Daktronics, Inc.
DAKTRONICS INC /SD/ (Form: 10-K, Received: 06/22/2015 15:42:22)

 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended May 2, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___ to ___.
Commission File Number: 0-23246


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 No.)
 
 
 
201 Daktronics Drive
Brookings SD
 
 
57006
(Address of principal executive offices)
 
(Zip Code)
(605) 692-0200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, No Par Value
 
NASDAQ Global Select Market
Common Stock Purchase Rights
 
NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o   No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o   No x

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 website, 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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     x                                                

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. (Check one):
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o
Smaller reporting company
o
(Do not check if a smaller reporting company.)
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o   No x

The aggregate market value of the registrant's common stock held by non-affiliates at November 1, 2014 (which is the last business day at the Registrant’s most recently completed second quarter), computed by reference to the closing sales price of the Registrant’s common stock on the NASDAQ Stock Market on such date, was approximately $577,558,461 . For purposes of determining this number, individual shareholders holding more than 10 percent of the Registrant’s outstanding Common Stock are considered affiliates. This number is provided only for the purpose of this Annual Report on Form 10-K and does not represent an admission by either the Registrant or any such person as to the status of such person.

The number of shares of the Registrant’s Common Stock outstanding as of June 15, 2015 was 43,756,906 .

Documents Incorporated By Reference
Portions of the Registrant’s Proxy Statement for its Annual Meeting of Shareholders to be held September 2, 2015 are incorporated by reference in Part III of the Form 10-K, as indicated in Items 10 through 14 of Part III.

 
 
 
 
 





DAKTRONICS INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED MAY 2, 2015

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SPECIAL NOTE REGARDING FORWARD–LOOKING STATEMENTS
 
This Annual Report on Form 10-K (including exhibits and any information incorporated by reference herein) (the "Form 10-K") 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; and (x.) the introduction of new products and technology. The words “may,” “would,” “could,” “should,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plans” and similar expressions and variations thereof are intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk 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 the section of this Form 10-K 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.

PART I.

Item 1.  BUSINESS

Business Overview

Daktronics Inc. (the “Company”, “Daktronics”, “we”, “our”, or “us”) is the world’s leading supplier of electronic scoreboards, large electronic display systems, digital messaging solutions, software and services for sporting, commercial and transportation applications.  We serve our customers by providing the highest quality standard display products as well as custom-designed and integrated systems.  We offer a complete line of products, from small scoreboards and electronic displays to large multi-million dollar video display systems as well as related control, timing, and sound systems.  We are recognized as a technical leader with the capabilities to design, market, manufacture, install and service complete integrated systems displaying real-time data, graphics, animation and video.

We were founded in 1968 by Drs. Aelred Kurtenbach and Duane Sander, professors of electrical engineering at South Dakota State University in Brookings, South Dakota. The Company began with the design and manufacture of electronic voting systems for state legislatures. In 1971, Daktronics developed the patented Matside® wrestling scoreboard, the first product in the Company's growing and evolving line. In 1994, Daktronics became a publicly traded company, offering shares under the symbol DAKT on the NASDAQ National Market system. Today, Daktronics has grown from a small company operating out of a garage to the world leader, offering the most complete product lineup in the display industry.

We have organized our business into five segments: 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. Financial information concerning these segments is set forth in this Form 10-K in "Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and " Note 2. Segment Reporting to the Consolidated Financial Statements" of the Notes to our Consolidated Financial Statements included in this Form 10-K.

We make significant investments to complement and develop our existing innovative, high quality products. We strive to grow into new geographic markets by strategically adding resources and emerging markets. Two of our targeted acquisitions were in fiscal 2014 and 2015; these acquisitions support our long-term growth objective which is to increase sales and profitability. For more information regarding these acquisitions, see " Note 4. Business Combinations " of the Notes to our Consolidated Financial Statements included in this Form 10-K.

Our annual, quarterly and current reports and any amendments to those reports are filed with the Securities and Exchange Commission (“SEC”) and are available at http://investor.daktronics.com. We post each of these documents on our website as soon as reasonably practicable after it is electronically filed with the SEC. These reports also may be found on the SEC’s website at www.sec.gov. Information contained on our website is not deemed to be incorporated by reference into this Report or filed with the SEC.

Industry Background

Over the years, our products have evolved significantly from scoreboards and matrix displays and related software applications to complex, integrated visual display systems which include full color video, text and graphics displays located on a local or remote network that are

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tied together through sophisticated control systems.  In the mid-1990's, as light emitting diodes (“LEDs”) became available in red, blue and green colors with outdoor brightness, we pioneered the development of full color LED video displays capable of replicating trillions of colors, thereby producing large format video systems with excellent color, brightness, energy efficiency and lifetime.  Due to our foundation of developing scoring and graphics display systems, we were able to add video capabilities so all of our customers' large format display needs could be met in a complete, integrated system.  This has proved to be a key factor in Daktronics becoming a leader in large electronic displays.  

Description of Business

We are engaged in a full range of activities: marketing and sales, engineering and product development, manufacturing, technical contracting, professional services and customer service and support.  Each of those activities is described below:

Marketing and Sales.   Our sales force is comprised of direct sales staff and resellers located throughout the world supporting all customer types in both sales and service. We primarily use a direct sales force for large integrated display systems sales in professional sports, colleges and universities, and commercial spectacular projects.  We use our direct sales force to sell third-party advertising and transportation applications.  We utilize resellers outside North America for large integrated system sales where we do not have a direct sales presence. The majority of the products sold by resellers in North America are standard catalog products.  We support our resellers through direct mail advertising, trade journal advertising, product and installation training, trade show exhibitions and accessibility to our regional sales or service teams.

Engineering and Product Development.   The large format electronic display industry is characterized by ongoing product innovations and developments in technology and complementary services.  To remain competitive, we have a tradition of applying engineering resources throughout our business to anticipate and respond rapidly to the system needs in the marketplace. We employ engineers and technicians in the areas of mechanical and electrical design; applications engineering; software design; and customer and product support.  We assign product managers to each product family to assist our sales staff in training and implementing product improvements which ensures each product is designed for maximum reliability and serviceability.  

