Daktronics, Inc.
DAKTRONICS INC /SD/ (Form: 10-Q, Received: 11/30/2012)

 
 
 
 
 

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, 2012

OR

¨ 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


DAKTRONICS, INC.
(Exact name of Registrant as specified in its charter)
South Dakota
(State or other jurisdiction of incorporation or organization)
 
46-0306862
(I.R.S. Employer Identification Number)
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 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 or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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

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 26, 2012 was 42,263,073 .
 
 
 
 
 



DAKTRONICS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended October 27, 2012

Table of Contents

 
 
 
Page
 
 
 
Consolidated Balance Sheets  as of October 27, 2012 and April 28, 2012
 
 
Consolidated Statements of Operations  for the Three and Six Months Ended October 27, 2012 and October 29, 2011
 
 
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended October 27, 2012 and October 29, 2011
 
 
 
Consolidated Statements of Cash Flows  for the Six Months Ended October 27, 2012 and October 29, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







Table of contents


P ART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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

 
 
October 27,
2012
 
April 28,
2012
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
53,094

 
$
29,423

Restricted cash
 
49

 
1,169

Marketable securities
 
25,969

 
25,258

Accounts receivable, net
 
71,189

 
66,923

Inventories
 
53,830

 
54,924

Costs and estimated earnings in excess of billings
 
32,480

 
23,020

Current maturities of long-term receivables
 
4,923

 
5,830

Prepaid expenses and other assets
 
7,000

 
5,528

Deferred income taxes
 
11,214

 
10,941

Income tax receivables
 
138

 
5,990

Total current assets
 
259,886

 
229,006

 
 
 
 
 
Long-term receivables, less current maturities
 
11,967

 
12,622

Goodwill
 
3,336

 
3,347

Intangibles
 
1,295

 
1,409

Advertising rights, net and other assets
 
1,039

 
1,157

Deferred income taxes
 
30

 
30

 
 
17,667

 
18,565

PROPERTY AND EQUIPMENT:
 
 

 
 

Land
 
1,497

 
1,497

Buildings
 
56,964

 
56,431

Machinery and equipment
 
62,748

 
61,654

Office furniture and equipment
 
16,198

 
15,648

Computer software and hardware
 
40,503

 
42,172

Equipment held for rental
 
868

 
1,003

Demonstration equipment
 
8,656

 
9,806

Transportation equipment
 
4,143

 
4,116

 
 
191,577

 
192,327

Less accumulated depreciation
 
127,170

 
123,931

 
 
64,407

 
68,396

TOTAL ASSETS
 
$
341,960

 
$
315,967

 
 
 
 
 
See notes to consolidated financial statements.
 
 

 
 


1

Table of contents


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

 
 
October 27,
2012
 
April 28,
2012
 
 
(unaudited)
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 

Notes payable, bank
 
$
478

 
$
1,459

Accounts payable
 
34,661

 
33,906

Accrued expenses
 
23,833

 
22,731

Warranty obligations
 
13,011

 
13,049

Billings in excess of costs and estimated earnings
 
17,711

 
14,385

Customer deposits (billed or collected)
 
14,703

 
12,826

Deferred revenue (billed or collected)
 
9,234

 
9,751

Current portion of other long-term obligations
 
477

 
359

Income tax payable
 
3,322

 
665

Deferred income taxes
 
57

 
42

Total current liabilities
 
117,487

 
109,173

 
 
 
 
 
Long-term warranty obligations
 
9,833

 
9,166

Long-term deferred revenue (billed or collected)
 
4,740

 
4,361

Other long-term obligations, less current maturities
 
1,457

 
1,009

Deferred income taxes
 
1,453

 
1,453

Total long-term liabilities
 
17,483

 
15,989

TOTAL LIABILITIES
 
134,970

 
125,162

 
 
 
 
 
SHAREHOLDERS' EQUITY:
 
 

 
 

Common stock, no par value, authorized 120,000,000 shares; 42,123,740 and 41,930,116 shares issued at October 27, 2012 and April 28, 2012, respectively
 
35,801

 
34,631

Additional paid-in capital
 
25,988

 
24,320

Retained earnings
 
145,223

 
131,830

Treasury stock, at cost, 19,680 shares
 
(9
)
 
(9
)
Accumulated other comprehensive (loss) income
 
(13
)
 
33

TOTAL SHAREHOLDERS' EQUITY
 
206,990

 
190,805

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
341,960

 
$
315,967

 
 
 
 
 
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 27,
2012
 
October 29,
2011
 
October 27,
2012
 
October 29,
2011
Net sales
$
149,871

 
$
135,910

 
$
282,790

 
$
254,607

Cost of goods sold
107,519

 
104,440

 
204,048

 
193,631

Gross profit
42,352

 
31,470

 
78,742

 
60,976

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

Selling expense
12,796

 
12,926

 
25,876

 
25,135

General and administrative
6,850

 
6,972

 
13,431

 
13,436

Product design and development
5,845

 
5,636

 
11,866

 
11,353

 
25,491

 
25,534

 
51,173

 
49,924

Operating income
16,861

 
5,936

 
27,569

 
11,052

 
 
 
 
 
 
 
 
Nonoperating income (expense):
 

 
 

 
 

 
 

Interest income
348

 
457

 
779

 
892

Interest expense
(36
)
 
(95
)
 
(123
)
 
(171
)
Other income (expense), net
150

 
(47
)
 
(30
)
 
(193
)
 
 
 
 
 
 
 
 
Income before income taxes
17,323

 
6,251

 
28,195

 
11,580

Income tax expense
5,776

 
2,292

 
9,970

 
4,253

Net income
$
11,547

 
$
3,959

 
$
18,225

 
$
7,327

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
42,163

 
41,792

 
42,138

 
41,759

Diluted
42,316

 
41,934

 
42,287

 
41,938

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 

 
 

Basic
$
0.27

 
$
0.09

 
0.43

 
0.18

Diluted
$
0.27

 
$
0.09

 
$
0.43

 
$
0.17

 
 
 
 
 
 
 
 
Cash dividend declared per share
$

 
$

 
$
0.115

 
$
0.11

 
 
 
 
 
 
 
 
See notes to consolidated financial statements.
 
