Daktronics, Inc.
DAKTRONICS INC /SD/ (Form: 10-Q, Received: 12/04/2015 12:58:31)

 
 
 
 
 

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 31, 2015

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 30, 2015 was 43,955,598 .
 
 
 
 
 




DAKTRONICS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended October 31, 2015

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)

 
 
October 31,
2015
 
May 2,
2015
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
27,460

 
$
57,284

Restricted cash
 
195

 
496

Marketable securities
 
24,935

 
25,346

Accounts receivable, net
 
90,938

 
80,857

Inventories, net
 
69,441

 
64,389

Costs and estimated earnings in excess of billings
 
28,906

 
35,068

Current maturities of long-term receivables
 
3,143

 
3,784

Prepaid expenses and other assets
 
6,160

 
6,663

Deferred income taxes
 
10,452

 
10,640

Income tax receivables
 
6,635

 
5,543

Total current assets
 
268,265

 
290,070

 
 
 
 
 
Long-term receivables, less current maturities
 
5,160

 
6,090

Goodwill
 
5,371

 
5,269

Intangibles, net
 
1,721

 
1,824

Investment in affiliates and other assets
 
2,456

 
2,680

Deferred income taxes
 
721

 
702

 
 
15,429

 
16,565

PROPERTY AND EQUIPMENT:
 
 

 
 

Land
 
2,139

 
2,147

Buildings
 
64,948

 
64,186

Machinery and equipment
 
85,113

 
80,664

Office furniture and equipment
 
15,827

 
15,823

Computer software and hardware
 
53,618

 
51,083

Equipment held for rental
 
803

 
803

Demonstration equipment
 
7,543

 
7,299

Transportation equipment
 
6,266

 
6,012

 
 
236,257

 
228,017

Less accumulated depreciation
 
161,513

 
155,173

 
 
74,744

 
72,844

TOTAL ASSETS
 
$
358,438

 
$
379,479

 
 
 
 
 
See notes to consolidated financial statements.
 
 

 
 


1

Table of contents


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

 
 
October 31,
2015
 
May 2,
2015
 
 
(unaudited)
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 

Accounts payable
 
$
44,182

 
$
52,747

Accrued expenses
 
25,992

 
26,063

Warranty obligations
 
13,486

 
11,838

Billings in excess of costs and estimated earnings
 
12,583

 
23,797

Customer deposits (billed or collected)
 
13,103

 
16,828

Deferred revenue (billed or collected)
 
11,501

 
9,524

Current portion of other long-term obligations
 
499

 
587

Income taxes payable
 
257

 
636

Total current liabilities
 
121,603

 
142,020

 
 
 
 
 
Long-term warranty obligations
 
14,978

 
14,643

Long-term deferred revenue (billed or collected)
 
3,958

 
3,914

Other long-term obligations, less current maturities
 
2,229

 
3,190

Long-term income tax payable
 
2,934

 
2,734

Deferred income taxes
 
1,389

 
939

Total long-term liabilities
 
25,488

 
25,420

TOTAL LIABILITIES
 
147,091

 
167,440

 
 
 
 
 
SHAREHOLDERS' EQUITY:
 
 

 
 

Common Stock, no par value, authorized 120,000,000 shares; 43,863,600 and 43,643,801 shares issued and outstanding at October 31, 2015 and May 2, 2015, respectively
 
49,570

 
48,960

Additional paid-in capital
 
33,971

 
32,693

Retained earnings
 
130,954

 
132,771

Treasury Stock, at cost, 19,680 shares
 
(9
)
 
(9
)
Accumulated other comprehensive loss
 
(3,139
)
 
(2,376
)
TOTAL SHAREHOLDERS' EQUITY
 
211,347

 
212,039

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
358,438

 
$
379,479

 
 
 
 
 
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 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Net sales
$
157,668

 
$
173,115

 
$
307,889

 
$
339,733

Cost of goods sold
122,155

 
132,238

 
236,875

 
255,453

Gross profit
35,513

 
40,877

 
71,014

 
84,280

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

Selling expense
14,825

 
14,665

 
29,089

 
29,711

General and administrative
8,116

 
7,820

 
16,286

 
15,757

Product design and development
6,975

 
6,150

 
13,943

 
12,953

 
29,916

 
28,635

 
59,318

 
58,421

Operating income
5,597

 
12,242

 
11,696

 
25,859

 
 
 
 
 
 
 
 
Nonoperating income (expense):
 

 
 

 
 

 
 

Interest income
266

 
275

 
564

 
575

Interest expense
(28
)
 
(56
)
 
(90
)
 
(124
)
Other (expense) income, net
(231
)
 
(225
)
 
(674
)
 
(397
)
 
 
 
 
 
 
 