Manufacturing. A majority of our products are manufactured in South Dakota and Minnesota in the United States. We also have manufacturing facilities in China, Belgium, and Ireland. For more details on our facilities, see "Item 2, Properties."

Our manufacturing is aligned with our business segments and is co-located with product development to accelerate technology improvements and improve our cost structure. We perform component manufacturing and system manufacturing (metal fabrication, electronic assembly, sub-assembly and final assembly) and testing in-house for most of our products to control quality, improve response time and maximize cost-effectiveness. We make our products in focused factories and product cells. We generally align sales, marketing, engineering and manufacturing into a cohesive business unit with a focus on customers.  Given the cyclical nature of some parts of our business, we also need to balance and maintain our ability to manufacture the same products across our plants so we can smooth out the customer demand of the various business units. A key strategy of ours is to increase standardization and commonality of parts and manufacturing processes across product lines through product platform strategies.

Our manufacturing facilities have embraced lean manufacturing techniques throughout all areas.  We have also placed significant emphasis on lean techniques in the non-manufacturing areas.  Our goal is to eliminate waste and timely deliver products to a customer while maintaining minimal inventory and eliminating non-value added tasks.

Technical Contracting.   We serve as a technical contractor for larger display system installations requiring custom designs and innovative product solutions.  The purchase of display systems typically involves competitive proposals.  As part of our response to a proposal request, we may suggest additional products or features to assist the prospective customer in analyzing the optimal type of display system.  We usually include in our proposal site preparation and installation services related to the display system.  In these cases, we serve as a contractor and may retain subcontractors for electrical, steel and installation labor.  We have developed relationships with many subcontractors throughout the United States and the world, which is an advantage for us in bidding and delivering on these projects. We are licensed in a number of jurisdictions as a general contractor.  

Professional Services. Our professional services are essential to continued market penetration and growth.  Professional services we provide include event support, content creation, product maintenance, marketing assistance, training on hardware and software, control room design, and continuing technical support for operators.

Customer Service and Support.   We offer limited warranties on our products, ranging from one to 10 years, against failure due to defective parts or workmanship. In addition, we offer service agreements of various scopes.  To serve our customers we provide help-desk access, parts repair and replacement, display monitoring and on-site support.  Our technical help desk has experienced technicians who are on-call 24 hours a day to support events and sites. Our field service personnel and third-party service partners are trained to provide on-site support. We use third-party service partners to allow us to respond to changes in volume of service during our seasonal peaks.

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Products and Technologies

The two principal components of our systems are the display and the controller, which manages the operation of the display.  We produce displays varying in complexity, size and resolution.  The physical dimensions of a display depend on the size of the viewing area, the distance from the viewer to the display, and the amount and type of information to be displayed.  The controller uses computer hardware and software products to compile information provided by the operator and other integrated sources to process information, graphics or animation on the displays. We customize our products according to the design specifications of the customer and the conditions of the environment in which our products function.

Our products are comprised of the following product families, all of which include control systems and software:

Video displays
Scoreboards and timing systems
Message displays
ITS (intelligent transportation systems) dynamic message signs
Space availability displays
Audio systems
Advertising displays
Digit and price displays

Each of these product families is described below:

Video Displays.   These displays are comprised of a large number of full-color pixels capable of showing various levels of video, graphics and animation plus controllers.  These displays include red, green and blue LEDs arranged in various combinations to form pixels.  The electronic circuitry which controls the pixels allows for variances in the relative brightness of each LED to provide a full color spectrum, thereby displaying video images in striking, vibrant colors. Variables in video displays include the spacing of the pixels (pixel pitch), the resolution of the displays (number of pixels), the brightness of the displays (nits), the number of discrete colors the display is able to produce (color depth), the viewing angles, and the LED mount technology (surface mount vs. through hole). 

Our LED ribbon board displays are ultra-slim, customizable displays that accommodate curved and 360° installations. These displays are used for end zones, sidelines, encircling a stadium, outfields, concourses, stadium exterior or other linear applications. For new construction projects, our ProRail® attachment system is combined with ribbon board technology to provide improved sight lines for fans.  Digital ribbon boards generally serve as a revenue generation source for teams and facilities through advertising, as well as another location to display information such as scoring and statistics.

Our mobile and modular display systems are transportable and are comprised of lightweight individual LED video panels less than a square meter in size and are assembled together to form a display in a customizable size.  These displays are used for touring shows and the events market.

We integrate our display technology with architectural mesh to deliver a dynamic communication medium that provides a semi-transparent viewing experience within a building. These displays can be mounted over a solid facade or in front of windows resulting in a finished solution that is free from visible cabling, and deliver a clean, semi-transparent view. These are less than one inch in depth and provide an elegant, refined structural appearance.

Our line of Freeform LED displays are architectural lighting and display products. The ProPixel® freeform products use mountable LED elements to transform ordinary structures into stunning visual landmarks. A flexible mounting platform allows designers to transform any structure into a full-motion video display.

The control components for video displays in live event applications are our Show Control Software Suite, proprietary digital media players and video processors. These control components provide advanced capabilities for the display of live video and real time content on our displays. The Show Control Software Suite can operate entire networks of displays from a single, intuitive control interface.  Features allow users to instantly deliver media clips, camera feeds, and streaming information to any display in a network.

Scoreboards and Timing Systems.   Our line of scoreboards and timing products include indoor and outdoor scoreboards for many different sports, digit displays, scoring and timing controllers, statistics software and other related products.  Indoor and outdoor systems range in complexity from small scoreboards to larger systems incorporating scoring, timing, video, message centers, advertising panels and control software.


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We offer a variety of controllers complementing our scoreboards and displays.  These controllers vary in complexity from the All Sport® 100, a handheld controller for portable scoreboards, to the All Sport® 5000, designed for more sophisticated scoring systems and allowing for more user-defined options.  

We also offer timing systems for sports events, primarily aquatics and track competitions.  A component of these systems is our OmniSport® 2000 timing console.  The system has the capability to time and rank the competitors and to interface with event management software to facilitate the sporting event.  Other timing system components include swimming touchpads, race start systems, and relay take-off platforms.