 
 

 
 

 
 



3

Table of contents


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

 
 
Three Months Ended
 
Six Months Ended
 
 
October 27,
2012
 
October 29,
2011
 
October 27,
2012
 
October 29,
2011
 
 
 
 
 
 
 
 
 
Net income
 
$
11,547

 
$
3,959

 
$
18,225

 
$
7,327

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Cumulative translation adjustments
 
219

 
(157
)
 
(8
)
 
(119
)
Unrealized (loss) gain on available-for-sale securities, net of tax
 
(12
)
 
1

 
(38
)
 
54

Total other comprehensive income (loss), net of tax
 
207

 
(156
)
 
(46
)
 
(65
)
Comprehensive income
 
$
11,754

 
$
3,803

 
$
18,179

 
$
7,262

 
 
 
 
 
 
 
 
 
See notes to consolidated financial statements.
 
 
 
 
 
 
 
 


4

Table of contents


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


 
Six Months Ended
 
October 27,
2012
 
October 29,
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
18,225

 
$
7,327

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

 
 

Depreciation
7,717

 
8,879

Amortization
114

 
131

Amortization of premium/discount on marketable securities
93

 
101

Gain on sale of property and equipment
(11
)
 
(7
)
Share-based compensation
1,654

 
1,669

Excess tax benefits from share-based compensation
(13
)
 
(10
)
Provision for doubtful accounts
(187
)
 
(337
)
Deferred income taxes, net
(258
)
 
(26
)
Change in operating assets and liabilities
6,708

 
3,748

Net cash provided by operating activities
34,042

 
21,475

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchases of property and equipment
(4,331
)
 
(6,236
)
Proceeds from sale of property and equipment
119

 
147

Purchases of marketable securities
(6,828
)
 
(7,739
)
Proceeds from sales or maturities of marketable securities
5,992

 
4,975

Net cash used in investing activities
(5,048
)
 
(8,853
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Borrowings on notes payable

 
782

Payments on notes payable
(982
)
 

Proceeds from exercise of stock options
439

 
330

Excess tax benefits from share-based compensation
13

 
10

Dividend paid
(4,832
)
 
(4,588
)
Net cash used in financing activities
(5,362
)
 
(3,466
)
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
39

 
(4
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
23,671

 
9,152

 
 
 
 
CASH AND CASH EQUIVALENTS:
 

 
 

Beginning of period
29,423

 
54,308

End of period
$
53,094

 
$
63,460

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash payments for:
 

 
 

Interest
$
149

 
$
93

Income taxes, net
1,783

 
1,290

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 

 
 

Demonstration equipment transferred to inventory
367

 
32

Purchase of property and equipment included in accounts payable
706

 
568

 
 
 
 
See notes to consolidated financial statements.
 

 
 



5

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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect 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 accounting principles generally accepted in the United States of America have been condensed or omitted.  The balance sheet at April 28, 2012 has been derived from the audited financial statements at that date, but it does not include all of the information and footnotes required by generally accepted accounting principles 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, 2012 , 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.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income . The ASU amends guidance for the presentation of comprehensive income. The amended guidance requires an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The previous option to report other comprehensive income and its components in the statement of shareholders’ equity has been eliminated. Although the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under existing guidance. In the first quarter of fiscal 2013, we revised our presentation of comprehensive income to conform to the guidance in this ASU.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment . Under this new standard, entities testing goodwill for impairment now have an option of performing a qualitative assessment before having to calculate the fair value of a reporting unit. If an entity determines, on the basis of qualitative factors, that it is more-likely-than-not that the fair value of the reporting unit is less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. This ASU is effective for impairment tests after April 29, 2012. The adoption of this standard is not expected to have a material impact on our consolidated results of operations or financial condition, as this ASU impacts only the analysis to be performed.

In July 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The amended guidance gives entities the option to perform a qualitative impairment assessment to determine whether it is more-likely-than-not that an indefinite lived intangible asset is impaired. An entity must identify and evaluate changes in economic, industry and entity-specific events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset and whether it is more-likely-than-not that the fair value exceeds its carrying amount. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted.  The adoption of this amended guidance is not expected to have a material impact on our consolidated results of operations or financial condition, as the ASU only impacts the analysis to be performed.

Note 2. Earnings Per Share (“EPS”)

Basic EPS is computed by dividing income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that would 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 that then share in our earnings.


6



The following is a reconciliation of the income and common share amounts used in the calculation of basic and diluted EPS for the three and six months ended October 27, 2012  and October 29, 2011
 
Net income
 
Shares
 
Per share income
For the three months ended October 27, 2012:
 
 
 
 
 
Basic earnings per share
$
11,547

 
42,163

 
$
0.27

Dilution associated with stock compensation plans

 
153

 

Diluted earnings per share
$
11,547

 
42,316

 
$
0.27

For the three months ended October 29, 2011:
 
 
 
 
 
Basic earnings per share
$
3,959

 
41,792

 
$
0.09

Dilution associated with stock compensation plans

 
142

 

Diluted earnings per share
$
3,959

 
41,934

 
$
0.09

For the six months ended October 27, 2012:
 
 
 
 
 
Basic earnings per share
$
18,225

 
42,138

 
$
0.43

Dilution associated with stock compensation plans

 
149

 

Diluted earnings per share
$
18,225

 
42,287

 
$
0.43

For the six months ended October 29, 2011:
 
 
 
 
 
Basic earnings per share
$
7,327

 
41,759

 
$
0.18

Dilution associated with stock compensation plans

 
179

 
(0.01
)
Diluted earnings per share
$
7,327

 
41,938

 
$
0.17

 
Options outstanding to purchase 2,467 shares of common stock with a weighted average exercise price of $15.16 for the three months ended October 27, 2012  and 1,660 shares of common stock with a weighted average exercise price of $18.97 for the three months ended October 29, 2011 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

Options outstanding to purchase 3,554 shares of common stock with a weighted average exercise price of $13.15 for the six months ended October 27, 2012 and 1,625 shares of common stock with a weighted average exercise price of $19.18 for the six months ended October 29, 2011 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

Note 3. Goodwill

The changes in the carrying amount of goodwill related to each reportable segment for the six months ended October 27, 2012  were as follows: 
 
Live Events
 
Commercial
 
Transportation
 
Total
Balance as of April 28, 2012:
$
2,435

 
$
741

 
$
171

 
$
3,347

Foreign currency translation
(5
)
 
(4
)
 
(2
)
 
(11
)
Balance as of October 27, 2012:
$
2,430

 
$
737

 
$
169

 
$
3,336

 
We perform an analysis of goodwill on an annual basis. We last performed this analysis as of October 30, 2011.  The result of that analysis indicated that no goodwill impairment existed as of that date. We are presently in the process of completing this annual analysis based on the goodwill amount as of the first business day of our third quarter.