 
Income before income taxes
5,604

 
12,236

 
11,496

 
25,913

Income tax expense
2,436

 
4,499

 
4,552

 
9,431

Net income
$
3,168

 
$
7,737

 
$
6,944

 
$
16,482

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
43,934

 
43,405

 
43,890

 
43,350

Diluted
44,113

 
43,798

 
44,255

 
43,926

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 

 
 

Basic
$
0.07

 
$
0.18

 
$
0.16

 
$
0.38

Diluted
$
0.07

 
$
0.18

 
$
0.16

 
$
0.38

 
 
 
 
 
 
 
 
Cash dividend declared per share
$
0.10

 
$
0.10

 
$
0.20

 
$
0.20

 
 
 
 
 
 
 
 
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 31, 2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
 
 
 
 
 
 
 
 
 
Net income
 
$
3,168

 
$
7,737

 
$
6,944

 
$
16,482

 
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
 
Cumulative translation adjustments
 
(202
)
 
(978
)
 
(760
)
 
(1,115
)
Unrealized loss on available-for-sale securities, net of tax
 
(18
)
 
(4
)
 
(3
)
 
(11
)
Total other comprehensive loss, net of tax
 
(220
)
 
(982
)
 
(763
)
 
(1,126
)
Comprehensive income
 
$
2,948

 
$
6,755

 
$
6,181

 
$
15,356

 
 
 
 
 
 
 
 
 
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 31,
2015
 
November 1,
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
6,944

 
$
16,482

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

 
 

Depreciation
8,186

 
7,377

Amortization
70

 
124

Amortization of premium/discount on marketable securities
58

 
91

Gain on sale of property, equipment and other assets
(50
)
 
(1,202
)
Share-based compensation
1,503

 
1,564

Excess tax benefits from share-based compensation
(3
)
 
(31
)
Provision for doubtful accounts
209

 
(136
)
Deferred income taxes, net
573

 
301

Change in operating assets and liabilities
(26,714
)
 
11,764

Net cash (used in) provided by operating activities
(9,224
)
 
36,334

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchases of property and equipment
(10,491
)
 
(12,699
)
Proceeds from sale of property, equipment and other assets
105

 
4,001

Purchases of marketable securities
(13,780
)
 
(6,451
)
Proceeds from sales or maturities of marketable securities
14,133

 
6,316

Acquisitions, net of cash acquired
(1,936
)
 
(5,915
)
Net cash used in investing activities
(11,969
)
 
(14,748
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Payments on notes payable
(27
)
 
(229
)
Proceeds from exercise of stock options
610

 
1,010

Excess tax benefits from share-based compensation
3

 
31

Principal payments on long-term obligations
(16
)
 
(930
)
Dividends paid
(8,760
)
 
(8,656
)
Net cash used in financing activities
(8,190
)
 
(8,774
)
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(441
)
 
(431
)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(29,824
)
 
12,381

 
 
 
 
CASH AND CASH EQUIVALENTS:
 

 
 

Beginning of period
57,284

 
45,054

End of period
$
27,460

 
$
57,435

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash payments for:
 

 
 

Interest
$
175

 
$
217

Income taxes, net of refunds
5,178

 
9,812

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 

 
 

Demonstration equipment transferred to inventory
192

 
39

Purchase of property and equipment included in accounts payable
364

 
1,516

Contributions of common stock under the employee stock purchase plan

 
1,737

 
 
 
 
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 U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions affecting the reported amounts therein.  Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.  The balance sheet at May 2, 2015 has been derived from the audited financial statements at that date, but it does not include all of the information and footnotes required by GAAP for complete financial statements.   These financial statements should be read in conjunction with our financial statements and notes thereto for the year ended May 2, 2015 , 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. Fiscal 2015 was a 53-week year; therefore, the six months ended October 31, 2015 contained operating results for 26 weeks while the six months ended November 1, 2014 contained operating results for 27 weeks.

Certain reclassifications in the Consolidated Balance Sheets' categories of prepaid expenses and other assets and investment in affiliates and other assets have been made to conform fiscal 2015 to the fiscal 2016 classifications for comparative purposes.

Recent Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-11, Simplifying the Measurement of Inventory , which changes the measurement principle of inventory from the lower of cost or market to lower of cost and net realizable value. The guidance will require prospective application at the beginning of our first quarter of fiscal 2018, but permits adoption in an earlier period. We are currently evaluating the effect that adopting ASU 2015-11 will have on our consolidated results of operations, cash flows, and financial position.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which was issued 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. This standard will also result in enhanced disclosures about revenue, providing guidance for transactions that were not previously addressed comprehensively and improving guidance for multiple-element arrangements. The FASB recently announced plans to defer the effective adoption date for one year. ASU 2014-09 is effective for us beginning in fiscal 2019 and can be adopted by the Company either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the effect that adopting ASU 2014-09 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 which may occur if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock which share in our earnings.


