Daktronics, Inc.
DAKTRONICS INC /SD/ (Form: 10-Q, Received: 12/05/2014 11:15:03)

 
 
 
 
 

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 November 1, 2014

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 December 1, 2014 was 43,557,540 .
 
 
 
 
 




DAKTRONICS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended November 1, 2014

Table of Contents

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







Table of contents


P ART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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

 
 
November 1,
2014
 
April 26,
2014
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
57,435

 
$
45,054

Restricted cash
 
777

 
514

Marketable securities
 
25,441

 
25,398

Accounts receivable, net
 
95,260

 
82,500

Inventories, net
 
62,824

 
62,228

Costs and estimated earnings in excess of billings
 
29,855

 
33,400

Current maturities of long-term receivables
 
3,768

 
5,235

Prepaid expenses and other assets
 
7,404

 
6,758

Deferred income taxes
 
10,743

 
10,694

Income tax receivables
 
2,780

 
2,459

Total current assets
 
296,287

 
274,240

 
 
 
 
 
Long-term receivables, less current maturities
 
7,125

 
7,877

Goodwill
 
5,441

 
4,558

Intangibles, net
 
2,149

 
2,680

Investment in Affiliates and Other Assets
 
1,392

 
826

Deferred income taxes
 
1,737

 
2,000

 
 
17,844

 
17,941

PROPERTY AND EQUIPMENT:
 
 

 
 

Land
 
2,180

 
2,539

Buildings
 
63,680

 
59,363

Machinery and equipment
 
77,467

 
72,787

Office furniture and equipment
 
15,908

 
15,754

Computer software and hardware
 
47,718

 
45,329

Equipment held for rental
 
803

 
868

Demonstration equipment
 
7,155

 
7,532

Transportation equipment
 
5,083

 
4,823

 
 
219,994

 
208,995

Less accumulated depreciation
 
148,569

 
143,725

 
 
71,425

 
65,270

TOTAL ASSETS
 
$
385,556

 
$
357,451

 
 
 
 
 
See notes to consolidated financial statements.
 
 

 
 


1

Table of contents


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

 
 
November 1,
2014
 
April 26,
2014
 
 
(unaudited)
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 

Notes payable, bank
 
$
47

 
$

Accounts payable
 
54,190

 
45,913

Accrued expenses
 
27,224

 
23,462

Warranty obligations
 
13,738

 
14,476

Billings in excess of costs and estimated earnings
 
22,429

 
22,483

Customer deposits (billed or collected)
 
19,441

 
17,654

Deferred revenue (billed or collected)
 
9,465

 
7,722

Current portion of other long-term obligations
 
804

 
809

Income taxes payable
 
1,037

 
1,162

Deferred income taxes
 
25

 
27

Total current liabilities
 
148,400

 
133,708

 
 
 
 
 
Long-term warranty obligations
 
15,299

 
12,774

Long-term deferred revenue (billed or collected)
 
4,928

 
4,978

Other long-term obligations, less current maturities
 
2,913

 
2,871

Deferred income taxes
 
2

 
1

Total long-term liabilities
 
23,142

 
20,624

TOTAL LIABILITIES
 
171,542

 
154,332

 
 
 
 
 
SHAREHOLDERS' EQUITY:
 
 

 
 

Common Stock, no par value, authorized 120,000,000 shares; 43,392,822 and 43,166,731 shares issued at November 1, 2014 and April 26, 2014, respectively
 
46,682

 
43,935

Additional paid-in capital
 
31,370

 
29,923

Retained earnings
 
137,093

 
129,266

Treasury Stock, at cost, 19,680 shares
 
(9
)
 
(9
)
Accumulated other comprehensive (loss) income
 
(1,122
)
 
4

TOTAL SHAREHOLDERS' EQUITY
 
214,014

 
203,119

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
385,556

 
$
357,451

 
 
 
 
 
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
 
November 1,
2014
 
October 26,
2013
 
November 1,
2014
 
October 26,
2013
Net sales
$
173,115

 
$
161,639

 
$
339,733

 
$
300,361

Cost of goods sold
132,238

 
118,274

 
255,453

 
221,494

Gross profit
40,877

 
43,365

 
84,280

 
78,867

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

Selling expense
14,665

 
13,304

 
29,711

 
26,922

General and administrative
7,820

 
6,804

 
15,757

 
14,103

Product design and development
6,150

 
5,692

 
12,953

 
11,681

 
28,635

 
25,800

 
58,421

 
52,706

Operating income
12,242

 
17,565

 
25,859

 
26,161

 
 
 
 
 
 
 
 
Nonoperating income (expense):
 

 
 

 
 

 
 

Interest income
275

 
312

 
575

 
655

Interest expense
(56
)
 
(12
)
 
(124
)
 
(127
)
Other (expense) income, net
(225
)
 
278

 
(397
)
 
(114
)
 
 
 
 
 
 
 
 
Income before income taxes
12,236

 
18,143

 
25,913

 
26,575

Income tax expense
4,499

 
6,353

 
9,431

 
9,066

Net income
$
7,737

 
$
11,790

 
$
16,482

 
$
17,509

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
43,405

 
42,709

 
43,350

 
42,639

Diluted
43,798

 
43,002

 
43,926

 
43,023

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 

 
 

Basic
$
0.18

 
$
0.28

 
$
0.38

 
$
0.41

Diluted
$
0.18

 
$
0.27

 
$
0.38

 
$
0.41

 
 
 
 
 
 
 
 
Cash dividend declared per share
$
0.100

 
$
0.090

 
$
0.200

 
$
0.210

 
 
 
 
 
 
 
 
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
 
 
November 1, 2014
 
October 26,
2013
 
November 1,
2014
 
October 26,
2013
 
 
 
 
 
 
 
 
 