As a key component of an integrated system, we market sports statistics and results software under the DakStats® trademark.  The software allows the entry and display of sports statistics and other information.  It is one of the leading applications of its type in collegiate and high school sports.

Message Displays.   The key product lines in this group are the Galaxy® and GalaxyPro® and are generally controlled with our Venus® 1500 display controller.

Galaxy® full-matrix displays, available in both indoor and outdoor models, are our leading product line for commercial applications.  Galaxy® displays are full color, monochrome, or tri-color, with varying pixel spacing depending on color, size and viewing distance.  They are used primarily as message centers to convey information and advertising to consumers.  
 
GalaxyPro® displays are full-matrix outdoor displays capable of displaying text, graphics and animation, as well as prerecorded video clips.  The product was developed to meet the video needs of the commercial market, primarily large retail market applications such as auto dealerships and shopping centers.  GalaxyPro® displays have varying pixel spacing and are capable of producing 68 billion colors.  

The Venus® 1500 display control software is used to control the creation of messages and graphic sequences for downloading to the Galaxy® and GalaxyPro® displays.  This software is designed to be user friendly and applicable to all general advertising or message applications.  We also provide software kits, allowing system integrators to write their own software using the Venus® 1500 to communicate to the displays.  

ITS Dynamic Message Signs (DMS). DMS products include a wide range of LED displays for road management, mass transit and aviation applications.  The Vanguard® family of dynamic message displays is typically used to direct traffic and inform motorists.  These displays are used over freeways, on arterial roads, near bridges, at toll booths and in other locations.  We have also developed a control system for these displays to help transportation agencies manage large networks of displays.

Space Availability Displays. This product line is our digit and directional displays, which are primarily marketed and sold for use in parking facilities.  They include multi-line displays delivered in vertical cabinets or drop-in digit panels designed to be mounted in existing structures or signs.

Audio Systems.   Our audio systems include both standard and custom options.  Standard audio systems are designed to meet the needs of a variety of outdoor sports venues based on the size and configuration of the facility.  Custom indoor and outdoor systems are for larger venues and venues with unique seating configurations.  Our sound systems are often integrated into an overall venue solution for scoring, timing, message display and/or video capability.

Advertising Displays.   Our line of advertising displays includes billboards and street furniture displays.

Our line of static and digital billboards offers a unique display solution for the Out-of-Home (“OOH”) advertising industry.  The products are used to display static images which change at regular intervals.  These systems include many features unique to the outdoor advertising market, such as our patented mounting system, self-adjusting brightness, improved energy consumption, and enhanced network security.

The Visiconn® system is the software application for controlling content and playback loops for digital billboard applications.  This system can transform any Internet-ready computer into a secure, global control center for multiple LED displays, flat panel monitors and other display technologies.  

Our line of street furniture engages people with advertising content at eye level as they walk through campuses, cityscapes, and outlet malls. This design enhances the message and complements surrounding architecture. These advertising light boxes are our most flexible solution for static, scrolling and digital OOH campaigns.

Digit and Price Displays.   The product line includes our DataTime® and Fuelight™ displays. The DataTime® product line consists of outdoor time and temperature displays which use a remote sensor for temperature data. Fuelight™ digit displays are specifically designed for the petroleum industry, offering high visibility and quick fuel price updates using the Fuelink™ control software.

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Raw Materials

Materials used in the production of our video display system are sourced from around the world. We source some of our materials from a limited number of suppliers due to the proprietary nature of the material.  The loss of a key supplier or a defect in the supplied material could have an adverse impact on our business and operations.  Our sourcing group works to implement strategies to mitigate these risks. Periodically, we enter into pricing agreements or purchasing contracts under which we agree to purchase a minimum amount of product in exchange for guaranteed price terms over the length of the contract, which generally does not exceed one year.

Intellectual Property

We own or hold licenses to use numerous patents, copyrights, and trademarks on a global basis. Our policy is to protect our competitive position by filing U.S. and international patent applications to protect technology and improvements that we consider important to the development of our business. This will allow us to pursue infringement claims against competitors for protection due to patent violations. We also rely on nondisclosure agreements with our employees and agents to protect our intellectual property.  Despite these intellectual property protections, there can be no assurance a competitor will not copy the functions or features of our products.

Seasonality

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.

Working Capital

For information regarding working capital items, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” in Part II, Item 7 of this Form 10-K.

Customers

We have a large and diverse worldwide customer base, ranging from local main street business owners to the owners and operators of premier professional sports arenas. Our customers are important to us, and we strive to serve them over the long-term to earn their future business. The loss of one or more customers could have an adverse effect on us. While we are not economically dependent on any single customer, within our Commercial business unit, two major customers account for more than 50 percent of sales in our digital billboard niche. See " Note 2. Segment Reporting " of the Notes to our Consolidated Financial Statements included in this Form 10-K for our primary markets and customers of each business unit.

Backlog

Our backlog consists of contractually obligating sales agreements or purchase orders we expect to fill within the next 24 months. Orders are booked and included in backlog only upon receipt of an executed contract and any required deposits. Because order backlog may be subject to extended delivery schedules, orders may be canceled, and orders have varied estimated profitability, our backlog is not necessarily indicative of future net sales or net income.  Backlog can fluctuate due to large order booking timing and seasonality. Backlog is not a measure defined by U.S. generally accepted accounting principles, and our methodology for determining backlog may vary from the methodology used by other companies in determining their backlog amounts.

Government and Other Regulation

In the United States and other countries, various laws, regulations and ordinances restrict the installation of outdoor signs and displays, particularly in the commercial market.  These laws and regulations impose greater restrictions on electronic displays versus non-electronic displays due to alleged concerns over aesthetics or driver safety.  These factors may prevent or inhibit us from selling products to some prospective customers.