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 31, 2015  and November 1, 2014
 
Net income
 
Shares
 
Per share income
For the three months ended October 31, 2015
 
 
 
 
 
Basic earnings per share
$
3,168

 
43,934

 
$
0.07

    Dilution associated with stock compensation plans

 
179

 

Diluted earnings per share
$
3,168

 
44,113

 
$
0.07

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 six months ended October 31, 2015
 
 
 
 
 
Basic earnings per share
$
6,944

 
43,890

 
$
0.16

    Dilution associated with stock compensation plans

 
365

 

Diluted earnings per share
$
6,944

 
44,255

 
$
0.16

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

 
Options outstanding to purchase 2,173 shares of common stock with a weighted average exercise price of $15.13 for the three months ended October 31, 2015  and 1,546 shares of common stock with a weighted average exercise price of $18.12 for the three months ended November 1, 2014 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

Options outstanding to purchase 1,378 shares of common stock with a weighted average exercise price of $18.61 for the six months ended October 31, 2015  and $1,494 shares of common stock with a weighted average exercise price of $18.34 for the six months ended November 1, 2014 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. These segments are based on the type of customer or geography and are the same as our business units.
 
Our Commercial business unit primarily consists of sales of our video display systems, digital billboards, and Galaxy ® and Fuelight product lines to resellers (primarily sign companies), out-of-home ("OOH") companies, national retailers, quick-serve restaurants, casinos and petroleum retailers.  Our Live Events business unit primarily consists of sales of integrated scoring and video display systems to college and professional sports facilities and convention centers and sales of our mobile display technology to video rental organizations and other live events type venues.  Our High School Park and Recreation business unit primarily consists of sales of scoring systems, Galaxy ® displays and video display systems to primary and secondary education facilities.  Our Transportation business unit primarily consists of sales of our Vanguard ® and Galaxy ® product lines to governmental transportation departments, airlines and other transportation related customers.  Our International business unit consists of sales of all product lines outside the United States and Canada. We focus on product lines that relate to integrated scoring and video display systems for sports and commercial applications, out-of-home advertising products, and European transportation related products.

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 are allocated to each segment based on various financial measures; however, some depreciation and amortization are corporate in nature and remain unallocated.  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 May 2, 2015 .  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, buildings and utilities, and procurement costs are allocated based on payroll dollars, square footage and various other financial measures.

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

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
 
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Net sales:
 
 
 
 
 
 
 
    Commercial
$
40,066

 
$
43,928

 
$
83,276

 
$
83,710

    Live Events
50,761

 
62,641

 
98,683

 
138,315

    High School Park and Recreation
24,253

 
24,243

 
43,212

 
44,354

    Transportation
13,294

 
12,015

 
27,061

 
25,328

    International
29,294

 
30,288

 
55,657

 
48,026

 
157,668

 
173,115

 
307,889

 
339,733

 
 
 
 
 
 
 
 
Contribution margin:
 
 
 
 
 
 
 
    Commercial
3,993

 
9,208

 
10,106

 
16,120

    Live Events
6,802

 
6,510

 
12,985

 
18,557

    High School Park and Recreation
3,785

 
4,431

 
7,560

 
9,589

    Transportation
3,183

 
2,429

 
6,363

 
5,710

    International
2,925

 
3,634

 
4,911

 
4,593

 
20,688

 
26,212

 
41,925

 
54,569

 
 
 
 
 
 
 
 
Non-allocated operating expenses:
 
 
 
 
 
 
 
    General and administrative
8,116

 
7,820

 
16,286

 
15,757

    Product design and development
6,975

 
6,150

 
13,943

 
12,953

Operating income
5,597

 
12,242

 
11,696

 
25,859

 
 
 
 
 
 
 
 
Nonoperating (expense) income:
 
 
 
 
 
 
 
    Interest income
266

 
275

 
564

 
575

    Interest expense
(28
)
 
(56
)
 
(90
)
 
(124
)
Other (expense) income, net
(231
)
 
(225
)
 
(674
)
 
(397
)
 
 
 
 
 
 
 
 
Income before income taxes
5,604

 
12,236

 
11,496

 
25,913

Income tax expense
2,436

 
4,499

 
4,552

 
9,431

Net income
$
3,168

 
$
7,737

 
$
6,944

 
$
16,482

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
    Commercial
$
1,134

 
$
1,218

 
$
2,391

 
$
2,425

    Live Events
1,097

 
1,168

 
2,418

 
2,315

    High School Park and Recreation
368

 
468

 
858

 
921

    Transportation
339

 
278

 
668

 
543

    International
342

 
305

 
598

 
555

    Unallocated corporate depreciation
921

 
348

 
1,323

 
742

 
$
4,201

 
$
3,785

 
$
8,256

 
$
7,501

 