We face a number of risks to our business which can adversely impact cash flows in each of our business units and cause a significant decline in the fair values of each business unit.  This decline could lead to an impairment of goodwill in some or all of our business units.  Certain events, such as a worsening trend of orders and sales without a corresponding way to preserve future cash flows or a significant decline in our stock price, could cause a further impairment in goodwill.



7



Note 4. Inventories

Inventories consisted of the following: 
 
October 27,
2012
 
April 28,
2012
Raw materials
$
26,524

 
$
24,880

Work-in-process
7,523

 
10,581

Finished goods
19,783

 
19,463

 
$
53,830

 
$
54,924

 
Note 5. 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, Schools and Theatres, Transportation, and the International business unit. These segments are based on the type of customer and geography.
 
Our Commercial business unit primarily consists of sales of our video, Galaxy ® , Fuelight and Valo product lines to resellers (primarily sign companies), outdoor advertisers, 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 Schools and Theatres business unit primarily consists of sales of scoring systems, Galaxy ® displays and video display systems to primary and secondary education facilities and sales of our Vortek ® automated rigging systems for theatre applications.  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.

Segment reports present results through contribution margin, which is comprised of gross profit less selling costs. 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, excluding that portion related to non-allocated costs, are allocated to each segment based on various financial measures.  In general, segments follow the same accounting policies as those described in Note 1 of our Annual Report on Form 10-K.  Unabsorbed costs of domestic field sales and services infrastructure, including most field administrative staff, are allocated to the Commercial, Live Events, and Schools and Theatres business units based on cost of sales.  Shared manufacturing, building 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.


8



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 27,
2012
 
October 29,
2011
 
October 27,
2012
 
October 29,
2011
Net sales:
 
 
 
 
 
 
 
Commercial
$
39,773

 
$
43,704

 
$
78,130

 
$
76,407

Live Events
50,604

 
46,664

 
95,113

 
85,181

Schools & Theatres
21,688

 
17,239

 
39,861

 
35,721

Transportation
17,571

 
12,439

 
34,167

 
23,939

International
20,235

 
15,864

 
35,519

 
33,359

 
149,871

 
135,910

 
282,790

 
254,607

 
 
 
 
 
 
 
 
Contribution margin:
 
 
 
 
 
 
 
Commercial
8,566

 
7,449

 
14,768

 
11,987

Live Events
8,073

 
6,021

 
15,149

 
9,429

Schools & Theatres
3,434

 
1,409

 
6,011

 
4,809

Transportation
6,025

 
2,795

 
12,004

 
6,139

International
3,458

 
870

 
4,934

 
3,477

 
29,556

 
18,544

 
52,866

 
35,841

 
 
 
 
 
 
 
 
Non-allocated operating expenses:
 
 
 
 
 
 
 
General and administrative
6,850

 
6,972

 
13,431

 
13,436

Product design and development
5,845

 
5,636

 
11,866

 
11,353

Operating income
16,861

 
5,936

 
27,569

 
11,052

 
 
 
 
 
 
 
 
Nonoperating income (expense):
 
 
 
 
 
 
 
Interest income
348

 
457

 
779

 
892

Interest expense
(36
)
 
(95
)
 
(123
)
 
(171
)
Other income (expense), net
150

 
(47
)
 
(30
)
 
(193
)
 
 
 
 
 
 
 
 
Income before income taxes
17,323

 
6,251

 
28,195

 
11,580

Income tax expense
5,776

 
2,292

 
9,970

 
4,253

Net income
$
11,547

 
$
3,959

 
$
18,225

 
$
7,327

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Commercial
$
1,213

 
$
1,517

 
$
2,493

 
$
3,198

Live Events
1,161

 
1,257

 
2,265

 
2,568

Schools & Theatres
562

 
581

 
1,138

 
1,220

Transportation
345

 
339

 
669

 
700

International
222

 
166

 
359

 
330

Unallocated corporate depreciation
452

 
499

 
907

 
994

 
$
3,955

 
$
4,359

 
$
7,831

 
$
9,010

 

9



No single geographic area comprises a material amount of net sales or long-lived assets net of accumulated depreciation other than the United States.  The following table presents information about net sales and long-lived assets in the United States and elsewhere:
 
Three Months Ended
 
Six Months Ended
 
October 27,
2012
 
October 29,
2011
 
October 27,
2012
 
October 29,
2011
Net sales:
 
 
 
 
 
 
 
United States
$
125,835

 
$
117,630

 
$
241,494

 
$
215,728

Outside U.S.
24,036

 
18,280

 
41,296

 
38,879

 
$
149,871

 
$
135,910

 
$
282,790

 
$
254,607

 
 
 
 
 
 
 
 
 
October 27,
2012
 
April 28,
2012
 
 
 
 
Long-lived assets:
 
 
 
 
 
 


United States
$
62,506

 
$
66,350

 
 
 


Outside U.S.
1,901

 
2,046

 
 
 
 
 
$
64,407

 
$
68,396

 
 
 


 
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.  We are not economically dependent on a limited number of suppliers for our inventory items because we have numerous suppliers world-wide.  

Note 6.  Commitments and Contingencies

Litigation:   We are a party to legal proceedings and claims that arise during the ordinary course of business. We review our legal proceedings and claims, regulatory reviews and inspections and other legal proceedings 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 that has been 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, 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, 2012 , we did not believe that there was a reasonable possibility that any material loss for these various claims or legal actions, including reviews, inspections or other legal proceedings, if any, had been incurred. Accordingly, no 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.

