer depending on the amount of custom work and customers’ delivery needs.

Limited configuration (standard systems) and after-sale parts contracts: Limited configured (standard systems) or after-sale parts contracts with limited or no configuration or limited integration are recognized as distinct individual performance obligations when material or when not distinct, we combine into one performance obligation the goods and/or services with each other until the bundle of goods or services are distinct. For standard display purchases made in large quantities, we account for each piece of equipment separately as a distinct performance obligation from which a customer derives benefit. Immaterial goods or services in the context of the contract are included with the display system performance obligation. Standard systems and equipment with limited configurations or integrations may include all or a combination (when immaterial) of the following performance obligations: engineering services, project management services, video display(s), control solution(s), installation and integration services, scoring, messaging and audio equipment, training, spare parts, software licenses, assurance-type warranties, and after-sale parts.

Revenue is recognized at a point in time when title or control passes, or over time as services are performed. When fulfilling limited configuration performance obligations, we are typically able to redirect the video displays or scoring, messaging, or audio equipment to another customer without incurring significant economic losses. Therefore, we have alternative use for the performance obligation and recognize revenue upon our substantial completion and at the point in time we estimate control has transferred to the customer. When limited configured single performance obligations are more service-type (i.e., installation and integration services), we recognize revenue over time using the cost-to-cost input method, which is the most faithful depiction of the customer obtaining control and benefits from the work performed.

Services and other: Services sold on a stand-alone basis or after the initial system sale include performance obligations such as event support, control room design, on-site training, equipment service, service-type warranties, technical support, software sold as a service, and other immaterial revenue streams. These are contracted with a customer generally per service event or service type on a stand-alone basis. Services and other are recognized as net sales when the services are performed, and control is transferred to the customer at a point in time when title or control passes or over time as services are performed and for time-based "stand ready to perform" type obligations. We use professional judgment to determine control transfer. If we have the right to consideration from a customer that directly corresponds with the value of our performance (where we bill a fixed amount for each hour of service provided), we recognize revenue related to the work completed.

Software: Revenues from software license fees on sales, other than uniquely configured type contracts, are recognized when delivery of the product has occurred. Subscription-based licenses include the right for a customer to use our licenses and receive related support for a specified term, and revenue is recognized pro-rata over the term of the engagement.


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Shipping and handling costs: Shipping and handling costs collected from our customers in connection with our sales are recorded as revenue. We record shipping and handling costs as a component of cost of sales at the time the product is shipped.

Warranty: Our warranty offerings are described in "Note 12. Commitments and Contingencies."

Disaggregation of revenue
In accordance with ASC 606-10-50, we disaggregate revenue from contracts with customers by the type of performance obligation and the timing of revenue recognition. We determine that disaggregating revenue in these categories achieves the disclosure objective to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors and to enable users of financial statements to understand the relationship to each reportable segment. As noted in the segment information footnote, we are organized in five business segments: Commercial, Live Events, High School Park and Recreation, Transportation, and International.

The following table presents our disaggregation of revenue by segments:
 
Three Months Ended October 27, 2018
 
Commercial
 
Live Events
 
High School Park and Recreation
 
Transportation
 
International
 
Total
Type of performance obligation
 
 
 
 
 
 
 
 
 
 
 
Unique configuration
$
11,426

 
$
38,283

 
$
6,671

 
$
10,427

 
$
10,776

 
$
77,583

Limited configuration
31,385

 
11,467

 
24,381

 
7,195

 
9,851

 
84,279

Service and other
3,258

 
5,349

 
528

 
455

 
1,240

 
10,830

 
$
46,069

 
$
55,099

 
$
31,580

 
$
18,077

 
$
21,867

 
$
172,692

Timing of revenue recognition
 
 
 
 
 
 
 
 
 
 
 
Goods/services transferred at a point in time
$
31,896

 
$
12,558

 
$
22,060

 
$
7,267

 
$
10,126

 
$
83,907

Goods/services transferred over time
14,173

 
42,541

 
9,520

 
10,810

 
11,741

 
88,785

 
$
46,069

 
$
55,099

 
$
31,580

 
$
18,077

 
$
21,867

 
$
172,692

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended October 27, 2018
 
Commercial
 
Live Events
 
High School Park and Recreation
 
Transportation
 
International
 
Total
Type of performance obligation
 
 
 