Net income
 
$
7,737

 
$
11,790

 
$
16,482

 
$
17,509

 
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
 
Cumulative translation adjustments
 
(978
)
 
290

 
(1,115
)
 
323

Unrealized (loss) gain on available-for-sale securities, net of tax
 
(4
)
 
11

 
(11
)
 
(20
)
Total other comprehensive loss, net of tax
 
(982
)
 
301

 
(1,126
)
 
303

Comprehensive income
 
$
6,755

 
$
12,091

 
$
15,356

 
$
17,812

 
 
 
 
 
 
 
 
 
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
 
November 1,
2014
 
October 26,
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
16,482

 
$
17,509

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

 
 

Depreciation
7,377

 
7,190

Amortization
124

 
181

Amortization of premium/discount on marketable securities
91

 
116

Gain on sale of property, equipment and other assets
(1,202
)
 
(76
)
Share-based compensation
1,564

 
1,456

Excess tax benefits from share-based compensation
(31
)
 
(19
)
Provision for doubtful accounts
(136
)
 
364

Deferred income taxes, net
301

 
578

Change in operating assets and liabilities
11,764

 
3,719

Net cash provided by operating activities
36,334

 
31,018

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchases of property and equipment
(12,699
)
 
(6,285
)
Proceeds from sale of property, equipment and other assets
4,001

 
133

Purchases of marketable securities
(6,451
)
 
(4,422
)
Proceeds from sales or maturities of marketable securities
6,316

 
2,958

Acquisitions, net of cash acquired
(5,915
)
 
(1,298
)
Net cash used in investing activities
(14,748
)
 
(8,914
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Payments on notes payable
(229
)
 

Proceeds from exercise of stock options
1,010

 
2,145

Excess tax benefits from share-based compensation
31

 
19

Principal payments on long-term obligations
(930
)
 
(3,640
)
Dividends paid
(8,656
)
 
(8,934
)
Net cash used in financing activities
(8,774
)
 
(10,410
)
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(431
)
 
(86
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
12,381

 
11,608

 
 
 
 
CASH AND CASH EQUIVALENTS:
 

 
 

Beginning of period
45,054

 
40,628

End of period
$
57,435

 
$
52,236

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash payments for:
 

 
 

Interest
$
217

 
$
47

Income taxes, net of refunds
9,812

 
10,832

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 

 
 

Demonstration equipment transferred to inventory
39

 
259

Purchase of property and equipment included in accounts payable
1,516

 
699

Contributions of common stock under the employee stock purchase plan
1,737

 
766

 
 
 
 
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 US generally accepted accounting principles 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 US generally accepted accounting principles have been condensed or omitted.  The balance sheet at April 26, 2014 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 26, 2014 , which are contained in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission.  The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

Daktronics, Inc. operates on a 52 to 53 week fiscal year, with our fiscal year ending on the Saturday closest to April 30 of each year. When April 30 falls on a Wednesday, the fiscal year ends on the preceding Saturday. Within each fiscal year, each quarter is comprised of 13 week periods following the beginning of each fiscal year. In each 53 week year, an additional week is added to the first quarter and each of the last three quarters is comprised of a 13 week period of that fiscal year. The fiscal year ended April 26, 2014 consisted of 52 weeks. Fiscal 2015 will be a 53-week year; therefore, the six months ended November 1, 2014 contains operating results for 27 weeks while the six months ended October 26, 2013 contained operating results for 26 weeks.

Certain reclassifications have been made to conform the fiscal 2014 amounts to the fiscal 2015 classifications for comparative purposes.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . ASU 2014-08 changes the criteria for determining which disposals should be presented as discontinued operations and modifies the related disclosure requirements. Additionally, the new guidance requires that a business that qualifies as held for sale upon acquisition should be reported as discontinued operations. The new guidance is effective for us beginning in fiscal 2016 and applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , as a new topic, Accounting Standards Codification ("ASC") 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element arrangements. ASU 2014-09 is effective for us beginning in fiscal 2018 and can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the effect that adopting this new accounting guidance will have on our consolidated results of operations, cash flows, and financial position.

Note 2. Earnings Per Share ("EPS")

Basic EPS is computed by dividing income attributable to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock sharing 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 November 1, 2014  and October 26, 2013
 
Net income
 
Shares
 
Per share income
For the three months ended November 1, 2014
 
 
 
 
 
Basic earnings per share
$
7,737

 
43,405

 
$
0.18

    Dilution associated with stock compensation plans

 
393

 

Diluted earnings per share
$
7,737

 
43,798

 
$
0.18

For the three months ended October 26, 2013
 
 
 
 
 
Basic earnings per share
$
11,790

 
42,709

 
$
0.28

    Dilution associated with stock compensation plans

 
293

 
(0.01
)
Diluted earnings per share
$
11,790

 
43,002

 
$
0.27

For the six months ended November 1, 2014
 
 
 
 
 
Basic earnings per share
$
16,482

 
43,350

 
$
0.38

    Dilution associated with stock compensation plans

 
576

 

Diluted earnings per share
$
16,482

 
43,926

 
$
0.38

For the six months ended October 26, 2013
 
 
 
 
 
Basic earnings per share
$
17,509

 
42,639

 
$
0.41

    Dilution associated with stock compensation plans

 
384

 

Diluted earnings per share
$
17,509

 
43,023

 
$
0.41

 
Options outstanding to purchase 1,546 shares of common stock with a weighted average exercise price of $18.12 for the three months ended November 1, 2014  and 2,356 shares of common stock with a weighted average exercise price of $15.66 for the three months ended October 26, 2013 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

Options outstanding to purchase 1,494 shares of common stock with a weighted average exercise price of $18.34 for the six months ended November 1, 2014 and 2,312 shares of common stock with a weighted average exercise price of $15.85 for the six months ended October 26, 2013 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

Note 3. Segment Disclosure

We have organized our business into 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 business units. These segments are based on the type of customer or geography.
 