8



No single geographic area comprises a material amount of our net sales or property and equipment, net of accumulated depreciation, other than the United States.  The following table presents information about net sales and property and equipment, net of accumulated depreciation, in the United States and elsewhere:
 
Three Months Ended
 
Six Months Ended
 
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Net sales:
 
 
 
 
 
 
 
United States
$
126,211

 
$
138,211

 
$
246,078

 
$
280,041

Outside U.S.
31,457

 
34,904

 
61,811

 
59,692

 
$
157,668

 
$
173,115

 
$
307,889

 
$
339,733

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 31,
2015
 
May 2,
2015
 
 
 
 
Property and equipment, net of accumulated depreciation:
 
 
 
 
 
 


United States
$
69,779

 
$
67,882

 
 
 


Outside U.S.
4,965

 
4,962

 
 
 
 
 
$
74,744

 
$
72,844

 
 
 


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

Note 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 .  As it relates to fixed income marketable securities, we do not intend to sell any of these investments, and it is not likely we will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of October 31, 2015 , we anticipate we will recover the entire amortized cost basis of such fixed income securities, and we have determined no other-than-temporary impairments associated with credit losses were required to be recognized. The cost of securities sold is based on the specific identification method. Where quoted market prices are not available, we use the market price of similar types of securities traded in the market to estimate fair value.  

As of October 31, 2015  and May 2, 2015 , our available-for-sale securities consisted of the following:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Balance as of October 31, 2015
 
 
 
 
 
 
 
Certificates of deposit
$
14,925

 
$

 
$

 
$
14,925

U.S. Government securities
500

 

 

 
500

U.S. Government sponsored entities
6,577

 

 
(4
)
 
6,573

Municipal obligations
2,936

 
1

 

 
2,937

 
$
24,938

 
$
1

 
$
(4
)
 
$
24,935

Balance as of May 2, 2015
 

 
 

 
 

 
 

Certificates of deposit
$
11,409

 
$

 
$

 
$
11,409

U.S. Government securities
1,000

 
1

 

 
1,001

U.S. Government sponsored entities
7,951

 

 
(9
)
 
7,942

Municipal obligations
4,989

 
5

 

 
4,994

 
$
25,349

 
$
6

 
$
(9
)
 
$
25,346


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 ” into earnings based on the specific identification method. In the six months ended October 31, 2015 and November 1, 2014 , the reclassifications from accumulated other comprehensive loss to earnings were immaterial.


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 October 31, 2015  were as follows:
 
Less than 12 months
 
1-5 Years
 
Total
Certificates of deposit
$
5,084

 
$
9,841

 
$
14,925

U.S. Government securities
500

 

 
500

U.S. Government sponsored agencies

 
6,573

 
6,573

Municipal obligations
2,489

 
448

 
2,937

 
$
8,073

 
$
16,862

 
$
24,935


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. The results of its operations have been included in our consolidated financial statements since the date of acquisition. We have not made pro forma disclosures because the results of its operations are not material to our consolidated financial statements.

Data Display is a European based company focused on the design and manufacture of transportation displays. This acquisition allows our organization 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.

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 using independent appraisals and other analysis. A final measurement was completed during the first quarter of fiscal 2016, and the fair values of the consideration paid and contingent consideration were finalized.

The following table summarizes the adjustments that were made to the original purchase price allocation:

 
Purchase price allocation as originally reported
Adjustments
Reconciliation of assets and liabilities transferred
Goodwill
$
1,099

$
364

$
1,463

Trademarks and Technology
480


480

Customer Relationships
84


84

Property and Equipment
1,433


1,433

Investment for Affiliates
437


437

Inventory
2,773

(149
)
2,624

Accounts Receivable
3,380

(317
)
3,063

Other Current Assets
1,869

23

1,892

Current Liabilities
3,616

79

3,695

Long-term Obligations
950


950


Note 6. Sale of Theatre Rigging Manufacturing

In July 2014, we sold our automated rigging systems business for theatre applications. Related to the sale, we recorded a $1,261 gain, which is included in cost of goods sold in the High School Park and Recreation business unit.

As part of the transaction, we sold assets of $2,817 that primarily consisted of accounts receivable, patents, inventory, and manufacturing equipment, net of $355 of accounts payable.

Note 7. Goodwill

The changes in the carrying amount of goodwill related to each reportable segment for the six months ended October 31, 2015  were as follows: 

10


 
Live Events
 
Commercial
 
Transportation
 
International
 
Total
Balance as of May 2, 2015
$
2,321

 
$
721

 
$
91

 
$
2,136

 
$
5,269

Acquisition, net of cash required

 

 

 
213

 
213

Foreign currency translation
(36
)
 
(2
)
 
(36
)
 
(37
)
 
(111
)
Balance as of October 31, 2015
$
2,285

 
$
719

 
$
55

 
$
2,312

 
$
5,371

 
We perform an analysis of goodwill on an annual basis. We performed our annual analysis based on the goodwill amount as of the first business day of our third quarter in fiscal 2015, which was November 2, 2014. 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 of fiscal 2016.