 
 
 
 
 
 
 
 
Unique configuration
$
14,475

 
$
77,204

 
$
15,614

 
$
20,045

 
$
26,992

 
$
154,330

Limited configuration
55,252

 
17,285

 
42,928

 
14,278

 
20,629

 
150,372

Service and other
6,911

 
10,082

 
1,158

 
911

 
3,116

 
22,178

 
$
76,638

 
$
104,571

 
$
59,700

 
$
35,234

 
$
50,737

 
$
326,880

Timing of revenue recognition
 
 
 
 
 
 
 
 
 
 
 
Goods/services transferred at a point in time
$
56,479

 
$
19,360

 
$
39,058

 
$
14,499

 
$
21,662

 
$
151,058

Goods/services transferred over time
20,159

 
85,211

 
20,642

 
20,735

 
29,075

 
175,822

 
$
76,638

 
$
104,571

 
$
59,700

 
$
35,234

 
$
50,737

 
$
326,880

 
 
 
 
 
 
 
 
 
 
 
 

See "Note 5. Segment Reporting" for a disaggregation of revenue by geography.

Contract Balances

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Contract assets represent revenue recognized in excess of amounts billed and include unbilled receivables. Unbilled receivables, which represent an unconditional right to payment subject only to the passage of time, are reclassified to accounts receivable when they are billed under the contract terms. Contract liabilities represent amounts billed to the clients in excess of revenue recognized to date.

The following table reflects the changes in our contract assets and liabilities:
 
October 27, 2018
 
April 28, 2018
 
Dollar Change
 
Percent Change
Contract assets
$
30,633

 
$
30,968

 
$
(335
)
 
(1.1
)%
Contract liabilities - current
47,198

 
39,379

 
7,819

 
19.9

Contract liabilities - noncurrent
8,520

 
7,475

 
1,045

 
14.0


The decrease in our contract assets and increase in contract liabilities from April 28, 2018 to October 27, 2018 was due to the timing of billing schedules and revenue recognition, which can vary significantly depending on the contractual payment terms and the seasonality of the sports markets. We had no material impairments of accounts receivable or contract assets for the year.

During the six months ended October 27, 2018, we recognized revenue of $30,667 related to our contract liabilities as of April 28, 2018.

Remaining performance obligations
As of October 27, 2018, the aggregate amount of the transaction price allocated to the remaining performance obligations was $201,955. We expect approximately $167,857 of our remaining performance obligations to be recognized over the next 12 months with the remainder recognized thereafter. Remaining performance obligations related to product and service agreements are $150,123 and $51,832, respectively. Although remaining performance obligations reflects business that is considered to be legally binding, cancellations, deferrals or scope adjustments may occur. Any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations and project deferrals are reflected or excluded in the remaining performance obligation balance as appropriate.

Note 5. Segment Reporting

We have organized and manage our business by five segments which meet the definition of reportable segments under ASC 280-10, Segment Reporting: Commercial, Live Events, High School Park and Recreation, Transportation, and International. These segments are based on the customer type or geography and are the same as our business units. We evaluate segment performance based on operating results through contribution margin, which is comprised of gross profit less selling expense. We exclude general and administration expense, product design and development expense, non-operating income and expense and income tax expense in the segment analysis. Separate financial information is available and regularly evaluated by our chief operating decision-maker (CODM), the president and chief executive officer, in making resource allocation decisions for our segments.  