Our Commercial business unit primarily consists of sales of our video display systems, digital billboards, Galaxy ® and Fuelight product lines to resellers (primarily sign companies), 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 High School Park and Recreation business unit (formerly known as 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.  Upon the sale of our automated rigging systems for theatre applications in July 2014, we changed the name of this business unit. Other than such sale, there was no change to the composition of the segment. 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 the portion related to non-allocated costs, are allocated to each segment based on various financial measures.  In general, our segments follow the same accounting policies as those described in Note 1 of our Annual Report on Form 10-K for the fiscal year ended April 26, 2014 .  Unabsorbed costs of domestic field sales and services infrastructure, including most field administrative staff, are allocated to the Commercial, Live Events, Transportation, and High School Park and Recreation 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.


7



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
 
November 1,
2014
 
October 26,
2013
 
November 1,
2014
 
October 26,
2013
Net sales:
 
 
 
 
 
 
 
    Commercial
$
43,928

 
$
44,973

 
$
83,710

 
$
78,674

    Live Events
62,641

 
58,175

 
138,315

 
113,252

    High School Park and Recreation
24,243

 
18,823

 
44,354

 
36,740

    Transportation
12,015

 
15,238

 
25,328

 
28,280

    International
30,288

 
24,430

 
48,026

 
43,415

 
173,115

 
161,639

 
339,733

 
300,361

 
 
 
 
 
 
 
 
Contribution margin:
 
 
 
 
 
 
 
    Commercial
9,208

 
10,179

 
16,120

 
16,123

    Live Events
6,510

 
10,287

 
18,557

 
18,629

    High School Park and Recreation
4,431

 
2,355

 
9,589

 
5,503

    Transportation
2,429

 
4,760

 
5,710

 
6,905

    International
3,634

 
2,480

 
4,593

 
4,785

 
26,212

 
30,061

 
54,569

 
51,945

 
 
 
 
 
 
 
 
Non-allocated operating expenses:
 
 
 
 
 
 
 
    General and administrative
7,820

 
6,804

 
15,757

 
14,103

    Product design and development
6,150

 
5,692

 
12,953

 
11,681

  Operating income
12,242

 
17,565

 
25,859

 
26,161

 
 
 
 
 
 
 
 
Nonoperating income (expense):
 
 
 
 
 
 
 
    Interest income
275

 
312

 
575

 
655

    Interest expense
(56
)
 
(12
)
 
(124
)
 
(127
)
  Other (expense) income, net
(225
)
 
278

 
(397
)
 
(114
)
 
 
 
 
 
 
 
 
  Income before income taxes
12,236

 
18,143

 
25,913

 
26,575

  Income tax expense
4,499

 
6,353

 
9,431

 
9,066

  Net income
$
7,737

 
$
11,790

 
$
16,482

 
$
17,509

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
    Commercial
$
1,218

 
$
1,065

 
$
2,425

 
$
2,117

    Live Events
1,168

 
1,115

 
2,315

 
2,262

    High School Park and Recreation
468

 
529

 
921

 
1,075

    Transportation
278

 
278

 
543

 
564

    International
305

 
183

 
555

 
419

    Unallocated corporate depreciation
348

 
379

 
742

 
934

 
$
3,785

 
$
3,549

 
$
7,501

 
$
7,371

 

8



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
 
November 1,
2014
 
October 26,
2013
 
November 1,
2014
 
October 26,
2013
Net sales:
 
 
 
 
 
 
 
United States
$
138,211

 
$
133,312

 
$
280,041

 
$
249,082

Outside U.S.
34,904

 
28,327

 
59,692

 
51,279

 
$
173,115

 
$
161,639

 
$
339,733

 
$
300,361

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
November 1,
2014
 
April 26,
2014
 
 
 
 
Long-lived assets:
 
 
 
 
 
 


United States
$
66,147

 
$
60,846

 
 
 


Outside U.S.
5,278

 
4,424

 
 
 
 
 
$
71,425

 
$
65,270

 
 
 


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

Note 4. 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) 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 we will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of November 1, 2014 , 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 November 1, 2014  and April 26, 2014 , our available-for-sale securities consisted of the following:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Balance as of November 1, 2014
 
 
 
 
 
 
 
Certificates of deposit
$
10,417

 
$

 
$

 
$
10,417

U.S. Government securities
1,500

 
2

 

 
1,502

U.S. Government sponsored entities
7,149

 

 
(9
)
 
7,140

Municipal obligations
6,373

 
9

 

 
6,382

 
$
25,439

 
$
11

 
$
(9
)
 
$
25,441

Balance as of April 26, 2014
 

 
 

 
 

 
 

Certificates of deposit
$
7,734

 
$

 
$

 
$
7,734

U.S. Government securities
2,000

 
2

 

 
2,002

U.S. Government sponsored entities
8,349

 

 
(8
)
 
8,341

Municipal obligations
7,309

 
12

 

 
7,321

 
$
25,392

 
$
14

 
$
(8
)
 
$
25,398


Realized gains or losses on investments are recorded in our 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 "accumulated other comprehensive (loss) income” and into earnings based on the specific identification method. In the six months ended November 1, 2014 and October 26, 2013 , the reclassifications from accumulated other comprehensive (loss) income to net assets were immaterial. Realized gains and losses on sales or maturities of investments were immaterial in the six months ended November 1, 2014 and October 26, 2013 .