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Our manufacturing facilities and products comply with industry specific requirements, including United States environmental rules and regulations and safety standards. The safety standards are developed by the Underwriters Laboratories in the United States. We comply with these standards as well as similar standards in other countries. These requirements include quality, manufacturing process controls, manufacturing documentation and supplier certification of raw materials. Our products and production processes require the storage, use and disposal of a variety of hazardous chemicals under applicable laws. We believe we are in material compliance with these requirements.

Our supply chain and sales distribution channels subject us to various trade compliance regulations. We have developed and implemented trade compliance procedures to assure that we adhere to these regulations.

Competition

We encounter a wide variety of competitors that vary by product, geographic area, and business unit. Our competitors are both U.S. and foreign companies and range in size and product offerings. Some of our competitors compete in some markets by providing lower-cost display systems, which are of a lesser quality with lower product performance or less customer support. Other competitors use sponsorships as a means to win the business at a location.

We believe that our ability to compete depends upon product quality and features, technical expertise, offering a broad range of services, and providing cost-effective solutions to our customers.

Research and Development

We believe our engineering and product development capability and experience are very important factors to continue to develop the most up-to-date digital displays and control system solutions desired by the market.

Employees

As of May 2, 2015 , we employed approximately 2,420 full-time employees and approximately 330 part-time and temporary employees.  Of these employees, approximately 1,040 were in manufacturing, 560 were in sales and marketing, 520 were in customer service, 380 were in engineering and 250 were in general and administrative.  None of our employees are represented by a collective bargaining agreement.  We believe employee relations are good.

Item 1A.  RISK FACTORS

The factors that are discussed below, as well as the matters that are generally set forth in this Form 10-K and the documents incorporated by reference herein, could materially and adversely affect the Company’s business, results of operations and financial condition.

We operate in highly competitive markets and face significant competition and pricing pressure. If we are unable to keep up with the rapidly changing product market or compete effectively, we could lose market share, and our results of operations could be negatively impacted.

The electronic display industry is characterized by ongoing product improvement, innovations and development. We compete against products produced in foreign countries and the U.S. In addition, our products also compete with other forms of advertising, such as television, print media and fixed display signs. Our competitors may develop cheaper, more efficient products, or they may be willing to charge lower prices to increase their market share.  Some competitors have more capital and other resources, which may allow them to take advantage of acquisition opportunities or adapt more quickly to changes in customer requirements. To remain competitive, we must anticipate and respond quickly to our customers’ needs, enhance our existing products, introduce new products and features, and continue to price our products competitively.

Our quarterly results of operations can be substantially affected by whether we are awarded large contracts and the size and timing of large contracts.

Our quarterly revenues and earnings have varied in the past and are likely to vary in the future. When awarded large contracts, primarily in the college and professional sports facilities market, the OOH niche, and the large spectacular niche, the timing and amount could cause material fluctuations in our net sales and earnings.  Awards of large contracts and their timing and amount are difficult to predict, may not be repeatable, and are outside of our control. Operating results in one quarter may not be indicative of future operating results. Some factors that may cause our operating results to vary include:

new product introductions;
variations in product and product mix; and

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delays or cancellations of orders.

Unanticipated warranty and other costs for defective products could adversely affect our financial condition and results of operations and reputation.

We provide warranties on our products with terms varying from one to 10 years.  In addition, we offer extended warranties.  These warranties require us to repair or replace faulty products and meet certain performance standards, among other customary warranty provisions.  Although we continually monitor our warranty claims and provide a reserve for estimated warranty costs, an unanticipated claim could have a material adverse impact on our financial results.  In some cases, we may be able to subrogate a claim back to a subcontractor or supplier if the subcontractor or supplier supplied the defective product or performed the service, but this may not always be possible. In addition, the need to repair or replace products with design and manufacturing defects could adversely affect our reputation.

We enter into fixed-priced contracts on a regular basis, which could reduce our profits.

As part of our strategy, we enter into capped or fixed-price contracts. Because of the complexity of many of our client contracts, accurately estimating the cost, scope and duration of a particular contract can be a difficult task. If our actual costs exceed original estimates on fixed-price contracts, our profits will be reduced.  Because of the large scale, customer timelines, seasonality of our business or long duration of some contracts, unanticipated cost increases may occur as a result of several factors including, but not limited to: increases in the cost or shortages of materials or labor; unanticipated technical problems; required project modifications not initiated by the customer; suppliers’ or subcontractors’ failure to perform or delay in performing their obligations; and additional costs due to capacity constraints.  In addition to increased costs, these factors could delay delivery of products which may result in the assessment of liquidated damages.  Unanticipated costs that we are unable to pass on to our customers or our payment of liquidated damages under fixed contracts would negatively impact our profits.

Backlog may not be indicative of future revenue or profitability.

Many of our products have long sales, delivery and acceptance cycles. In addition, our backlog is subject to order cancellations and delays. Orders normally contain cancellation provisions to permit our recovery of costs expended and a pro-rata portion of the profit.  If projects are delayed, revenue recognition can occur over longer periods of time, and projects may remain in the backlog for extended periods of time.  If we receive relatively large orders in any given quarter, fluctuations in the levels of the quarterly backlog can result because the backlog may reach levels which may not be sustained in subsequent quarters.

Unanticipated events resulting in credit losses could have a material adverse impact on our financial results.
    
Significant portions of our sales are to customers who place large orders for custom products.  We closely monitor the credit worthiness of our customers and have not, to date, experienced significant credit losses.  We mitigate our exposure to credit risk, to some extent, by requiring deposits, payments prior to shipment, progress payments and letters of credit. However, because some of our exposure to credit losses is outside of our control, unanticipated events resulting in credit losses could have a material adverse impact on our operating results.

We depend on a single-source or a limited number of suppliers for our raw materials and components, and the loss of any of these suppliers or an increase in cost of raw materials could harm our business.

We obtain some of our raw materials from one or limited number of suppliers. If we cannot obtain key raw materials from our suppliers, the raw materials may not be readily available from other suppliers, other suppliers may not agree to supply the materials to us on terms as favorable as the terms we currently receive, or the raw materials from any other suppliers may not be of adequate and consistent quality. Although we believe our supply of raw materials is adequate for the needs of our business, we cannot assure that new sources of supply will be available when needed.  Any interruption in our supply of raw materials could affect our ability to manufacture our products until a new source of supply is located and; therefore, could have a material adverse effect on our business, financial condition or results of operations.