Note 8. Inventories

Inventories consisted of the following: 
 
October 31,
2015
 
May 2,
2015
Raw materials
$
29,861

 
$
28,325

Work-in-process
8,679

 
7,512

Finished goods
30,901

 
28,552

 
$
69,441

 
$
64,389

 
Note 9. Receivables

Accounts receivable are reported net of an allowance for doubtful accounts of $2,526 and $2,316 at October 31, 2015 and May 2, 2015 , 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 United States GAAP, and profit is recognized to the extent the present value is in excess of cost.  We generally retain a security interest in the equipment or in the cash flow generated by the equipment until the contract is paid.  The present value of long-term contracts and lease receivables, including accrued interest and current maturities, was $8,303 and $9,874 as of October 31, 2015 and May 2, 2015 , respectively.  Contract and lease receivables bearing annual interest rates of 4.8 to 10.0 percent are due in varying annual installments through August 2024.  The face amount of long-term receivables was $9,640 as of October 31, 2015 and $10,976 as of May 2, 2015 .  Included in accounts receivable as of October 31, 2015 and May 2, 2015 was $892 and $385 , 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 being incurred is probable, but the amount cannot be reasonably estimated, or when the loss is believed to be only reasonably possible or remote, although disclosures will be made for material matters as required by ASC 450-20, 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 31, 2015 and May 2, 2015 , 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.

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

11



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 accrued warranty obligations and, to the extent we experience any changes in warranty claim activity or costs associated with servicing those claims, our warranty obligations are adjusted accordingly.

During fiscal year 2016, we increased accrued warranty obligations by $3,180 for estimable and probable costs for an issue in our Commercial business unit for our OOH product application previously not anticipated in accrued warranty obligations . We will monitor the reserves for this issue and adjust accordingly.

Changes in our warranty obligation for the six months ended October 31, 2015 consisted of the following:
 
 
 
Amount
Beginning accrued warranty obligations
 
 
$
26,481

      Warranties issued during the period
 
 
7,009

      Settlements made during the period
 
 
(9,540
)
      Changes in accrued warranty obligations for pre-existing warranties during the period, including expirations
 
 
4,514

Ending accrued warranty obligations
 
 
$
28,464

 
Performance guarantees:   We have entered into standby letters of credit and surety bonds with financial institutions relating to the guarantee of our future performance on contracts, primarily construction type contracts.  As of October 31, 2015 , we had outstanding letters of credit and surety bonds in the amount of $13,035 and $68,615 , respectively.  Performance guarantees are issued to certain customers to guarantee the operation and installation of the equipment and our ability to complete a contract.  These performance guarantees have various terms, which are generally one year.

Leases:   We lease vehicles, office space and various equipment for various 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 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 $1,311 and $1,392 for the six months ended October 31, 2015 and November 1, 2014 , 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 31, 2015 :
Fiscal years ending
 
Amount
2016
 
$
1,330

2017
 
1,573

2018
 
473

2019
 
85

2020
 
38

 
 
$
3,499


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 that extend beyond one year.  As of October 31, 2015 , we were obligated under the following conditional and unconditional purchase commitments, which included $600 in conditional purchase commitments:
Fiscal years ending
 
Amount
2016
 
$
1,323

2017
 
1,090

2018
 
295

2019
 
100

2020
 

 
 
$
2,808



12



Note 11. 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, our fiscal years 2012, 2013, and 2014 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 October 31, 2015 , we had $2,933 of unrecognized tax benefits which would affect our effective tax rate if recognized.  

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 which may be utilized when measuring fair value.

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

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

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

The fair values for fixed-rate 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.


13



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 31, 2015 and May 2, 2015 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 31, 2015
 
 
 
 
 
Cash and cash equivalents
$
27,460

 
$

 
$
27,460

Restricted cash
195

 

 
195

Available-for-sale securities:
 

 
 

 
 
Certificates of deposit

 
14,925

 
14,925

U.S. Government securities
500

 

 
500

U.S. Government sponsored entities

 
6,573

 
6,573

Municipal obligations

 
2,937

 
2,937

Derivatives - currency forward contracts

 
87

 
87

 
$
28,155

 
$
24,522

 
$
52,677

Balance as of May 2, 2015
 

 
 

 
 

Cash and cash equivalents
$
57,284

 
$

 
$
57,284

Restricted cash
496

 

 
496

Available-for-sale securities:
 

 
 

 
 
Certificates of deposit

 
11,409

 
11,409

U.S. Government securities
1,001

 

 
1,001

U.S. Government sponsored entities

 
7,942

 
7,942

Municipal obligations

 
4,994

 
4,994

Derivatives - currency forward contracts

 
(283
)
 
(283
)
 
$
58,781

 
$
24,062

 
$
82,843


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

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

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

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

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

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

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

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

14



value in connection with business combinations or when an impairment is recognized and the related assets are written down to fair value.  We utilized the fair value measurement standard, using primarily Level 3 inputs, to value the assets and liabilities for the business combination involving Data Display and the determination of goodwill associated with the sale of our automated rigging systems business for theatre applications. See Note 5. Business Combination s and Note 6. Sale of Theatre Rigging Manufacturing for more information.