9



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 November 1, 2014  were as follows:
 
Less than 12 months
 
1-5 Years
 
Total
Certificates of deposit
$
3,463

 
$
6,954

 
$
10,417

U.S. Government securities
1,001

 
501

 
1,502

U.S. Government sponsored agencies

 
7,140

 
7,140

Municipal obligations
4,503

 
1,879

 
6,382

 
$
8,967

 
$
16,474

 
$
25,441


Note 5. Business Combination

We acquired 100 percent ownership in Data Display, a European transportation display company, on August 11, 2014 for an undisclosed amount.

Data Display is a European based company focused on the design and manufacture of transportation displays. This acquisition will combine our organizations to better service transportation customers world-wide and broaden our leadership position on a global scale. This acquisition included a manufacturing plant in Ireland to manufacture transportation displays. This acquisition was funded with cash on hand. The results of operations have been included in our consolidated financial statements since the date of acquisition. We have not made pro forma disclosures, as the results of operations are not material to our consolidated financial statements.

During the second quarter of fiscal 2015, we prepared the preliminary fair value measurements of assets acquired and liabilities assumed, as of the acquisition date. The excess of purchase price over the net tangible and intangible assets was recorded as goodwill of $1.1 million. Included in the purchase price allocation were acquired identifiable intangibles valued at $0.5 million representing trademarks and technology with a useful life of 20 years and customer relationships valued at $0.1 million with a useful life of 18 years. The purchase price allocation is expected to be completed by the end of fiscal 2015.

Data Display's $2.4 million of net sales were included in the International business unit results and $1.0 million of net sales were included in the Transportation business unit results during the three months ended November 1, 2014. General and administrative expenses included $0.4 million for the six months ended November 1, 2014 for professional fees relating to the acquisition.

Note 6. Sale of Theatre Rigging Manufacturing

In July 2014, we sold our automated rigging systems for theatre applications. Related to the sale, we recorded a $1.3 million gain which is included in cost of goods sold in the High School Park and Recreation business unit. In connection with the sale, we changed the name of the business unit from Schools and Theatres to High School Park and Recreation to more accurately describe it.

As part of the transaction, we sold assets of $2.8 million that primarily consisted of accounts receivable, patents, inventory, and manufacturing equipment net of $0.4 million of accounts payable.

Note 7. Goodwill

The changes in the carrying amount of goodwill related to each reportable segment for the six months ended November 1, 2014  were as follows: 
 
Live Events
 
Commercial
 
Transportation
 
International
 
Total
Balance as of April 26, 2014
$
2,381

 
$
723

 
$
129

 
$
1,325

 
$
4,558

Disposal of automated rigging systems for theatre applications
(22
)
 

 

 

 
(22
)
Acquisition, net of cash required

 

 

 
1,099

 
1,099

Foreign currency translation
(6
)
 

 
(7
)
 
(181
)
 
(194
)
Balance as of November 1, 2014
$
2,353

 
$
723

 
$
122

 
$
2,243

 
$
5,441

 
We perform an analysis of goodwill on an annual basis. We complete this annual analysis during our third quarter of each fiscal year, based on the goodwill amount as of the first business day of our third quarter in fiscal 2014, which was October 27, 2013. The result of the analysis indicated no goodwill impairment existed as of that date. 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.


10



Note 8. Inventories

Inventories consisted of the following: 
 
November 1,
2014
 
April 26,
2014
Raw materials
$
26,785

 
$
27,660

Work-in-process
10,229

 
11,835

Finished goods
25,810

 
22,733

 
$
62,824

 
$
62,228

 
Note 9. Receivables

Accounts receivable are reported net of an allowance for doubtful accounts of $2,403 and $2,539 at November 1, 2014 and April 26, 2014 , respectively.

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 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 $10,893 and $13,112 as of November 1, 2014 and April 26, 2014 , respectively.  Contract and lease receivables bearing annual interest rates of 5.0 to 10.0 percent are due in varying annual installments through July 2022.  The face amount of long-term receivables was $12,790 as of November 1, 2014 and $14,892 as of April 26, 2014 .  Included in accounts receivable as of November 1, 2014 and April 26, 2014 was $456 and $2,098 , respectively, of retainage on construction-type contracts, all of which is expected to be collected within one year.

Note 10. Commitments and Contingencies

Litigation:   We are a party to legal proceedings and claims which arise during the ordinary course of business. We review our legal proceedings and claims, regulatory reviews and inspections and other legal matters on an ongoing basis and follow appropriate accounting guidance when making accrual and disclosure decisions. We establish accruals for those contingencies when the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. We do not record an accrual when the likelihood of loss 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 November 1, 2014 , we did not believe there was a reasonable probability any material loss for these various claims or legal actions, including reviews, inspections or other legal proceedings, if any, will be 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 $1,100 as of November 1, 2014 and April 26, 2014 .  In accordance with the provisions of ASC 460, Guarantees, there is no guarantee liability in accrued expenses that needed to be recognized 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 to include on-site labor, routine maintenance and event support.  In addition, the terms of warranties on some installations can vary from one to 10 years.  The specific terms and conditions of these warranties vary primarily depending on the type of the product sold.  We estimate the costs which may be incurred under the warranty obligations and record a liability in the amount of such estimated costs at the time the revenue is recognized.  Factors affecting our estimate of the cost of our warranty obligations include historical experience and expectations of future conditions.  We continually assess the adequacy of our recorded warranty reserves and, to the extent we experience any changes in warranty claim activity or costs associated with servicing those claims, our warranty obligation is adjusted accordingly.


11



Changes in our warranty liability for the six months ended November 1, 2014 consisted of the following:
 
 
 
Amount
Beginning accrued warranty costs
 
 
$
27,250

      Warranties issued during the period
 
 
6,320

      Settlements made during the period
 
 
2,433

      Changes in accrued warranty costs for pre-existing warranties during the period, including expirations
 
 
(6,966
)
Ending accrued warranty costs
 
 
$
29,037

 
Performance guarantees:   We have entered into standby letters of credit and surety bonds with financial institutions relating to the guarantee of future performance on contracts, primarily construction type contracts.  As of November 1, 2014 , we had outstanding letters of credit and surety bonds in the amount of $8,658 and $4,471 , 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, office space and various equipment for sales and service locations throughout the world, 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 facility 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 $1,377 and $1,388 for the six months ended November 1, 2014 and October 26, 2013 , respectively.  