Guarantees:   In connection with the sale of equipment to various customers, we have entered into contractual arrangements whereby we agreed to repurchase equipment at the end of the lease term at a fixed price. Our total obligations under these fixed price arrangements were $1,285 as of October 27, 2012 and April 28, 2012 .  We have recognized a guarantee liability in accrued expenses for the amount of $185 in accordance with the provisions of ASC 460, Guarantees , in connection with these arrangements.

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 that include on-site labor, routine maintenance and event support.  In addition, the terms of warranties on some installations can vary from one to ten years.  The specific terms and conditions of these warranties vary primarily depending on the type of the product sold.  We estimate the costs that may be incurred under the warranty obligations and record a liability in the amount of such estimated costs at the time the revenue is recognized.  Factors that affect our estimate of the cost of our warranty obligations include historical experience and expectations of future conditions.  We periodically assess the adequacy of our recorded warranty reserves and, to the extent that we experience any changes in warranty claim activity or costs associated with servicing those claims, our warranty obligation is adjusted accordingly.


10



Changes in our warranty liability for the six months ended October 27, 2012 consisted of the following:
 
 
 
Amount
Beginning accrued warranty costs
 
 
$
22,215

Warranties issued during the period
 
 
5,349

Settlements made during the period
 
 
(7,320
)
     Changes in accrued warranty costs for pre-existing
            warranties during the period, including expirations
 
 
2,600

Ending accrued warranty costs
 
 
$
22,844

 
Performance guarantees:   We have entered into standby letter of credit agreements, bank guarantees and surety bonds with financial institutions relating to the guarantee of future performance on contracts, primarily construction type contracts.  As of October 27, 2012 , we had outstanding letters of credit agreements, bank guarantees and surety bonds in the amount of $3,989 and $27,897 , 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 less than one year.

Leases:   We lease vehicles and office space for various sales and service locations throughout the world, including manufacturing space in the United States and China and various equipment. 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 three years past its current term, which ends December 31, 2016, and it contains an option to purchase the property subject to the lease from January 1, 2015 to December 31, 2016 for $8,400 , which approximates fair value.  If the lease is extended, the purchase option increases to $8,600 for the year ending December 31, 2017 and $8,800 for the year ending December 31, 2018.  Rental expense for operating leases was $1,450 and $1,683 for the six months ended October 27, 2012 and October 29, 2011 , 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, 2012 :
Fiscal years ending
 
Amount
2013
 
$
1,539

2014
 
2,483

2015
 
1,884

2016
 
1,667

2017
 
849

Thereafter
 
77

 
 
$
8,499


Purchase commitments:   From time to time, we commit to purchase inventory, advertising, and various other products and services over periods that extend beyond one year.  As of October 27, 2012 , we were obligated under the following conditional and unconditional purchase commitments, which included $1,000 in conditional purchase commitments.
Fiscal years ending
 
Amount
2013
 
$
745

2014
 
1,142

2015
 
399

2016
 
300

2017
 
250

Thereafter
 
200

 
 
$
3,036


Allowance for doubtful accounts: During the first quarter of fiscal 2013, we became aware of circumstances that could cause an increase in our allowance for doubtful accounts in an amount between $0 and $2,500 . These circumstances arose out of a contract for which payment by our customer is dependent on funding from a local government entity that is not under any legal obligation to pay our customer. Subsequently, we have received additional information and payment security, which reduces our non-payment risk to remote and therefore, we have not increased our allowance for doubtful accounts.


11



Note 7.  Income Taxes

We are subject to U.S. Federal income tax as well as the income taxes of multiple state jurisdictions.  As a result of the completion of examinations by the Internal Revenue Service on prior years and the expiration of statutes of limitations, fiscal years 2009, 2010, 2011 and 2012 are the only years remaining 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 2004.

As of October 27, 2012 , we had $458 of unrecognized tax benefits that would affect our effective tax rate if recognized.  We recognize interest and penalties related to income tax matters in income tax expense.

Note 8.  Fair Value Measurement

ASC 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer the 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 that 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 contracts receivable 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 consolidated balance sheets for contracts receivable approximate fair value and have been categorized as a Level 2 fair value measurement.  The carrying amounts reported for variable rate long-term marketing obligations approximate fair value.  Fair values for fixed-rate long-term marketing obligations are estimated using a discounted cash flow calculation that applies interest rates currently being offered for debt with similar terms and underlying collateral.  The total carrying value of long-term marketing obligations reported on our consolidated balance sheets approximates fair value and has been categorized as a Level 2 fair value measurement.


12



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, 2012 and April 28, 2012 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
 
Total
Balance as of October 27, 2012:
 
 
 
 
 
Cash and cash equivalents
$
53,094

 
$

 
$
53,094

Restricted cash
49

 

 
49

Available-for-sale securities:
 

 
 

 
 
Certificates of deposit

 
7,405

 
7,405

U.S. Government securities
6,028

 

 
6,028

U.S. Government sponsored entities

 
4,702

 
4,702

Municipal obligations

 
7,834

 
7,834

Derivatives - currency forward contracts

 
(7
)
 
(7
)
 
$
59,171

 
$
19,934

 
$
79,105

Balance as of April 28, 2012:
 

 
 

 
 

Cash and cash equivalents
$
29,423

 
$

 
$
29,423

Restricted cash
1,169

 

 
1,169

Available-for-sale securities:
 

 
 

 
 
Certificates of deposit

 
7,657

 
7,657

U.S. Government securities
7,556

 

 
7,556

U.S. Government sponsored entities

 
4,505

 
4,505

Municipal obligations

 
5,540

 
5,540

Derivatives - currency forward contracts

 
(95
)
 
(95
)
 
$
38,148

 
$
17,607

 
$
55,755


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 that are 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 : Consist of Fannie Mae and Federal Home Loan Bank investment grade debt securities that trade 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 obligations : Consist of investment grade municipal bonds that trade 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 that trade 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 valuation from a third party bank. See Note 11 for more information regarding our derivatives.
 

13



The fair value measurement standard also applies to certain non-financial assets and liabilities that are measured at fair value on a nonrecurring basis.  For example, certain long-lived assets such as goodwill, intangible assets and property, plant and equipment are measured at fair value in connection with business combinations or when an impairment is recognized and the related assets are written down to fair value.  We did not make any material business combinations or recognize significant impairment losses during the first six months of fiscal 2013 or during fiscal 2012.