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The following table sets forth certain financial information for each of our five reporting segments for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
October 27,
2018
 
October 28,
2017
 
October 27,
2018
 
October 28,
2017
Net sales:
 
 
 
 
 
 
 
    Commercial
$
46,069

 
$
34,377

 
$
76,638

 
$
67,240

    Live Events
55,099

 
68,653

 
104,571

 
146,265

    High School Park and Recreation
31,580

 
29,660

 
59,700

 
58,139

    Transportation
18,077

 
16,476

 
35,234

 
35,388

    International
21,867

 
20,143

 
50,737

 
35,005

 
172,692

 
169,309

 
326,880

 
342,037

 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
    Commercial
11,757

 
5,271

 
18,651

 
13,539

    Live Events
12,312

 
16,255

 
22,545

 
33,309

    High School Park and Recreation
9,759

 
10,553

 
19,261

 
20,904

    Transportation
6,140

 
6,181

 
11,591

 
13,126

    International
2,789

 
4,344

 
8,956

 
6,372

 
42,757

 
42,604

 
81,004

 
87,250

 
 
 
 
 
 
 
 
Contribution margin: (1)
 
 
 
 
 
 
 
    Commercial
7,050

 
602

 
9,524

 
4,176

    Live Events
8,918

 
12,854

 
15,903

 
26,590

    High School Park and Recreation
6,706

 
7,810

 
13,258

 
15,557

    Transportation
4,991

 
5,079

 
9,286

 
10,987

    International
(1,033
)
 
909

 
530

 
(349
)
 
26,632

 
27,254

 
48,501

 
56,961

 
 
 
 
 
 
 
 
Non-allocated operating expenses:
 
 
 
 
 
 
 
    General and administrative
8,574

 
8,868

 
17,111

 
17,803

    Product design and development
9,039

 
8,948

 
18,331

 
17,995

Operating income
9,019

 
9,438

 
13,059

 
21,163

 
 
 
 
 
 
 
 
Nonoperating income (expense):
 
 
 
 
 
 
 
    Interest income
188

 
151

 
385

 
362

    Interest expense
(2
)
 
(47
)
 
(41
)
 
(133
)
Other (expense) income, net
(66
)
 
(87
)
 
(220
)
 
58

 
 
 
 
 
 
 
 
Income before income taxes
9,139

 
9,455

 
13,183

 
21,450

Income tax expense
533

 
2,323

 
3

 
5,889

Net income
$
8,606

 
$
7,132

 
$
13,180

 
$
15,561

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
    Commercial
$
1,236

 
$
1,544

 
$
2,414

 
$
3,078

    Live Events
1,334

 
1,196

 
2,506

 
2,434

    High School Park and Recreation
517

 
422

 
960

 
844

    Transportation
277

 
285

 
551

 
579

    International
723

 
270

 
1,423

 
551

    Unallocated corporate depreciation
725

 
725

 
1,446

 
1,416

 
$
4,812

 
$
4,442

 
$
9,300

 
$
8,902

(1) Contribution margin consists of gross profit less selling expense. 

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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 27,
2018
 
October 28,
2017
 
October 27,
2018
 
October 28,
2017
Net sales:
 
 
 
 
 
 
 
United States
$
146,377

 
$
145,034

 
$
268,074

 
$
300,472

Outside United States
26,315

 
24,275

 
58,806

 
41,565

 
$
172,692

 
$
169,309

 
$
326,880

 
$
342,037

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 27,
2018
 
April 28,
2018
 
 
 
 
Property and equipment, net of accumulated depreciation:
 
 
 
 
 
 


United States
$
61,665

 
$
61,206

 
 
 


Outside United States
7,805

 
6,853

 
 
 
 
 
$
69,470

 
$
68,059

 
 
 


 
We have numerous customers worldwide for sales of our products and services, and no customer accounted for 10% or more of net sales; therefore, we are not economically dependent on a limited number of customers for the sale of our products and services. 

We have numerous raw material and component suppliers, and no supplier accounts for 10% or more of our cost of sales; however, we have a number of single-source suppliers that could limit our supply or cause delays in obtaining raw material and components needed in manufacturing.