In addition, we purchase various raw materials and components in order to manufacture our products. Historically, fluctuations in the prices of these raw materials and components have not had a material impact on our business. In the future, however, if we experience increases in the price of raw materials and components and are unable to pass on those increases to our customers, it could negatively affect our business, financial condition or results of operations.

Our international operations are exposed to additional risks and uncertainties, including unfavorable political developments, weak foreign economies, and compliance with foreign governmental requirements, which may impact our results of operations.


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For the 2015 , 2014 , and 2013 fiscal years, revenue outside the United States represented approximately 19.7% , 17.8% , and 17.0% of our consolidated net sales, respectively. Our operations and earnings throughout the world have been and may in the future be adversely affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and foreign governments, agencies, and similar organizations. These conditions include, but are not limited to, changes in a country's or region's economic or political conditions; trade regulations affecting production, pricing and marketing of products; local labor conditions and regulations; reduced protection of intellectual property rights in some countries; changes in the regulatory or legal environment; restrictions and fluctuations on currency exchange activities; and burdensome taxes and tariffs and other trade barriers. International risks and uncertainties also include changing social and economic conditions, terrorism, political hostilities and war, difficultly in enforcing agreements or collecting receivables and increased transportation and other shipping costs.  The likelihood of such occurrences and their overall effect on us vary greatly from country to country and are not predictable.  These factors may result in a decline in net sales or profitability and could adversely affect our ability to expand our business outside of the United States.

Our future results may be affected by legal compliance risks related to the U.S. Foreign Corrupt Practices Act and other anti-bribery and anti-corruption laws for the countries in which we operate.

We are required to comply with the U.S. Foreign Corrupt Practices Act, which prohibits United States companies from engaging in bribery or making other prohibited payments to foreign officials for the purpose of obtaining or retaining business. It also requires us to maintain specific record-keeping standards and adequate internal accounting controls. In addition, we are subject to similar requirements in other countries. Bribery, corruption, and trade laws and regulations, and the enforcement thereof, are increasing in frequency, complexity and severity on a global basis. Although we have internal policies and procedures with the intention of assuring compliance with these laws and regulations, our employees, contractors, agents and licensees involved in our international sales may take actions in violations of such policies. If our internal controls and compliance program do not adequately prevent or deter our employees, agents, distributors, suppliers and other third parties with whom we do business from violating anti-bribery, anti-corruption or similar laws and regulations, we may incur severe fines, penalties and reputational damage.

We may fail to continue to attract, develop and retain key management personnel, which could negatively impact our operating results.

We depend on the performance of our senior executives and key employees, including experienced and skilled technical personnel.  The loss of any of our senior executives could negatively impact our operating results and ability to execute our business strategy.  Our future success will also depend upon our ability to attract, train, motivate and retain qualified personnel.

We may not be able to utilize our capacity efficiently or accurately plan our capacity requirements, which may negatively affect our business and operating results.

We increase our production capacity and the overhead supporting production based on anticipated market demand.  Market demand, however, has not always developed as expected or remained at a consistent level.  This underutilization risk can potentially decrease our profitability and impairment of certain assets.

The following factors are among those that could complicate capacity planning for market demand:

changes in the demand for and mix of products that our customers buy;
our ability to add and train our manufacturing staff in advance of demand;
the market’s pace of technological change;
variability in our manufacturing productivity; and
long lead times for our plant and equipment expenditures.

We have been required to conduct a good faith reasonable country of origin analysis on our use of “conflict minerals,” which has imposed and may impose additional costs on us and could raise reputational challenges and other risks.

The SEC has promulgated final rules in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding disclosure of the use of certain minerals, known as conflict minerals, mined from the Democratic Republic of the Congo and adjoining countries. As required, we filed Forms SD in May 2014 and May 2015 reporting on the source of conflict minerals we use, and we will be required to file a Form SD annually. We incurred costs associated with complying with these disclosure requirements. As we continue our due diligence, we may face reputational challenges if we are unable to verify the origins for all conflict minerals used in our products. We may also encounter challenges in our efforts to satisfy customers that may require all of the components of products purchased to be certified as conflict free. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier.

Our actual results could differ from the estimates and assumptions used to prepare our financial statements, which could have a material impact on our financial condition and results of operations.

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Our management is required under U.S. generally accepted accounting principles ("GAAP") to make estimates and assumptions as of the dates of the financial statements. These estimates and assumptions affect the recognition of contract revenue, costs, profits or losses in applying the principles of percentage of completion; estimated amounts for warranty costs, the collectability of billed and unbilled accounts receivable and the amount of any allowance for doubtful accounts; the amount of estimated liabilities; the valuation of assets acquired plus liabilities, goodwill, and intangible assets assumed in acquisitions; and the valuation of stock-based compensation.

If our internal control over financial reporting is found to be inadequate, our financial results may not be accurate, raising concerns for investors and potentially adversely affecting our stock price.

Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to evaluate and determine the effectiveness of our internal controls over financial reporting.  We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. We may encounter problems or delays in completing the review and evaluation, implementing improvements, or receiving a positive attestation from our independent registered public accounting firm.  In addition, our assessment of internal controls may identify deficiencies in our internal controls over financial reporting or other matters which may raise concerns for investors and therefore adversely affect our stock price.

If goodwill or other intangible assets in connection with our acquisitions become impaired, we could take significant non-cash charges against earnings.

We have pursued and will continue to seek potential acquisitions to complement and expand our existing businesses, increase our revenues and profitability, and expand our markets.  As a result of prior acquisitions, we have goodwill and intangible assets recorded on our balance sheet as described in " Note 6. Long-Lived Assets " of the Notes to our Consolidated Financial Statements included in this Form 10-K. Under current accounting guidelines, we must assess, at least annually, whether the value of goodwill and other intangible assets has been impaired. Any reduction or impairment of the value of goodwill or other intangible assets will result in additional charges against earnings, which could adversely affect our results of operations in future periods.