Future minimum payments under non-cancelable 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 November 1, 2014 :
Fiscal years ending
 
Amount
2015
 
$
1,369

2016
 
2,266

2017
 
1,183

2018
 
255

2019
 
18

 
 
$
5,091


Purchase commitments:   From time to time, we commit to purchase inventory, advertising, information technology maintenance and support services, and various other products and services over periods extending beyond one year.  As of November 1, 2014 , we were obligated under the following conditional and unconditional purchase commitments, which included $800 in conditional purchase commitments.
Fiscal years ending
 
Amount
2015
 
$
1,473

2016
 
1,791

2017
 
1,000

2018
 
250

2019
 
100

 
 
$
4,614


Note 11. Income Taxes

We are subject to US 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, our fiscal years 2011, 2012, and 2013 are the remaining years open under statutes of limitations.  Certain subsidiaries are also subject to income tax in several foreign jurisdictions which have open tax years varying by jurisdiction beginning in fiscal 2005.

As of November 1, 2014 , we had $501 of unrecognized tax benefits which would affect our effective tax rate if recognized.  


12



Note 12. 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 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.  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 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 November 1, 2014 and April 26, 2014 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 November 1, 2014
 
 
 
 
 
Cash and cash equivalents
$
57,435

 
$

 
$
57,435

Restricted cash
777

 

 
777

Available-for-sale securities:
 

 
 

 
 
Certificates of deposit

 
10,417

 
10,417

U.S. Government securities
1,502

 

 
1,502

U.S. Government sponsored entities

 
7,140

 
7,140

Municipal obligations

 
6,382

 
6,382

Derivatives - currency forward contracts

 
194

 
194

 
$
59,714

 
$
24,133

 
$
83,847

Balance as of April 26, 2014
 

 
 

 
 

Cash and cash equivalents
$
45,054

 
$

 
$
45,054

Restricted cash
514

 

 
514

Available-for-sale securities:
 

 
 

 
 
Certificates of deposit

 
7,734

 
7,734

U.S. Government securities
2,002

 

 
2,002

U.S. Government sponsored entities

 
8,341

 
8,341

Municipal obligations

 
7,321

 
7,321

Derivatives - currency forward contracts

 
(85
)
 
(85
)
 
$
47,570

 
$
23,311

 
$
70,881


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.


13



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

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

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

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

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

Derivatives – currency forward contracts : Consists of currency forward contracts trading with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.  The fair value of these securities was measured based on valuation from a third-party bank. See Note 13. Derivative Financial Instruments for more information regarding our derivatives.
 
The fair value measurement standard also applies to certain non-financial assets and liabilities 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 will utilize the fair value measurement standard to value the assets and liabilities for the business combination involving Data Display, which occurred during the second quarter of fiscal 2015. See Note 5. Business Combination for more information. We utilized the fair value measurement standard, primarily Level 3 inputs, to value the assets and liabilities for the business combination involving OPEN, which occurred during the first three months of fiscal 2014. We did not make any material business combinations or recognize any significant impairment losses during fiscal 2014.

Note 13. Derivative Financial Instruments

We utilize derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates on those transactions denominated in currencies other than our functional currency, which is the U.S. dollar.  We enter into currency forward contracts to manage these economic risks.  We account for all derivatives on the balance sheet within other assets or accounts payable measured at fair value, and changes in fair values are recognized in earnings unless specific hedge accounting criteria are met for cash flow or net investment hedges. As of November 1, 2014  and April 26, 2014 , we had not designated any of our derivative instruments as accounting hedges, and thus we recorded the changes in fair value in other (expense) income, net.

The foreign currency exchange contracts in aggregated notional amounts in place to exchange United States Dollars at November 1, 2014  and April 26, 2014 were as follows:
 
November 1, 2014
 
April 26, 2014
 
U.S. Dollars
 
Foreign
Currency
 
U.S.
Dollars
 
Foreign
Currency
Foreign Currency Exchange Forward Contracts:
 
 
 
 
 
 
 
U.S. Dollars/Australian Dollars
1,249

 
1,399

 
455

 
512

U.S. Dollars/Canadian Dollars
3,828

 
4,308

 

 

U.S. Dollars/British Pounds
1,723

 
1,053

 
2,484

 
1,500

U.S. Dollars/Singapore Dollars
1,022

 
1,300

 
1,035

 
1,300

U.S. Dollars/New Zealand Dollars
893

 
1,090

 

 

U.S. Dollars/Euros
2,371

 
1,853

 
1,314

 
973


As of November 1, 2014 and April 26, 2014 , there was a net asset and liability of $194 and $85 , respectively, representing the fair value of foreign currency exchange forward contracts, which was determined using Level 2 inputs from a third-party bank.


14



Note 14. Subsequent Events

On December 4, 2014 , our Board of Directors declared a dividend of $0.10 per share payable on December 26, 2014 to shareholders of record of our common stock on December 15, 2014.


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 within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21B of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for the future.  These statements appear in a number of places in this Report and include all statements that are not historical statements of fact regarding the intent, belief or current expectations with respect to, among other things: (i.) our competition; (ii.) our financing plans; (iii.) trends affecting our financial condition or results of operations; (iv,) our growth strategy and operating strategy; (v.) the declaration and payment of dividends; (vi.) the timing and magnitude of future contracts; (vii.) parts shortages and lead times; (viii.) fluctuations in margins; (ix.) the seasonality of our business; (x.) the introduction of new products and technology; and (xi.) the timing and magnitude of any acquisitions or dispositions.  The words “may,” “would,” “could,” “should,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plans” and similar expressions and variations thereof are intended to identify forward-looking statements.  Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond our ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein, including those discussed in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended April 26, 2014 in the section entitled “Item 1A. Risk Factors” and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," and those factors discussed in detail in our other filings with the Securities and Exchange Commission.