Note 6. 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 on the condensed consolidated balance sheets.  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 27, 2018, 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 27, 2018 and April 28, 2018, our available-for-sale securities consisted of the following:
 
Amortized Cost
 
Unrealized Losses
 
Fair Value
Balance as of October 27, 2018
 
 
 
 
 
Certificates of deposit
$
5,196

 
$

 
$
5,196

U.S. Government securities
7,240

 
(9
)
 
7,231

U.S. Government sponsored entities
16,090

 
(104
)
 
15,986

Municipal bonds
3,322

 
(14
)
 
3,308

 
$
31,848

 
$
(127
)
 
$
31,721

Balance as of April 28, 2018
 

 
 

 
 

Certificates of deposit
$
8,669

 
$

 
$
8,669

U.S. Government securities
999

 
(7
)
 
992

U.S. Government sponsored entities
20,072

 
(123
)
 
19,949

Municipal bonds
4,936

 
(24
)
 
4,912

 
$
34,676

 
$
(154
)
 
$
34,522


Realized gains or losses on investments are recorded in our condensed consolidated statements of operations as "Other (expense) income, net." Upon the sale of a security classified as available-for-sale, the security’s specific unrealized gain (loss) is reclassified out of

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accumulated other comprehensive loss into earnings based on the specific identification method. In the six months ended October 27, 2018 and October 28, 2017, the reclassifications from accumulated other comprehensive loss to net earnings were immaterial.

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 27, 2018 were as follows:
 
Less than 12 months
 
1-5 Years
 
Total
Certificates of deposit
$
2,479

 
$
2,717

 
$
5,196

U.S. Government securities
6,240

 
991

 
7,231

U.S. Government sponsored entities
11,157

 
4,829

 
15,986

Municipal bonds
2,961

 
347

 
3,308

 
$
22,837

 
$
8,884

 
$
31,721


Note 7. Business Combinations

AJT Systems, Inc. Acquisition

We acquired the net assets of AJT Systems, Inc. ("AJT"), a Florida-based company, on June 21, 2018. The results of its operations have been included in our condensed consolidated financial statements since the date of acquisition. We have not made pro forma disclosures because the results of its operations are not material to our condensed consolidated financial statements.

AJT is a developer of real-time live to air graphics rendering and video server systems for the broadcast TV industry. This acquisition will allow our organization to grow and strengthen our solution offerings to the market. This acquisition was primarily funded with cash on hand.

Note 8. Sale of Non-Digital Division Assets

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 sales in the International business unit during the second quarter of fiscal 2018. No gain was recorded in the three or six months ended October 27, 2018.

Note 9. Goodwill

The changes in the carrying amount of goodwill related to each reportable segment for the six months ended October 27, 2018 were as follows: 
 
Live Events
 
Commercial
 
Transportation
 
International
 
Total
Balance as of April 28, 2018
$
2,295

 
$
3,344

 
$
67

 
$
2,558

 
$
8,264

Foreign currency translation
(6
)
 
(40
)
 
(6
)
 
(159
)
 
(211
)
Balance as of October 27, 2018
$
2,289

 
$
3,304

 
$
61

 
$
2,399

 
$
8,053

 
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 perform our 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 the analysis indicated no goodwill impairment existed for our third quarter in fiscal 2018, which began on October 30, 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 2019, which began on October 29, 2018.

In conducting our impairment testing, we compare the fair value of each of our business units to the related carrying value of the allocated assets. We utilize the income approach based on discounted projected cash flows to estimate the fair value of each unit. The projected cash flows use many estimates including market conditions, expected market demand and our ability to grow or maintain market share, gross profit, and expected expenditures for capital and operating expenses. Assets shared or not directly attributed to a reportable segment's activities are allocated to the reportable segment based on sales and other measures.


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Note 10. Selected Financial Statement Data

Inventories consisted of the following: 
 
October 27,
2018
 
April 28,
2018
Raw materials
$
27,693

 
$
30,570

Work-in-process
8,075

 
8,645

Finished goods
33,761

 
36,120

 
$
69,529

 
$
75,335


Property and equipment, net consisted of the following:
 