Acquisitions and divestitures pose financial, management and other risks and challenges.

We routinely explore acquiring other businesses and assets. Periodically, we may also consider disposing of certain assets, subsidiaries, or lines of business. Acquisitions or divestitures present financial, managerial and operational challenges. These include, but are not limited to, the following:

diversion of management attention;
difficulty with integrating acquired businesses;
difficulty with the integration of different corporate cultures;
personnel issues;
increased expenses;
assumption of unknown liabilities and indemnification obligations;
potential disputes with the buyers or sellers;
the time involved in evaluating or modifying the financial systems of an acquired business; and
establishment of internal controls.

There can be no assurance that we will engage in any acquisitions or divestitures or that we will be able to do so on terms that will result in any expected benefits.

The terms and conditions of our credit facility impose restrictions on our operations, and if we default on our credit facility, it could have a material adverse effect on our results of operations and financial condition and make us vulnerable to adverse economic or industry conditions.

The terms and conditions of our credit facilities impose restrictions limiting our ability to incur debt, merge, sell assets, make distributions (including cash dividends) and create or incur liens.  The availability of credit facilities is also subject to certain covenants as explained in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  A breach of any of these covenants could result in an event of default under our credit facility. Upon the occurrence of an event of default, the lender could elect to declare any and all amounts outstanding under such facility to be immediately due and payable and terminate all commitments to extend further credit.

In addition, it is anticipated that borrowings from our existing credit facilities and cash provided by operating activities should provide sufficient funds to finance our capital expenditures, working capital and otherwise meet operating expenses and debt service requirements.  However, if additional capital is required, there can be no assurance we will be able to obtain such capital when needed

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or on satisfactory terms. Also, market conditions can negatively impact our clients' ability to fund their projects and can impact our vendors, suppliers, and subcontractors and may not allow them to perform their obligations to us.

If we became unable to obtain adequate surety bonding or letters of credit, it could adversely affect our ability to bid on new work, which could have a material adverse effect on our future revenue and business prospects.

In line with industry practice, we are often required to provide performance and surety bonds to customers and may be required to provide letters of credit. These bonds and letters of credit provide credit support for the client if we fail to perform our obligations under the contract. If security is required for a particular project and we are unable to obtain a bond or letter of credit on terms acceptable to us, we may not be able to pursue that project. In addition, bonding may be more difficult to obtain in the future or may only be available at significant additional cost as a result of general conditions that affect the insurance and bonding markets.

We may be unable to protect our intellectual property rights effectively, or we may infringe upon the intellectual property of others, either of which may have a material adverse effect on our operating results and financial condition.

We rely on a variety of intellectual property rights we use in our products and services.  We may not be able to successfully preserve our intellectual property rights in the future, and these rights could be invalidated, circumvented or challenged.  In particular, the laws of certain countries in which our products are sold do not protect our products and intellectual property rights to the same extent as the laws of the United States. If litigation is necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others, such litigation could result in substantial costs and diversion of resources.

In addition, intellectual property of others also has an impact on our ability to offer some of our products and services for specific uses or at competitive prices. Competitor's patents or other intellectual property may limit our ability to offer products or services to our customers. Any infringement or claimed infringement of the intellectual property rights of others could result in litigation and adversely affect our ability to continue to provide, or could increase the cost of providing, products and services.

The outcome of pending and future claims or litigation can have a material adverse impact on our business, financial condition, and results of operations.

We can be a party to litigation in the normal course of business. Litigation and regulatory proceedings are subject to inherent uncertainties, and unfavorable rulings can and do occur. Pending or future claims against us could result in professional liability, product liability, criminal liability, warranty obligations or other liabilities to the extent we are not insured against a loss or our insurance fails to provide adequate coverage. Also, a well-publicized actual or perceived problem could adversely affect our reputation and reduce the demand for our products.

Our data systems could fail or their security could be compromised.

Any failure of our data systems, or any breach of our systems’ security measures, could adversely affect our operations, at least until our data can be restored and/or the breaches remediated.

The protections we have adopted and to which we are subject may discourage takeover offers favored by our shareholders.

Our articles of incorporation, by-laws and other corporate governance documents and the South Dakota Business Corporation Act (SD Act) contain provisions that could have an anti-takeover effect and discourage, delay or prevent a change in control or an acquisition that many shareholders may find attractive. These provisions make it more difficult for our shareholders to take some corporate actions. These provisions relate to:

the ability of our Board of Directors to issue undesignated shares on terms and with the rights, preferences and designations determined by the Board without shareholder action;
the classification of our Board of Directors, which effectively prevents shareholders from electing a majority of the directors at any one meeting of shareholders;
the adoption of a shareholder rights plan providing for the exercise of common stock purchase rights when a person becomes the beneficial owner of 15 percent or more of our outstanding common stock (subject to certain exceptions);
under the SD Act, limitations on the voting rights of shares acquired in specified types of acquisitions and restrictions on specified types of business combinations; and
under the SD Act, prohibitions against engaging in a “business combination” with an “interested shareholder” for a period of four years after the date of the transaction in which the person became an interested shareholder unless the business combination is approved.


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These provisions may deny shareholders the receipt of a premium on their common stock, which in turn may have a depressive effect on the market price of our common stock.

Our common stock has at times been thinly traded, which may result in low liquidity and price volatility.

The daily trading volume of our common stock has at times been relatively low. If this were to occur in the future, the liquidity and appreciation of our common stock may not meet our shareholders’ expectations, and the prices at which our stock trades may be volatile. The market price of our common stock could be adversely impacted as a result of sales by existing shareholders of a large number of shares of common stock in the market or by the perception such sales could cause.

Significant changes in the market price of our common stock could result in securities litigation claims against us.

The market price of our common stock has fluctuated and will likely continue to fluctuate, and in the past, companies that have experienced significant changes in the market price of their stock have been subject to securities litigation claims. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.

Our executive officers, directors and principal shareholders have the ability to significantly influence all matters submitted to our shareholders for approval.