The following discussion highlights the principal factors affecting changes in our 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 included in this Report.

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 affecting the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate our estimates, including those related to total costs on long-term construction-type contracts, costs to be incurred for product warranties and extended maintenance contracts, bad debts, excess and obsolete inventory, income taxes, share-based compensation and contingencies. Our estimates are based on historical experience and on various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates.

OVERVIEW

We design, manufacture and sell a wide range of display systems to customers throughout the world.  We focus our sales and marketing efforts on markets, geographical regions and products.  Our five business segments consist of four domestic business units and an International business unit.  The four domestic business units consist of Commercial, Live Events, High School Park and Recreation (formerly known as Schools and Theatres), and Transportation, all of which include the geographic territories of the United States and Canada. Disclosures related to our business segments are provided in Note 3. Our Commercial business unit primarily consists of sales of our video display systems, digital billboards, Galaxy ® and Fuelight product lines to resellers (primarily sign companies), 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 High School Park and Recreation business unit (formerly known as 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. Upon the sale of our automated rigging systems for theatre applications in July 2014, we changed the name of this business unit. Other than such sale, there was no change to the composition of the segment. 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.

Our net sales and profitability historically have fluctuated due to the impact of large project orders, such as display systems for professional sports facilities, colleges and universities, and spectacular projects in the commercial area, as well as the seasonality of the sports market. Large project orders can include a number of displays, controllers, and subcontracted structure builds, each of which can occur on varied schedules according to the customer's needs. Net sales and gross profit percentages also have fluctuated due to other seasonal factors, including the impact of holidays, which primarily affects our third quarter.  Our gross margins on large custom and large standard orders

16

Table of contents


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

Orders are booked and included in backlog only upon receipt of an executed contract and 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 effects of those pronouncements on our financial results, refer to Note 1 of the Notes to the Consolidated Financial Statements included elsewhere in this Report.

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 video display contracts are similar across the business units over the long-term.  There are, however, differences in the short term among the business units, which are discussed in the following analysis.

Overall, our business growth is driven by the market demand for large format electronic displays with the depth and quality of our products, including related control systems, the depth of our service offerings and our technology serving these market demands.  This growth, however, is partially offset by declines in product prices caused by increasing competition.  Each business unit also has unique key growth drivers and challenges.

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

The growing interest in our standard display products used in many different retail-type establishments and other types of commercial establishments.  The demand in this area is driven by these establishments' desire to attract the attention of motorists and others into their store.  It is also driven by the need to communicate messages to the public.  National accounts may replace their displays reaching end of life, which could lead to increased sales. Furthermore, we believe 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 increased 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.
The continued deployment of digital billboards as Out-of-Home ("OOH") companies continue developing new sites and start to replace digital billboards which are reaching end of life.  This is dependent on there being no adverse changes in the digital billboard regulatory environment, which could restrict future deployments of billboards, as well as maintaining our current market share of the business concentrated in a few large OOH companies.

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

Facilities spending more on larger display systems to enhance the game-day and event experiences for attendees.
Lower product costs, driving an expansion of the marketplace.
Our product and service offerings, which remain the most integrated and comprehensive offerings in the industry.
The competitive nature of sports teams, which strive to out-perform their competitors with display systems.
The desire for high-definition video displays, which typically drives larger displays or higher resolution displays, both of which increase the average transaction size.

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

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


17

Table of contents


Transportation Business Unit: Over the long-term, we believe growth in the Transportation business unit will result from increasing applications and acceptance of electronic displays to manage transportation systems, including roadway, airport, parking, transit and other applications.  This growth is highly dependent on government spending, primarily by the federal government, along with the continuing acceptance of private public partnerships as an alternative funding source.

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

Each of our business units is impacted by adverse economic conditions in different ways and to different degrees.  The effects of an adverse economy are generally less severe on our sports related business as compared to our other businesses, although in severe economic downturns, the sports business also can be severely impacted.  Our Commercial and International business units are highly dependent on economic conditions in general.

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 product to generate the same or 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

Daktronics, Inc. operates on a 52 to 53 week fiscal year, with our fiscal year ending on the Saturday closest to April 30 of each year. When April 30 falls on a Wednesday, the fiscal year ends on the preceding Saturday. Within each fiscal year, each quarter is comprised of 13 week periods following the beginning of each fiscal year. In each 53 week year, an additional week is added to the first quarter and each of the last three quarters is comprised of a 13 week period of that fiscal year. The fiscal year ended April 26, 2014 consisted of 52 weeks. Fiscal 2015 will be a 53-week year; therefore, the six months ended November 1, 2014 contains operating results for 27 weeks while the six months ended October 26, 2013 contained operating results for 26 weeks.