Note 9.  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 ASU 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) income.  As it relates to fixed income marketable securities we do not intend to sell any of these investments and it is not more likely than not that we will be required to sell any of these investments before recovery of the entire amortized cost basis. 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 that are traded in the market to estimate fair value.  

As of October 27, 2012  and April 28, 2012 , our available-for-sale securities consisted of the following:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Balance as of October 27, 2012:
 
 
 
 
 
 
 
Certificates of deposit
$
7,403

 
$
2

 
$

 
$
7,405

U.S. Government securities
5,998

 
30

 

 
6,028

U.S. Government sponsored entities
4,701

 
1

 

 
4,702

Municipal obligations
7,817

 
17

 

 
7,834

 
$
25,919

 
$
50

 
$

 
$
25,969

Balance as of April 28, 2012:
 

 
 

 
 

 
 

Certificates of deposit
$
7,657

 
$

 
$

 
$
7,657

U.S. Government securities
7,507

 
49

 

 
7,556

U.S. Government sponsored entities
4,503

 
2

 

 
4,505

Municipal obligations
5,517

 
23

 

 
5,540

 
$
25,184

 
$
74

 
$

 
$
25,258


Realized gains or losses on investments are recorded in our consolidated statements of operations within other 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) income” into earnings based on the specific identification method. In the six months ended October 27, 2012 and October 29, 2011 , the reclassifications from accumulated other comprehensive (loss) income to net assets were immaterial. Realized gains and losses on sales and maturities of investments were immaterial in the six months ended October 27, 2012 and October 29, 2011 .

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, 2012  were as follows:
 
Less than 12 months
 
Greater than 12 months
 
Total
Certificates of deposit
$
4,691

 
$
2,714

 
$
7,405

U.S. Government securities
3,004

 
3,024

 
6,028

U.S. Government sponsored entities

 
4,702

 
4,702

Municipal obligations
2,696

 
5,138

 
7,834

 
$
10,391

 
$
15,578

 
$
25,969


Note 10.  Receivables

We sell our products throughout the United States and in certain foreign countries on credit terms that we establish for each customer.  On the sale of certain products, we have the ability to file a contractor’s lien against the product installed as collateral and to file claims against surety bonds to protect our interest in receivables.  Foreign sales are at times secured by irrevocable letters of credit or bank guarantees.

Accounts receivable are reported net of an allowance for doubtful accounts of $2,211 and $2,398 at October 27, 2012 and April 28, 2012 , respectively.

14




We make estimates regarding the collectability of our accounts receivable, long-term receivables, costs and estimated earnings in excess of billings and other receivables.  In evaluating the adequacy of our allowance for doubtful accounts, we analyze specific balances, customer creditworthiness, changes in customer payment cycles, and current economic trends.  If the financial condition of any customer was to deteriorate, resulting in an impairment of its ability to make payments, additional allowances may be required.  We charge off receivables at such time as it is determined that collection will not occur.  Charge offs of receivables and our allowance for doubtful accounts related to financing receivables are not material to our financial results.

In connection with certain sales transactions, we have entered into sales contracts with installment payments exceeding six 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 generally accepted accounting principles, and profit is recognized to the extent that 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 $16,890 and $18,452 as of October 27, 2012 and April 28, 2012 , respectively.  Contract and lease receivables bearing annual interest rates of 5.8 to 10.0 percent are due in varying annual installments through May 2023.  The face amount of long-term receivables was $19,762 as of October 27, 2012 and $21,494 as of April 28, 2012 .  Included in accounts receivable as of October 27, 2012 and April 28, 2012 was $504 and $783 , respectively, of retainage on construction-type contracts, all of which is expected to be collected in one year.

Note 11.  Derivative Financial Instruments

We utilize derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates on those transactions that are 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 as an asset or liability 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 27, 2012  and April 28, 2012 , 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 United States Dollars at October 27, 2012  and April 28, 2012 were as follows:
 
October 27, 2012
 
April 28, 2012
 
U.S.
Dollars
 
Foreign
Currency
 
U.S.
Dollars
 
Foreign
Currency
Foreign Currency Exchange Forward Contracts:
 
 
 
 
 
 
 
U.S. Dollars/Australian Dollars
2,619

 
2,548

 
3,315

 
3,269

U.S. Dollars/Canadian Dollars
575

 
571

 
870

 
868

U.S. Dollars/Singapore Dollars

 

 
96

 
121

U.S. Dollars/Brazilian Reais

 

 
242

 
436

U.S. Dollars/Euros

 

 
130

 
99


As of October 27, 2012 and April 28, 2012 , there was a net liability of $7 and $95 , respectively, representing the fair value of foreign currency exchange forward contracts, which was determined using Level 2 inputs from a third party bank.


15



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 that are subject to the safe harbors created under the Securities Act of 1933, as amended, and 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 our intent, belief or current expectations with respect to, among other things: (i) our financing plans; (ii) trends affecting our financial condition or results of operations; (iii) our growth strategy and operating strategy; (iv) the declaration and payment of dividends; (v) the timing and magnitude of future contracts; (vi) parts shortages and longer lead times; (vii) fluctuations in margins; and (viii) the introduction of new products and technology.  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 in our Annual Report on Form 10-K for the fiscal year ended April 28, 2012 in the section entitled “Item 1A. Risk Factors.”

The following discussion highlights the principal factors affecting changes in financial condition and results of operations.  This discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes to the Consolidated Financial Statements.

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 accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect 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 estimated total costs on long-term construction-type contracts, estimated costs to be incurred for product warranties and extended maintenance contracts, bad debts, excess and obsolete inventory, income taxes, stock-based compensation and contingencies.  Our estimates are based on historical experience and on various other assumptions that are 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 that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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 segments consist of four domestic business units and an International business unit.  The four domestic business units consist of Live Events, Commercial, Schools and Theatres, and Transportation.