Dr. Aelred Kurtenbach served as our Chairman of the Board until September 3, 2014, when he retired. Mr. Reece Kurtenbach, Dr. Aelred Kurtenbach's son, serves as our Chairman and Chief Executive Officer. In addition, Dr. Aelred Kurtenbach has two other children who serve as our Vice President of Human Resources and as our Vice President of Manufacturing. Together, these individuals, in the aggregate, beneficially owned 8.6 percent of our outstanding common stock as of June 15, 2015 , assuming the exercise by them of all of their options that were currently exercisable or that vest within 60 days of June 15, 2015 . In addition, our other executive officers and directors, in the aggregate, beneficially owned an additional 4.9 percent of our outstanding common stock as of June 15, 2015 , assuming the exercise by them of all of their options currently exercisable or that vest within 60 days of June 15, 2015 . While this does not represent a majority of our outstanding common stock, if these shareholders were to choose to act together, they would be able to significantly influence all matters submitted to our shareholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, could significantly influence the election of directors and approval of any merger, consolidation, sale of all or substantially all of our assets or other business combination or reorganization. This concentration of voting power could delay or prevent an acquisition of us on terms that other shareholders may desire. The interests of this group of shareholders may not always coincide with the interests of other shareholders, and they may act in a manner that advances their best interests and not necessarily those of other shareholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.

Unexpected events, including natural disasters, may increase our cost of doing business or disrupt our operations.

The occurrence of one or more unexpected events, including war, terrorist acts, fires, tornadoes, floods and severe weather in the United States or in other countries in which we operate may disrupt our operations as well as the operations of our customers. Such acts could create additional uncertainties, forcing customers to reduce, delay, or cancel already planned projects. These events could result in damage to, and a complete or partial closure of, one or more of our manufacturing facilities, which could make it difficult to supply our customers with product and provide our employees with work thereby adversely affecting our business, operating results or financial condition.

Item 1B.  UNRESOLVED STAFF COMMENTS

None.

Item 2.  PROPERTIES

Our principal real estate properties are located in areas we deem necessary to meet sales, service and operating requirements.  We consider all of our properties to be both suitable and adequate to meet our requirements for the foreseeable future. A description of our principal facilities is set forth below:

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Facilities
Owned or Leased
Square Footage
Facility Activities
Brookings, SD
Owned
773,000
Corporate Office, Manufacturing, Sales, Service
Redwood Falls, MN
Owned
120,000
Manufacturing, Sales, Service, Office
Rupelmonde, Belgium
Owned
40,000
Manufacturing, Sales, Service, Office
Ennistymon, Ireland
Owned
44,000
Manufacturing, Sales, Service, Office
Sioux Falls, SD
Leased
145,000
Manufacturing, Sales, Service, Office
Shanghai, China
Leased
90,500
Manufacturing, Sales, Service, Office

 
The remaining sales and service offices located throughout the United States, Canada, Europe, South America, and the Asia-Pacific regions are small offices, generally consisting of less than 10,000 square feet leased under operating leases.  These lease obligations expire on various dates, with the longest commitment extending to fiscal 2019.  We believe all of our leases will be renewable at market terms, at our discretion or that suitable alternative space will be available to lease under similar terms and conditions. See " Note 17. Commitments and Contingencies " of the Notes to our Consolidated Financial Statements included in the Form 10-K for further information on lease obligations.

Item 3.  LEGAL PROCEEDINGS

We are involved in a variety of legal actions relating to various matters during the normal course of business.  Although we are unable to predict the ultimate outcome of these legal actions, it is the opinion of management that the disposition of these matters, taken as a whole, will not have a material adverse effect on our financial condition or results of operations.

Item 4.  MINE SAFETY DISCLOSURES

Not applicable.


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PART II

Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is quoted on The NASDAQ Global Select Market under the symbol “DAKT.”  As of June 15, 2015 , we had 1,164 shareholders of record.  Following are the high and low sales prices for our common stock for each quarter within the last two fiscal years.
 
Fiscal Year 2015
 
Fiscal Year 2014
 
Sales Price
 
Cash Dividends Declared
 
Sales Price
 
Cash Dividends Declared
 
High
 
Low
 
 
High
 
Low
 
1 st  Quarter
$
14.47

 
$
11.05

 
$
0.10

 
$
11.49

 
$
9.63

 
$
0.12

2 nd  Quarter
13.68

 
11.02

 
0.10

 
12.35

 
10.45

 
0.09

3 rd  Quarter
13.87

 
11.48

 
0.10

 
15.80

 
11.73

 
0.09

4 th  Quarter
13.05

 
10.03

 
0.10

 
14.63

 
13.06

 
0.09


On May 29, 2015 , our Board of Directors declared a quarterly dividend payment of $0.10 per share payable on June 23, 2015 to holders of record of our common stock on June 12, 2015 .

Although we expect to continue to pay dividends for the foreseeable future, any and all subsequent dividends will be reviewed regularly and declared by the Board at its discretion.  In addition, our credit facility imposes limitations on our ability to pay dividends as further described in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

Performance Graph
 
The following graph shows changes during the period from  May 1, 2010 to May 2, 2015 in the value of $100 invested in: (1) our common stock; (2) The NASDAQ Composite; and (3) the Standard and Poor's 600 Index for Electronic Equipment Manufacturers.  The values of each investment as of the dates indicated are based on share prices plus any cash dividends, with the dividends reinvested on the date they were paid.  The calculations exclude trading commissions and taxes.



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Item 6.  SELECTED FINANCIAL DATA (in thousands, except per share data)

The table below provides selected historical financial data, which should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements, which are included in Items 7 and 8 of this Annual Report on Form 10-K.  The statement of operations data for the fiscal years ended May 2, 2015 , April 26, 2014 and April 27, 2013 and the balance sheet data at May 2, 2015 and April 26, 2014 are derived from, and are qualified by reference to, the audited Consolidated Financial Statements included elsewhere in this Form 10-K.  The statement of operations data for the fiscal years ended April 28, 2012 and April 30, 2011 and the balance sheet data at April 27, 2013 , April 28, 2012 and April 30, 2011 are derived from audited financial statements that are not included in this Form 10-K.
 