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 accounts receivable or accounts payable measured at fair value, and changes in fair values are recognized in earnings unless specific hedge accounting criteria are met for cash flow or net investment hedges. As of October 31, 2015  and May 2, 2015 , 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 U.S. Dollars at October 31, 2015  and May 2, 2015 were as follows:
 
October 31, 2015
 
May 2, 2015
 
U.S. Dollars
 
Foreign
Currency
 
U.S.
Dollars
 
Foreign
Currency
Foreign Currency Exchange Forward Contracts:
 
 
 
 
 
 
 
U.S. Dollars/Australian Dollars
3,124

 
4,384

 
1,487

 
1,918

U.S. Dollars/Japanese Yen
139

 
16,707

 
764

 
91,282

U.S. Dollars/Canadian Dollars
380

 
500

 
4,129

 
4,923

U.S. Dollars/British Pounds
2,037

 
1,320

 
1,679

 
1,123

U.S. Dollars/Singapore Dollars
392

 
534

 
1,176

 
1,601

U.S. Dollars/New Zealand Dollars
164

 
261

 

 

U.S. Dollars/Euros
544

 
482

 
(229
)
 
(174
)
U.S Dollars/Swiss Franc
3,817

 
3,696

 
5,662

 
5,500


As of October 31, 2015 and May 2, 2015 , there was a net asset and liability of $87 and $283 , respectively, representing the fair value of foreign currency exchange forward contracts, which were determined using Level 2 inputs from a third-party bank.

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 May 2, 2015 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.


15

Table of contents


The following discussion highlights the principal factors impacting our financial condition and further describes our 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 U.S. generally accepted accounting principles ("GAAP"). 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 the 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. Segment Disclosure of the Notes to the Consolidated Financial Statements included elsewhere in this Report.

Our net sales and profitability historically have fluctuated due to the impact of large project orders, such as display systems for professional sports facilities, colleges and universities, and spectacular projects in the commercial area, as well as the seasonality of the sports market. Large project orders can include 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 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. Basis of Presentation and Summary of Critical Accounting Policies 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.

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 its own unique key growth drivers and challenges.


16

Table of contents


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

Standard display product market growth due to market adoption and lower product costs, which drive marketplace expansion. Standard display products are used to attract or communicate with customers and potential customers of retail, commercial, and other establishments.  Pricing and economic conditions impact our success in this business unit. We utilize a reseller network to distribute our standard products.
National accounts standard display market opportunities due to their desire to communicate their message, advertising and content consistently across the country. Increased demand is possible from retailers, quick serve restaurants, petroleum businesses, and other nationwide organizations.
Increasing interest in spectaculars, which include very large and sometimes highly customized displays as part of entertainment venues such as casinos, 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.
Replacement cycles within each of these areas.

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

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

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

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.

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

International Business Unit: Over the long-term, we believe growth in the International business unit will result from achieving greater penetration in various geographies and building products more suited to individual markets. We are broadening our product offerings into the transportation segment in Europe and the Middle East. We currently focus on third-party advertising market opportunities and the factors listed in each of the other business units to the extent they apply outside the United States and Canada.

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


17

Table of contents


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. Fiscal 2015 was a 53-week year; therefore, the six months ended October 31, 2015 contain operating results for 26 weeks while the six months ended November 1, 2014 contained operating results for 27 weeks.

COMPARISON OF THE THREE MONTHS ENDED OCTOBER 31, 2015 AND NOVEMBER 1, 2014

Net Sales
 
Three Months Ended
(in thousands)
October 31,
2015
 
November 1,
2014
 
Dollar Change
 
Percent Change
Net sales:
 
 
 
 
 
 
 
    Commercial
$
40,066

 
$
43,928

 
$
(3,862
)
 
(8.8
)%
    Live Events
50,761

 
62,641

 
(11,880
)
 
(19.0
)
    High School Park and Recreation
24,253

 
24,243

 
10

 

    Transportation
13,294

 
12,015

 
1,279

 
10.6

    International
29,294

 
30,288

 
(994
)
 
(3.3
)
 
$
157,668

 
$
173,115

 
$
(15,447
)
 
(8.9
)%
Orders:
 

 
 