Our net sales and profitability historically have fluctuated due to the impact of large product orders, such as display systems for professional sports facilities and colleges and universities, as well as the seasonality of the sports market. Net sales and gross profit percentages also have fluctuated due to other seasonal factors, including the impact of holidays, which primarily affects our third quarter.   Our gross margins on large custom and standard orders tend to fluctuate more than small standard orders.   Large product orders that involve 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 that our future results of operations will be subject to similar fluctuations.

Orders are booked and included in backlog only upon receipt of a firm contract and after receipt of any required deposits.  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.

For a summary of recently issued accounting pronouncements and the affects of those pronouncements on our financial results, refer to Note 1 of the Notes to the Consolidated Financial Statements, which is included elsewhere in this Report.


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GENERAL

Our business, especially the large video display business in all of our business units, is very competitive, and generally our margins on these large contracts are similar across the business units over the long-term.  There are, however, differences that arise in the short term among the business units, which are discussed more fully in the following analysis.

Overall, our business growth is driven by the market demand for large format electronic displays and the depth and quality of our products, including related control systems, the depth of our service offerings and our technology that serve these market demands.  This growth, however, is partially offset by declines in product prices caused by increasing competition.  Within each business unit, there are also key growth drivers that apply uniquely to that business unit.

Commercial Business Unit: Over the long-term, we believe that the following factors are important growth drivers to our Commercial business unit:

The continued deployment of digital billboards, which we believe can expand as billboard companies continue developing new sites for digital billboards and start to replace digital billboards which are reaching end of life.  This growth 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 that is concentrated in a few large billboard companies.
The growing interest in our standard display products that are used in many different retail-type establishments, among other types of applications.  The demand in this area is driven by retailers and other types of commercial establishments desire to attract the attention of motorists and others into their storefront.  It is also driven by the need to communicate messages to the public.  Furthermore, we believe that in the future there will be increased demand from national accounts, including retailers, quick serve restaurants and other types of nationwide organizations, which could lead to increasing sales.
Increasing interest in spectaculars, which include very large and sometimes highly customized displays as part of entertainment venues such as casinos, amusement parks and Times Square type locations.
The introduction 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.

Live Events Business Unit: Over the long-term, we believe that growth in the Live Events business unit will result from a number of factors, including:

Facilities spending more on larger display systems.
Lower product costs, which are 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.

Schools and Theatres Business Unit: Over the long-term, we believe that growth in the Schools and Theatres business unit will result from a number of factors, including:

Increasing demand for video systems in high schools as school districts realize the revenue generating potential of these displays versus traditional scoreboards.
Increasing demand for different types of displays, such as message centers at schools to communicate to students, parents and the broader community.
The use of more sophisticated displays in more athletic venues, such as aquatics in schools.

Transportation Business Unit: Over the long-term, we believe that growth in the Transportation business unit will result from increasing applications of electronic displays to manage commuters, including roadway, airport, parking, transit and other applications.  This growth is highly dependent on government spending, primarily federal government spending.

International Business Unit: Over the long-term, we believe that growth in the International business unit will result from achieving greater penetration in various geographies, building products more suited to individual markets, and the reasons listed in each of the other business units to the extent they apply outside the United States.

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 can be severely impacted.  Our Commercial and International business units are highly dependent on economic conditions in general.  


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The cost and selling prices of our products have decreased over time and are expected to continue to decrease in the future.  As a result, each year we must sell more products to generate the same or a greater level of net sales as in previous fiscal years. This price decline has been significant as a result of increased competition across all business units.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED OCTOBER 27, 2012 AND OCTOBER 29, 2011

Net Sales
 
Three Months Ended
(in thousands)
October 27,
2012
 
October 29,
2011
 
Percent Change
Net Sales:
 
 
 
 
 
Commercial
$
39,773

 
$
43,704

 
(9.0
)%
Live Events
50,604

 
46,664

 
8.4

Schools & Theatres
21,688

 
17,239

 
25.8

Transportation
17,571

 
12,439

 
41.3

International
20,235

 
15,864

 
27.6

 
$
149,871

 
$
135,910

 
10.3
 %
Orders:
 

 
 

 
 

Commercial
$
32,035

 
$
33,358

 
(4.0
)%
Live Events
34,195

 
44,488

 
(23.1
)
Schools & Theatres
14,465

 
13,475

 
7.3

Transportation
7,496

 
12,342

 
(39.3
)
International
22,141

 
14,132

 
56.7

 
$
110,332

 
$
117,795

 
(6.3
)%

Commercial: The decrease in net sales for the three months ended October 27, 2012 compared to the same period one year ago was the net result of:

A decrease in sales of large custom video contracts, due to a multi-million dollar custom video project converting to sales in the second quarter of fiscal 2012. The level of large custom contract orders and sales in this niche is subject to volatility and, during the second quarter of fiscal 2013, we did not have the same level of large video projects to convert to sales.
An increase in sales of on-premise advertising displays resulting from orders for a national account customer replacement program.
Sales in our billboard niche were relatively flat.

The decrease in orders for the three months ended October 27, 2012 compared to the same period one year ago was the net result of:

An increase in orders for large custom video projects net of a decline in orders for on-premise advertising displays due to order timing and, to some degree, the economic uncertainty.
A decrease in orders for our national account business and outdoor advertising customers resulting from variability in timing of orders being booked.

Live Events:   The increase in net sales for the three months ended October 27, 2012 compared to the same period one year ago was the result of the higher order volume in the first quarter of fiscal 2013, which we converted to net sales during the second quarter of fiscal 2013.
 
Orders decreased for the three months ended October 27, 2012 compared to the same period one year ago due to order timing as a number of expected orders have pushed into our third quarter of fiscal 2013.

Schools and Theatres: The increase in net sales for the three months ended October 27, 2012 compared to the same period one year ago was primarily the result of increased demand in video projects which converted to sales in the second quarter of fiscal 2013.

The increase in orders for the three months ended October 27, 2012 compared to the same period one year ago appears to be resulting from an overall improvement in the market, which we believe is related to less impact of public school spending pressures and the growing interest in video systems in high schools. In addition, orders for video projects increased by 92 percent over the second quarter of fiscal 2012.

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Transportation: The increase in net sales for the three months ended October 27, 2012 compared to the same period one year ago was the result of an increase of $4.6 million in sales related to orders under a large procurement contract and some production on an order booked during the first quarter of fiscal 2013 for a major airport.