October 27,
2018
 
April 28,
2018
Land
$
2,178

 
$
2,161

Buildings
67,834

 
67,773

Machinery and equipment
97,437

 
93,439

Office furniture and equipment
6,073

 
5,878

Computer software and hardware
54,982

 
53,004

Equipment held for rental
287

 
287

Demonstration equipment
7,004

 
7,035

Transportation equipment
7,667

 
7,632

 
243,462

 
237,209

Less accumulated depreciation
173,992

 
169,150

 
$
69,470

 
$
68,059

 
Note 11. Receivables

Accounts receivable are reported net of an allowance for doubtful accounts of $2,236 and $2,151 at October 27, 2018 and April 28, 2018, respectively. Included in accounts receivable as of October 27, 2018 and April 28, 2018 was $2,013 and $964, 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 12 months and sales-type leases.  The present value of these contracts and leases are recorded as a receivable as the revenue is recognized in accordance with 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 $2,653 and $3,393 as of October 27, 2018 and April 28, 2018, respectively.  Contract and lease receivables bearing annual interest rates of 4.8 to 9.0 percent are due in varying annual installments through 2024.  The face amount of long-term receivables was $2,929 as of October 27, 2018 and $3,733 as of April 28, 2018.

Note 12. 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 condensed 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 27, 2018 and April 28, 2018, we recorded a liability and related other receivable of $1,529 and $1,904 for a net claim from a customer against work performed by one of our subcontractors during installation which damaged our customer's property. The amount recorded is for probable and reasonably estimated cost to remediate the damage. Our subcontractor has full insurance for such matters, we have claims to a performance bond as additional collateral, and we carry insurance to cover such matters. In the opinion of management, the ultimate liability of this claim is not expected to have a material effect on our financial position, liquidity or capital resources.


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As of October 27, 2018 and April 28, 2018, a customer was withholding $2,224 of payment claiming we did not perform to the customer's specifications. We believe we have performed to the agreed-upon written specifications, have strong contractual documentation to support our position, and a customer with wherewithal to pay. We believe that we will ultimately prevail in collections. Although our assessment of the loss is remote, a number of factors could change the outcome.
 
For other unresolved legal proceedings or claims, we do not believe there is a reasonable probability that any material loss would be incurred. Accordingly, no material accrual or disclosure of a potential range of loss has been made related to these matters. We do not expect the ultimate liability of these unresolved legal proceedings or claims to have a material effect on our financial position, liquidity or capital resources.

Warranties:  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 product sold.  We estimate the costs which may be incurred under the contractual warranty obligations (assurance type warranty) 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. For service-type warranty contracts, we allocate revenue to this performance obligation and recognize the revenue over time and costs as incurred.

We disclosed a warranty issue in Note 18 of our Annual Report on Form 10-K for the fiscal year ended April 28, 2018 regarding a mechanical device failure within a module for displays. During the six months ended October 27, 2018 and October 28, 2017, we recognized warranty expense for probable and reasonably estimated costs to remediate this issue of $1,335 and $3,439, respectively. As of October 27, 2018, we had $1,301 remaining accrued warranty and maintenance agreement obligations for the estimate of probable future claims related to this issue. Although many of our contractual warranty arrangements have expired 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.

Changes in our warranty obligation for the six months ended October 27, 2018 consisted of the following:
 
 
October 27, 2018
Beginning accrued warranty obligations
 
$
29,953

      Warranties issued during the period
 
4,838

      Settlements made during the period
 
(9,201
)
      Changes in accrued warranty obligations for pre-existing warranties during the period, including expirations
 
3,128

Ending accrued warranty obligations
 
$
28,718

 
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 27, 2018, we had outstanding letters of credit and surety bonds in the amount of $11,936 and $5,218, respectively.  Performance guarantees are issued to certain customers to guarantee the operation and installation of the equipment and our ability to complete a contract.  These performance guarantees have various terms, but are generally one year.