COMPARISON OF THE THREE MONTHS ENDED NOVEMBER 1, 2014 AND OCTOBER 26, 2013

Net Sales
 
Three Months Ended
(in thousands)
November 1,
2014
 
October 26,
2013
 
Percent Change
Net sales:
 
 
 
 
 
    Commercial
$
43,928

 
$
44,973

 
(2.3
)%
    Live Events
62,641

 
58,175

 
7.7

    High School Park and Recreation
24,243

 
18,823

 
28.8

    Transportation
12,015

 
15,238

 
(21.2
)
    International
30,288

 
24,430

 
24.0

 
$
173,115

 
$
161,639

 
7.1
 %
Orders:
 

 
 

 
 

    Commercial
$
44,503

 
$
38,147

 
16.7
 %
    Live Events
46,216

 
36,160

 
27.8

    High School Park and Recreation
13,520

 
14,142

 
(4.4
)
    Transportation
12,161

 
11,708

 
3.9

    International
32,702

 
26,797

 
22.0

 
$
149,102

 
$
126,954

 
17.4
 %

Commercial: The decrease in net sales for the three months ended November 1, 2014 compared to the same period one year ago was the net result of a decrease in sales of national accounts and on-premise niches due to differences in timing and variability of project deliveries as compared to the same period one year ago, which was offset by a slight increase in our billboard niche.

The increase in orders for the three months ended November 1, 2014 compared to the same period one year ago was the result of:
An increase of $5.3 million in orders of large custom video contracts due to timing of order bookings.
An increase of $3.7 million in orders from our billboard niche resulting from timing of orders from a national billboard customer.
A decrease of $2.6 million in orders from our on-premise and national accounts niches mainly due to the timing and volatility of orders and timing of renewals for extended service agreements.


18

Table of contents


Live Events:   The increase in net sales for the three months ended November 1, 2014 compared to the same period one year ago was primarily the net result of:
A net increase of $8.2 million in sales of systems related to National Basketball Association ("NBA") and National Hockey League ("NHL") stadiums that were manufactured and installed during the second quarter of fiscal 2015 related to orders received during the first quarter of fiscal 2015.
A net decrease of $3.7 million in sales related to video displays for universities and the National Football League ("NFL") stadiums.
 
Orders increase d $10.1 million for the three months ended November 1, 2014 compared to the same period one year ago primarily due to the timing of two orders for Major League Baseball ("MLB") stadiums.

High School Park and Recreation: The increase in net sales for the three months ended November 1, 2014 compared to the same period one year ago was primarily due to production and delivery on a higher volume of orders year to date. Order transaction size increased due to larger display sizes.

Orders remained relatively flat for the three months ended November 1, 2014 compared to the same period one year ago primarily due to the timing of orders.

Transportation: Net sales for the three months ended November 1, 2014 compared to the same period one year ago decrease d due to the result of $3.4 million of sales recognized during fiscal 2014 for two major state transportation authorities. No project of similar size occurred during the second quarter of fiscal 2015, and overall order volume is down for the year, impacting the second quarter. We completed the acquisition of Data Display during the second quarter of fiscal 2015. Data Display's sales in the Transportation business unit were $1.0 million during the three months ended November 1, 2014.

Orders for the three months ended November 1, 2014 compared to the same period one year ago increase d primarily due to the timing of orders and inclusion of Data Display's order volume.

International:   Net sales in our International business unit for the three months ended November 1, 2014 compared to the same period one year ago increase d mainly due to $8.0 million in sales recognized during the quarter for a multi-million dollar sports stadium project and for the delivery of a large billboard project. Data Display sales in the International business unit were $2.4 million during the three months ended November 1, 2014.

The increase in orders of $5.9 million for the three months ended November 1, 2014 compared to the same period one year ago was mainly due to orders received from stadiums. Data Display's orders included in the International business unit results were $1.3 million during the three months ended November 1, 2014.

Backlog

The product order backlog as of November 1, 2014 was $146 million as compared to $132 million as of October 26, 2013 and $165 million at the end of the first quarter of fiscal 2015 .  Historically, our backlog varies due to the seasonality of our business, the timing of large orders, and customer delivery schedules for these orders.  The backlog increased from one year ago in our High School Park and Recreation, Commercial, Live Events, and International business units and decreased in our Transportation business unit.  

Backlog is not a measure defined by US generally accepted accounting principles, and our methodology for determining backlog may vary from the methodology 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 evidenced by an arrangement with fixed and determinable prices and with collectability reasonably assured. Backlog may not be indicative of future operating results, and arrangements in our backlog may be canceled, modified or otherwise altered; therefore, it is not necessarily indicative of future sales or net income.


19

Table of contents


Gross Profit
 
Three Months Ended
 
November 1, 2014
 
 
 
October 26, 2013
 
 Amount
 
As a Percent of Net Sales
 
 
 
 Amount
 
As a Percent of Net Sales
(in thousands)
Commercial
$
13,290

 
30.3
%
 

 
$
13,992

 
31.1
%
Live Events
10,010

 
16.0

 

 
13,277

 
22.8

High School Park and Recreation
6,952

 
28.7

 

 
4,927

 
26.2

Transportation
3,666

 
30.5

 

 
5,616

 
36.9

International
6,959

 
23.0

 

 
5,553

 
22.7

 
$
40,877

 
23.6
%
 

 
$
43,365

 
26.8
%

The decrease in our gross profit   percentage for the three months ended November 1, 2014 compared to the same period one year ago was the net result of the mix of larger projects with lower margins and additional expenditures for overtime, expediting, and shipping costs to meet critical event dates for our customers. The following describes the overall impact by business unit:

Commercial:   The gross profit percent decrease for the three months ended November 1, 2014 compared to the same period one year ago was the result of product mix and the overall competitiveness of large custom contracts, which generally have lower margins, offset by lower warranty cost as a percent of sales.

Live Events: The gross profit percent decrease for the three months ended November 1, 2014 compared to the same period one year ago was the result of the increased mix of large custom contracts, increased installation activity on the mix of business, and the higher than anticipated volumes of business which stretched our capacity in various areas of the company including: design engineering, manufacturing installation and training. Additional dollars were spent on overtime, expediting and shipping costs to meet critical event dates for sports customers. The installation activity generally lowers margins per project as we outsource subcontracted on-site work at general contracting rates which generally has a lower margin than video equipment production.