The decrease in orders for the three months ended October 27, 2012 compared to the same period one year ago is the result of order timing.

International:   The increase in net sales in our International business unit for the three months ended October 27, 2012 compared to the same period one year ago is the result of a significant increase in orders booked during the first and second quarters of fiscal 2013 compared to the same period of the previous year. There were a number of orders that were delayed in booking in the fourth quarter of fiscal 2012 that ultimately booked in the first quarter of fiscal 2013, which led to a higher level of sales during the first half of fiscal 2013.

The increase in orders for the three months ended October 27, 2012 compared to the same period one year ago is the result of a $6.1 million order for a large architectural lighting project and orders for two international sports stadiums in excess of $3 million.

Backlog

The product order backlog as of October 27, 2012 was $128 million as compared to $137 million as of October 29, 2011 and $164 million at the end of first quarter of fiscal 2013.  Historically, our backlog varies due to the timing of large orders and customer delivery schedules for these orders.  The backlog increased from one year ago in our Transportation and Schools and Theatres business units and decreased in our Commercial, Live Events and International business units.  

Backlog is not a measure defined by U.S. generally accepted accounting principles, and our methodology for determining backlog may vary from the methodologies used by other companies in determining their backlog amounts. Our backlog is equal to the amount of net sales expected to be recognized in future periods on standard product and contract sales that are evidenced by an arrangement, with prices that are fixed and determinable and with collectability reasonably assured. Arrangements in our backlog may be canceled, modified or otherwise altered. Lead times for orders in our backlog can range from a week to several years. Most standard product lead time is less than 8 weeks, but large contracts can range from twelve weeks to more than a year. Thus, overall backlog is not directly indicative of sales in future quarters.

Gross Profit
 
Three Months Ended
 
October 27, 2012
 
 
 
October 29, 2011
 
 Amount
 
As a Percent of Net Sales
 
Percent Change
 
 Amount
 
As a Percent of Net Sales
(in thousands)
Commercial
$
12,038

 
30.3
%
 
9.8
%
 
$
10,964

 
25.1
%
Live Events
11,421

 
22.6

 
24.1

 
9,200

 
19.7

Schools & Theatres
6,022

 
27.8

 
43.7

 
4,191

 
24.3

Transportation
6,881

 
39.2

 
85.1

 
3,717

 
29.9

International
5,990

 
29.6

 
76.3

 
3,398

 
21.4

 
$
42,352

 
28.3
%
 
34.6
%
 
$
31,470

 
23.2
%

The increase in our gross profit   percentage for the three months ended October 27, 2012 compared to the same period one year ago was the net result of:

An increase of approximately two percentage points in margin on product sales because of sales mix. During the second quarter of fiscal 2013 we produced a higher volume of standard orders with higher margins versus the same quarter of fiscal 2012.
An increase of approximately one percentage point due to lower manufacturing conversion costs resulting from increased manufacturing utilization and decreased component costs.
An increase of approximately one percentage point due to lower warranty costs as a percentage of net sales.
An increase of approximately one percentage point due to the increased services infrastructure utilization and other cost containment measures.

Commercial:   The gross profit percent increase for the three months ended October 27, 2012 compared to the same period one year ago was the result of an improvement of reseller and national account business due to sales mix, increased manufacturing and services infrastructure utilization, and a reduction of warranty costs as a percentage of sales, partially offset by a small decline in the outdoor advertising niche due to competitive market pressures on pricing.

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Live Events: The gross profit percent increase for the three months ended October 27, 2012 compared to the same period one year ago was the result of improvements from manufacturing utilization, a reduction of warranty costs as a percentage of sales, and improved margin based on sales mix.

Schools and Theatres:   The gross profit percent increase for the three months ended October 27, 2012 compared to the same period one year ago was the result of higher gross profit percentages on product sales mix, increased manufacturing utilization, and lower warranty costs as a percentage of sales.

Transportation:   The gross profit percent increase for the three months ended October 27, 2012 compared to the same period one year ago was the net result of an increase of approximately four percentage points in margin on product sales because of sales mix and profitability on the contracts produced this quarter, increased manufacturing and services infrastructure utilization and a decrease in warranty expenses as a percentage of sales.

International:   The gross profit percent increase for the three months ended October 27, 2012 compared to the same period one year ago was primarily the result of improved margins on product sales mix.

Selling Expense
 
Three Months Ended
 
October 27, 2012
 
 
 
October 29, 2011
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
(in thousands)
 
 
 
 
Commercial
$
3,472

 
8.7
%
 
(1.2
)%
 
$
3,515

 
8.0
%
Live Events
3,348

 
6.6

 
5.3

 
3,179

 
6.8

Schools & Theatres
2,589

 
11.9

 
(6.9
)
 
2,781

 
16.1

Transportation
855

 
4.9

 
(7.3
)
 
922

 
7.4

International
2,532

 
12.5

 
0.1

 
2,529

 
15.9

 
$
12,796

 
8.5
%
 
(1.0
)%
 
$
12,926

 
9.5
%
 
Selling expenses were slightly lower in the three months ended October 27, 2012 compared to the same period one year ago as a result of our cost containment efforts offsetting nearly $0.7 million in increased personnel costs, including salary, taxes, and employee benefits.

Commercial:   Commercial selling expenses decreased approximately one percent in the second quarter of fiscal 2013 compared to the same period one year ago.  The decrease was the result of reductions in convention expenses and travel and entertainment expenses, offset by an increase in personnel costs.

Live Events:   Selling expenses increased by approximately five percent in the second quarter of fiscal 2013 compared to the same period in fiscal 2012.  This was primarily the result of an increase in the cost of employee benefits due to an increase in workers compensation claims.

Schools and Theatres:   Selling expenses decreased approximately seven percent compared to the same period in fiscal 2012.  This was mainly due to a decrease in bad debt expense.

Transportation:   Selling expenses declined approximately seven percent for the second quarter of fiscal 2013 compared to the same period one year ago.  The decline for the second quarter was due to cost reductions in travel and entertainment and convention expenses.