 
 
 
 

    Commercial
$
30,203

 
$
44,503

 
$
(14,300
)
 
(32.1
)%
    Live Events
64,267

 
46,216

 
18,051

 
39.1

    High School Park and Recreation
12,555

 
13,520

 
(965
)
 
(7.1
)
    Transportation
16,697

 
12,161

 
4,536

 
37.3

    International
11,873

 
32,702

 
(20,829
)
 
(63.7
)
 
$
135,595

 
$
149,102

 
$
(13,507
)
 
(9.1
)%


Commercial: The decrease in net sales for the three months ended October 31, 2015 compared to the same period one year ago was the result of a decrease of sales in our spectacular niche due to the timing of projects. Sales in our billboard niche were also down compared to last year due to volatility of order timing and a general market delay in placing orders as compared with prior periods, which was offset by an increase in sales in our on-premise niche.

The decrease in orders for the three months ended October 31, 2015 compared to the same period one year ago was the result of order timing variability and general project decision delays in our billboard and spectacular niches. Orders increased in our on-premise niche due to a large petroleum digit project.

Live Events:   The decrease in net sales for the three months ended October 31, 2015 compared to the same period one year ago was primarily due to our decision to delay production on some orders into the third quarter of fiscal 2016 to take advantage of newly-released product enhancements. In addition, the mix of business was substantially different in the second quarter of fiscal 2016 compared to the second quarter of last year. In second quarter of fiscal 2015, Live Event sales were primarily in outdoor stadiums as compared to the second quarter of this fiscal year during which there were fewer deliveries for outdoor opportunities in the marketplace. In the second quarter of fiscal 2016, the mix of business turned to indoor arena applications, as we had a record number of center hung (arena) systems during the quarter.

Orders increase d for the three months ended October 31, 2015 compared to the same period one year ago due to orders received in connection with a large multi-million dollar project for a National Football League ("NFL") stadium, a professional sports arena, and a number of projects for college and university sports stadiums.

High School Park and Recreation: Net sales for the three months ended October 31, 2015 compared to the same period one year ago remained relatively flat.

Orders decrease d for the three months ended October 31, 2015 compared to the same period one year ago due to a change in the business mix for video based projects during fiscal 2016 compared to fiscal 2015. During the second quarter of fiscal 2016, we have seen an

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increase in indoor video orders as compared to more outdoor video orders in fiscal 2015, which are normally larger in size and dollar value.

Transportation: Net sales for the three months ended October 31, 2015 compared to the same period one year ago increase d because of a strong order backlog coming into second quarter of fiscal 2016.

Orders for the three months ended October 31, 2015 compared to the same period one year ago increase d primarily due to the award of a multi-million dollar project for the New York MTA subway.

International:   Net sales in our International business unit were relatively flat for the three months ended October 31, 2015 compared to the same period one year ago.

Orders decrease d for the three months ended October 31, 2015 compared to the same period one year ago primarily due to the timing and volatility of large orders. In addition, we had multi-million dollar large custom video orders for stadiums, OOH, and spectaculars in the second quarter of fiscal 2015, and no similar sized orders were received during the second quarter of fiscal 2016. We have a strong pipeline of upcoming projects that we anticipate will book during the third quarter of fiscal 2016.

Backlog

The product order backlog as of October 31, 2015 was $184.2 million as compared to $146.1 million as of November 1, 2014 and $205.5 million at the end of the first quarter of fiscal 2016 .  Historically, our backlog varies due to the seasonality of our business, the timing of large projects, and customer delivery schedules for these orders.  The backlog as of October 31, 2015 increased from November 1, 2014 in our Live Events, High School Park and Recreation, and Transportation business units and decreased in our Commercial and International business units. As of October 31, 2015 , Live Events backlog included approximately $35 million that we expect to realize after fiscal 2016 because of the timing of new stadium builds.  

Gross Profit
 
Three Months Ended
 
October 31, 2015
 
 
 
November 1, 2014
 
 Amount
 
As a Percent of Net Sales
 
 
 
 Amount
 
As a Percent of Net Sales
(in thousands)
Commercial
$
8,133

 
20.3
%
 

 
$
13,290

 
30.3
%
Live Events
10,104

 
19.9

 

 
10,010

 
16.0

High School Park and Recreation
6,415

 
26.5

 

 
6,952

 
28.7

Transportation
4,202

 
31.6

 

 
3,666

 
30.5

International
6,659

 
22.7

 

 
6,959

 
23.0

 
$
35,513

 
22.5
%
 

 
$
40,877

 
23.6
%

The decrease in our gross profit   percentage for the three months ended October 31, 2015 compared to the same period one year ago was primarily due to an additional warranty charge in the second quarter of fiscal 2016. The following describes the overall impact by business unit:

Commercial:   The gross profit percent decrease for the three months ended October 31, 2015 compared to the same period one year ago was primarily the result of a $2.1 million warranty charge in our OOH product application, which decreased our gross profit percentage by 5.3% during the quarter. This warranty charge relates to the costs of upgrading firmware to improve display performance and refurbishing displays. Gross profit also declined due to low manufacturing utilization, the product mix of sales, and overall competitiveness of large custom contracts.