High School Park and Recreation:   The gross profit percent increase for the three months ended November 1, 2014 compared to the same period one year ago was the result of an increase in large display sizes and improved margins related to volume manufacturing efficiencies.
 
Transportation:   The gross profit percent decrease for the three months ended November 1, 2014 compared to the same period one year ago was primarily due to fewer large procurement contracts causing non-utilized manufacturing capacity, offset by lower warranty costs as a percent of sales.

International:   The gross profit percent increase for the three months ended November 1, 2014 compared to the same period one year ago was primarily the result of increased margins on contracts and lower warranty costs as a percent of sales.

Selling Expense
 
Three Months Ended
 
November 1, 2014
 
 
 
October 26, 2013
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
(in thousands)
 
 
 
 
Commercial
$
4,082

 
9.3
%
 
7.1
 %
 
$
3,812

 
8.5
%
Live Events
3,500

 
5.6

 
17.1

 
2,990

 
5.1

High School Park and Recreation
2,521

 
10.4

 
(2.0
)
 
2,572

 
13.7

Transportation
1,237

 
10.3

 
44.5

 
856

 
5.6

International
3,325

 
11.0

 
8.2

 
3,074

 
12.6

 
$
14,665

 
8.5
%
 
10.2
 %
 
$
13,304

 
8.2
%
 
Selling expenses consist primarily of salaries, other employee-related costs, travel and entertainment expenses, facilities-related costs for sales and service offices, bad debt expenses, third-party commissions and expenditures for marketing efforts, including the costs of collateral materials, conventions and trade shows, product demos, and supplies.


20

Table of contents


Selling expense in our Commercial, Live Events, Transportation, and International business units increased $0.3 million, $0.5 million, $0.4 million, and $0.3 million, respectively, in the second quarter of fiscal 2015 compared to the same quarter a year ago, which was mainly related to increases in personnel expenses, marketing expenses, travel and entertainment expenses, the implementation of a sales opportunity management tool, the additional costs associated with the Data Display sales teams, and various other expenses, with a slight reduction in bad debt expense.

Selling expenses in our High School Park and Recreation business unit remained relatively flat in the three months ended November 1, 2014 compared to the same period one year ago.

Other Operating Expenses
 
Three Months Ended
 
November 1, 2014
 
 
 
October 26, 2013
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
(in thousands)
General and administrative
$
7,820

 
4.5
%
 
14.9
%
 
$
6,804

 
4.2
%
Product design and development
$
6,150

 
3.6
%
 
8.0
%
 
$
5,692

 
3.5
%

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 2015 increase d as compared to the same period one year ago primarily due to increases in personnel expenses, professional fees, the addition of Data Display costs and other expenses. We incurred $0.1 million in general and administration expense for the professional fees related to the Data Display acquisition during the quarter.

Product design and development expenses consist primarily of salaries, other employee-related costs, facilities cost 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 offers improved performance at a lower cost point over our current offerings. In addition, we continue to focus on various other products to standardize display components and control systems for both single site and network displays.  

Our costs for product development represent an allocated amount of costs based on time charges, materials costs and the overhead of our engineering departments.  Generally, a significant portion of our engineering time is spent on product development while the rest is allocated to large contract work and included in cost of goods sold. Product development expenses in the second quarter of fiscal 2015 as compared to the same period one year ago increase d primarily due to an increase in material for the development of new products and labor costs.

Other Income and Expenses  
 
Three Months Ended
 
November 1, 2014
 
 
 
October 26, 2013
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
(in thousands)
Interest income (expense), net
$
219

 
0.1
 %
 
(27.0
)%
 
$
300

 
0.2
%
Other (expense) income, net
$
(225
)
 
(0.1
)%
 
(180.9
)%
 
$
278

 
0.2
%
 
Interest income (expense), net:   We generate interest income through short-term cash investments, marketable securities, product sales on an installment basis, or in exchange for the rights to sell and retain advertising revenues from displays, which result in long-term receivables.  Interest expense is comprised primarily of interest costs on long-term marketing obligations.

Interest income, net in the second quarter of fiscal 2015 compared to the same period one year ago decrease d slightly, as a result of the volatility of working capital needs and changes in investing and financing activities, along with changes in the interest rate environment. It is difficult to project changes in interest income.

Other (expense) income, net:   Other income and expense, net decrease d for the second quarter of fiscal 2015 as compared to the same period one year ago primarily due to unrealized foreign currency losses from the volatility of the Euro, Australian dollar, and Canadian dollar.


21



Income Taxes

Our effective tax rate was 36.8 percent for the second quarter of fiscal 2015 as compared to an effective tax rate of 35.0 percent for the second quarter of fiscal 2014 .  Our effective tax rate can potentially have wide variances from quarter to quarter, resulting from interim reporting requirements, and the recognition of discrete events. In comparing the second quarter of fiscal 2015 to the second quarter of fiscal 2014 , changes in our effective tax rate were the net result of the following:

The effective tax rate for the second quarter of 2014 was reduced by a decrease in the effective tax rate of approximately 1.9 percent from the research and development tax credit as compared to no credit in the second quarter of fiscal 2015 due to the expiration of the tax credit on December 31, 2013.
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.


22



COMPARISON OF THE SIX MONTHS ENDED NOVEMBER 1, 2014 AND OCTOBER 26, 2013

Net Sales
 
Six Months Ended
(in thousands)
November 1,
2014
 
October 26,
2013
 
Percent Change
Net sales:
 
 
 
 
 
    Commercial
$
83,710

 
$
78,674

 
6.4
 %
    Live Events
138,315

 
113,252

 
22.1

    High School Park and Recreation
44,354

 
36,740

 
20.7

    Transportation
25,328

 
28,280

 
(10.4
)
    International
48,026

 
43,415

 
10.6

 
$
339,733

 
$
300,361