International:   Selling expenses remained flat compared to the same period in fiscal 2012 due to increases in personnel costs, including taxes and benefits that were offset by reductions in various other expenses consistent with those noted above.
  
Other Operating Expenses
 
Three Months Ended
 
October 27, 2012
 
 
 
October 29, 2011
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
(in thousands)
General and administrative
$
6,850

 
4.6
%
 
(1.7
)%
 
$
6,972

 
5.1
%
Product design and development
$
5,845

 
3.9
%
 
3.7
 %
 
$
5,636

 
4.1
%


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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, amortization of intangibles and the costs of supplies. General and administrative expenses   in the second quarter of fiscal 2013 as compared to the same period one year ago remained relatively flat as increases in payroll costs, including taxes and benefits, were offset by net decreases in information system related maintenance expenses, professional services expenses and various other expenses. These reductions in expenses were due to one-time costs incurred in the second quarter of fiscal 2012 and continued traction on our initiatives to reduce variable spending during the current year as a part of our strategic goals to improve operating income.

Product design and development expenses consist primarily of salaries, other employee-related costs, facilities and equipment-related costs and supplies. Product development investments in the near term are focused on video technology with a range of pixel pitches for outdoor applications using LED surface mount technology, which offer improved performance at a lower cost point over our current offerings. In addition, we continue to focus on a new full-color family of Vanguard displays for the transportation market and various other products to standardize display components and control systems for both single site displays and networked displays.  Our costs for product development represent an allocated amount of costs based on time charges, materials costs and 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 included in cost of goods sold.

The increase in product development expense   in the second quarter of fiscal 2013 as compared to the same period one year ago was due to the increase in time allocated to product development efforts of $0.6 million for new product offering development, partially offset by a decrease of $0.2 million in costs of material used to prototype and test new products and a decrease of $0.2 million in various other expenses.

Other Income and Expenses  
 
Three Months Ended
 
October 27, 2012
 
 
 
October 29, 2011
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
(in thousands)
Interest income, net
$
312

 
0.2
%
 
(13.8
)%
 
$
362

 
0.3
 %
Other income (expense), net
$
150

 
0.1
%
 
(419.1
)%
 
$
(47
)
 
 %
 
Interest income, net:   We generate interest income through short-term cash investments, marketable securities, and product sales on an installment basis, under lease arrangements, 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 and the unused portion of our line of credit.

Interest income was relatively flat in the second quarter of fiscal 2013 compared to the same period one year ago. Interest expense decreased slightly in the second quarter of fiscal 2013 as compared to the same period in fiscal 2012 due to reduced levels of outstanding debt on our line of credit.

Other income (expense), net:   We realized an increase of $0.2 million in income from the net result of other income and expenses for the second quarter of fiscal 2013 as compared to the same period one year ago due to a decrease in foreign currency losses for changes in the fair value of currency hedges, which are generally offset by net gains in the hedged transactions and various other non-operating gains.

Income Taxes

Our effective tax rate was 33.3 percent for the second quarter of fiscal 2013 as compared to 36.7 percent for the second quarter of fiscal 2012.  The primary difference was a one-time two percentage points decrease in tax rates due to an international tax change and the remaining difference was due to the effective rate mix in various jurisdictions.

Our effective tax rate can vary significantly due to the mix of pre-tax income and permanent adjustments to taxable income in different countries and the estimate of the annual effective rate in each country.


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COMPARISON OF THE SIX MONTHS ENDED OCTOBER 27, 2012 AND OCTOBER 29, 2011

Net Sales
 
Six Months Ended
(in thousands)
October 27,
2012
 
October 29,
2011
 
Percent Change
Net Sales:
 
 
 
 
 
Commercial
$
78,130

 
$
76,407

 
2.3
 %
Live Events
95,113

 
85,181

 
11.7

Schools & Theatres
39,861

 
35,721

 
11.6

Transportation
34,167

 
23,939

 
42.7

International
35,519

 
33,359

 
6.5

 
$
282,790

 
$
254,607

 
11.1
 %
Orders:
 

 
 

 
 

Commercial
$
76,634

 
$
80,599

 
(4.9
)%
Live Events
84,894

 
83,823

 
1.3

Schools & Theatres
37,923

 
31,648

 
19.8

Transportation
39,532

 
28,016

 
41.1

International
44,891

 
33,899

 
32.4

 
$
283,874

 
$
257,985

 
10.0
 %

Commercial: The increase in net sales for the six months ended October 27, 2012 compared to the same period one year ago was the net result of:

An increase in sales of on-premise advertising displays, which was primarily due to an increase in orders for a national account customer replacement program, as previously disclosed.
A decrease in sales for large video display projects due to the lower volume of demand for custom video orders.
A small increase in sales to outdoor advertising companies.

The decrease in orders for the six months ended October 27, 2012 compared to the same period one year ago was the net result of:

A decrease in demand for large video display systems.
A decrease in orders for standard Galaxy ® displays used in on-premise advertising other than our national accounts business, which we attribute to soft economic conditions.
An increase of outdoor advertising company orders for new or replacement billboards.

Live Events:   The increase in net sales for the six months ended October 27, 2012 compared to the same period one year ago was the net result of the near record level of orders booked in the first quarter of fiscal 2013 as compared to the first quarter of fiscal 2012, which we converted to sales.

Schools and Theatres:   The increase in net sales for the six months ended October 27, 2012 compared to the same period one year ago was the result of schools demonstrating more willingness this year than in fiscal 2012 to move forward with projects and the increasing demand in video projects for high schools.

Transportation:   The increase in net sales for the six months ended October 27, 2012 compared to the same period one year ago was driven by sales recorded from a large procurement contract compared to the previous year. In addition, orders for the first half of fiscal 2013 were significantly higher than the previous year primarily due to an order for $21 million in video displays at the LAX Bradley International Terminal in Los Angeles.

International:   The increase in net sales for the six months ended October 27, 2012 compared to the same period one year ago was the result of a significant increase in orders during the first half of fiscal 2013 compared to fiscal 2012. The increase in orders was being driven by orders from a number of outdoor advertising companies located around the world, a $6 million large architectural lighting project and orders for two international sports stadiums totaling in excess of $3 million.


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Gross Profit
 
Six Months Ended