Live Events: The gross profit percent increase for the three months ended October 31, 2015 compared to the same period one year ago was the result of the additional expenditures incurred for overtime, expediting, and shipping costs to meet critical event dates for our customers in the second quarter of fiscal 2015 that were not incurred in the second quarter of fiscal 2016 and lower warranty costs as a percent of sales.

High School Park and Recreation:   The gross profit percent decrease for the three months ended October 31, 2015 as compared to the same period one year ago was primarily due to the decrease of large display sizes, offset by improved manufacturing utilization, and lower warranty costs as a percent of sales.
 

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Transportation:   The gross profit percent increase for the three months ended October 31, 2015 compared to the same period one year ago was primarily due to improved gross margins on contracts and standard orders and improved manufacturing utilization because of improved throughput, which was partially offset by increased warranty costs as a percentage of sales.

International:   The gross profit percent decrease for the three months ended October 31, 2015 compared to the same period one year ago was primarily the result of a low utilization of our international manufacturing facilities and an increase in warranty costs as a percent of sales, offset by increased margins on our large custom contracts and transportation contracts.

Selling Expense
 
Three Months Ended
 
October 31, 2015
 
 
 
November 1, 2014
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
(in thousands)
 
 
 
 
Commercial
$
4,140

 
10.3
%
 
1.4
 %
 
$
4,082

 
9.3
%
Live Events
3,302

 
6.5

 
(5.7
)
 
3,500

 
5.6

High School Park and Recreation
2,630

 
10.8

 
4.3

 
2,521

 
10.4

Transportation
1,019

 
7.7

 
(17.6
)
 
1,237

 
10.3

International
3,734

 
12.7

 
12.3

 
3,325

 
11.0

 
$
14,825

 
9.4
%
 
1.1
 %
 
$
14,665

 
8.5
%
 

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

Selling expense in our Commercial, High School Park and Recreation, and International business units increased in the second quarter of fiscal 2016 compared to the same quarter a year ago, which was mainly related to increases in personnel expenses and bad debt expense, partially offset by decreases in marketing expenses and travel and entertainment expenses.

Selling expenses in our Transportation and Live Events business units decreased in the three months ended October 31, 2015 compared to the same period one year ago primarily due to lower marketing expenses.

Other Operating Expenses
 
Three Months Ended
 
October 31, 2015
 
 
 
November 1, 2014
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
(in thousands)
General and administrative
$
8,116

 
5.1
%
 
3.8
%
 
$
7,820

 
4.5
%
Product design and development
$
6,975

 
4.4
%
 
13.4
%
 
$
6,150

 
3.6
%


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 2016 increase d as compared to the same period one year ago primarily due to increases in information technology and personnel expenses, partially offset by decreases in professional fees.

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 developing 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 as compared to 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 2016

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as compared to the same period one year ago increase d primarily due to an increase in materials used in the development of product transitions and labor costs assigned to product development projects.

Other Income and Expenses  
 
Three Months Ended
 
October 31, 2015
 
 
 
November 1, 2014
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
(in thousands)
Interest income (expense), net
$
238

 
0.2
 %
 
8.7
 %
 
$
219

 
0.1
 %
Other (expense) income, net
$
(231
)
 
(0.1
)%
 
(2.7
)%
 
$
(225
)
 
(0.1
)%
 
Interest income (expense), net:   We generate interest income through short-term cash investments, marketable securities, and product sales on an installment basis or in exchange for the rights to sell and retain advertising revenues from displays, which result in long-term receivables.  Interest expense is comprised primarily of interest costs on long-term marketing obligations.

Interest income, net in the second quarter of fiscal 2016 compared to the same period one year ago increased 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 :   The change in other income and expense, net for the second quarter of fiscal 2016 as compared to the same period one year ago was primarily due to foreign currency losses from the volatility of the Euro, Australian dollar, and Canadian dollar, offset by an adjustment in the amount of the contingent consideration paid for Data Display.

Income Taxes

Our effective tax rate was 43.5 percent for the second quarter of fiscal 2016 as compared to an effective tax rate of 36.8 percent for the second quarter of fiscal 2015 .  The substantial factors which increased our effective tax rate were decreases in our projected book income and the related impact of permanent items such as domestic manufacturing deductions, meals and entertainment and stock compensation and an increase to our capital loss valuation allowance offset by changes to the geographic mix of income before taxes.


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COMPARISON OF THE SIX MONTHS ENDED