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 $1,724 and $1,715 for the six months ended October 27, 2018 and October 28, 2017, 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 27, 2018:

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Fiscal years ending
 
Amount
2019
 
$
1,611

2020
 
2,770

2021
 
2,398

2022
 
1,646

2023
 
249

Thereafter
 
296

 
 
$
8,970


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 27, 2018, we were obligated under the following conditional and unconditional purchase commitments, which included $250 in conditional purchase commitments:
Fiscal years ending
 
Amount
2019
 
$
1,782

2020
 
3,918

2021
 
2,051

2022
 
143

2023
 
113

Thereafter
 
266

 
 
$
8,273


Note 13. Income Taxes

We calculate the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. Due to various factors and operating in multiple state and foreign jurisdictions, our effective tax rate is subject to fluctuation. We recorded an effective tax rate expense of 5.8 percent and 0.0 percent for the three and six months ended October 27, 2018, respectively, and an effective tax rate expense of 24.6 percent and 27.5 percent for the three and six months ended October 28, 2017, respectively. The decreases in the effective tax rates, as compared to the same prior year period, are due to tax credits proportionate to pre-tax book income, and a decrease in the federal statutory tax rate from 35 percent to 21 percent pursuant to the Tax Act.

Pursuant to the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year from the enactment date of December 22, 2017. The accounting for the deemed repatriation tax is provisional and incomplete due to continued guidance from the U.S. tax authority and our ongoing analysis of final year-end data and tax positions. This provisional estimate was included in our consolidated financial statements as of April 28, 2018. We did not make any measurement period adjustments during the first six months of fiscal 2019. We expect to complete the analysis within the measurement period in accordance with SAB 118. As of October 27, 2018, the accounting for the remeasurement of U.S. deferred tax assets was finalized, resulting in additional tax expense of $12. We have also elected to recognize tax resulting from any Global Intangible Low Taxed Income (GILTI) inclusion as a period cost if, and when, incurred. We have not previously provided deferred taxes on unremitted earnings attributable to foreign subsidiaries that have been considered to be reinvested indefinitely. The full effects of the Tax Act require a reassessment of previous indefinite reinvestment assertions with respect to certain jurisdictions. As of October 27, 2018, undistributed earnings of our foreign subsidiaries were considered to have been reinvested indefinitely.

We are subject to U.S. federal income tax as well as income taxes of multiple state and foreign jurisdictions. Fiscal years 2015, 2016, 2017, and 2018 remain open to federal and state income tax examinations.  Certain subsidiaries are also subject to income tax in several foreign jurisdictions which have open tax years varying by jurisdiction beginning in fiscal 2008. In the event of any future tax assessments, we have elected to record the income taxes and any related interest and penalties as income tax expense on our statement of operations.

As of October 27, 2018, we had $3,360 of unrecognized tax benefits which would reduce our effective tax rate if recognized.


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Note 14. 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 fair values for fixed-rate long-term receivables are estimated using a discounted cash flow analysis based on interest rates currently being offered for contracts with similar terms to customers with similar credit quality. The carrying amounts reported on our condensed consolidated balance sheets for long-term receivables approximate fair value and have been categorized as a Level 2 fair value measurement.  Fair values for fixed-rate long-term marketing obligations are estimated using a discounted cash flow calculation applying interest rates currently being offered for debt with similar terms and underlying collateral.  The total carrying value of long-term marketing obligations as reported on our condensed consolidated balance sheets within other long-term obligations approximates fair value and has been categorized as a Level 2 fair value measurement.

The following table sets forth by Level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at October 27, 2018 and April 28, 2018 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 27, 2018
 
 
 
 
 
 
 
Cash and cash equivalents
$
35,557

 
$

 
$

 
$
35,557

Restricted cash
26

 

 

 
26

Available-for-sale securities:
 

 
 

 
 
 
 
Certificates of deposit

 
5,196

 

 
5,196

U.S. Government securities
7,231

 

 

 
7,231

U.S. Government sponsored entities

 
15,986

 

 
15,986

Municipal bonds

 
3,308

 

 
3,308

Derivatives - asset position

 
187

 

 
187

Derivatives - liability position

 
(7
)
 

 
(7
)
Contingent liabilities

 

 
(1,338
)
 
(1,338
)
 
$
42,814

 
$
24,670

 
$
(1,338
)
 
$
66,146

Balance as of April 28, 2018
 

 
 

 
 
 
 

Cash and cash equivalents
$
29,727

 
$

 
$

 
$
29,727

Restricted cash
28