2015
 
2014
 
2013
 
2012
 
2011
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
615,942

 
$
551,970

 
$
518,322

 
$
489,526

 
$
441,676

Gross profit
144,579

 
141,710

 
133,894

 
113,437

 
111,484

Gross profit margin
23.5
%
 
25.7
%
 
25.8
%
 
23.2
%
 
25.2
%
Operating income
31,285

 
36,557

 
30,600

 
10,275

 
19,527

Operating margin
5.1
%
 
6.6
%
 
5.9
%
 
2.1
%
 
4.4
%
Net income
20,882

 
22,206

 
22,779

 
8,489

 
14,244

Diluted earnings per share
0.47

 
0.51

 
0.53

 
0.20

 
0.34

Weighted average diluted shares outstanding
44,443

 
43,762

 
42,621

 
42,304

 
42,277

Balance Sheet Data:
 

 
 

 
 

 
 

 
 

Working capital
$
149,075

 
$
140,532

 
$
125,456

 
$
119,833

 
$
128,160

Total assets
379,479

 
357,451

 
319,418

 
315,967

 
327,847

Total long-term liabilities
25,420

 
20,624

 
16,480

 
15,989

 
15,083

Total shareholders' equity
212,039

 
203,119

 
188,246

 
190,805

 
203,102

Cash dividends per share
0.40

 
0.39

 
0.73

 
0.62

 
0.60


Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides our highlights and commentary related to factors impacting our financial conditions and further describes the results of operations. The most significant risks and uncertainties are discussed in "Item 1A. Risk Factors."

This discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in this Form 10-K.

EXECUTIVE OVERVIEW

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

The global market place and adoption of digital solutions has expanded over the years. As the market matures, product pricing has been a barrier to entry for more participants in the market. The marketplace continues to expand the use of digital technology in a wide variety of applications. With this positive demand, strong competition exists across all of our business units, which causes margin constraints. Projects with revenues exceeding $1.0 million also attract competition, which generally reduces profitability. In addition, as a result of the lower sales prices, we must sell more products to generate the same or greater level of net sales in future years.

We organize around customer segments and geographic regions as further described in " Note 2. Segment Reporting " of the Notes to our Consolidated Financial Statements included in this Form 10-K. Each of our business units is impacted by adverse economic conditions in different ways and to different degrees.  Each business unit also has unique key growth drivers and challenges, as described below.


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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.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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 which affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.  On a regular basis, we evaluate our estimates, including those related to 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.

We believe the following critical accounting policies require significant judgments and estimates in the preparation of our consolidated financial statements:

Revenue recognition on long-term construction-type contracts.  Earnings on construction-type contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract.  Contract costs include all direct material and labor costs and those indirect costs related to contract performance.  Indirect costs include charges for such items as facilities, engineering and project management.  Provisions for estimated losses on uncompleted contracts are made in the period such losses are capable of being estimated.  Generally, construction-type contracts we enter into have fixed prices established, and to the extent the actual costs to complete construction-type contracts are higher than the amounts estimated as of the date of the financial statements, the resulting gross margin would be negatively affected in future quarters when we revise our estimates.  Our practice is to revise estimates as soon as such changes in estimates are known.  We do not believe there is a reasonable likelihood there will be a material change in future estimates or assumptions we use to determine these estimates.  We combine contracts for accounting purposes when they are negotiated as a package with an overall profit margin objective, essentially represent an agreement to do a single project for a customer, involve interrelated construction activities, and are performed concurrently or sequentially.  When a group of contracts is combined, revenue and profit are recognized uniformly over the performance of the combined projects.  We segment revenues in accordance with the contract segmenting criteria in Accounting Standards Codification (“ASC”) 650-35, Construction-Type and Production-Type Contracts.

Allowance for doubtful accounts.   We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.  If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.  To identify impairment in customers’ ability to pay, we review aging reports, contact customers in connection with collection efforts and review other available information.  Although we consider our allowance for doubtful accounts adequate, if the financial condition of our customers were to deteriorate and impair their ability to make payments to us, additional allowances may be required in future periods.  We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to determine the allowance for doubtful accounts.  As of May 2, 2015 and April 26, 2014 , we had an allowance for doubtful accounts balance of approximately $2.3 million and $2.5 million , respectively.

Warranties.   We have recognized a reserve for warranties on our products equal to our estimate of the actual costs to be incurred in connection with our performance under the warranties.  Generally, estimates are based on historical experience taking into account known or expected changes.  If we would become aware of an increase in our estimated warranty costs, additional reserves may become necessary, resulting in an increase in costs of goods sold.  We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to determine our reserve for warranties.  As of May 2, 2015 and April 26, 2014 , we had approximately $26.5 million and $27.3 million reserved for these costs, respectively.

Extended warranty and product maintenance.   We recognize deferred revenue related to separately priced extended warranty and product maintenance agreements.  The deferred revenue is recognized ratably over the contractual term.  If we would become aware of an increase in our estimated costs under these agreements in excess of our deferred revenue, additional reserves may be necessary, resulting in an increase in costs of goods sold.  In determining if additional reserves are necessary, we examine cost trends on the contracts and other information and compare them to the deferred revenue.  We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to determine estimated costs under these agreements.  As of May 2, 2015 and April 26, 2014 , we had $13.1 million and $13.8 million of deferred revenue related to separately priced extended warranty and product maintenance agreements, respectively.

Inventory.   Inventories are stated at the lower of cost or market.  Market refers to the current replacement cost, except market may not exceed the net realizable value (that is, the estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal), and market is not less than the net realizable value reduced by an allowance for normal profit margins.  In valuing inventory, we estimate market value where it is believed to be the lower of cost or market, and any necessary changes are charged to costs of goods sold in the period in which they occur.  In determining market value, we review various factors such as current inventory

16

Table of contents


levels, forecasted demand and technological obsolescence.  We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to calculate the estimated market value of inventory.  However, if market conditions change, including changes in technology, product components used in our products or expected sales, we may be exposed to unforeseen losses which could be material.

Income taxes.    We operate in multiple income tax jurisdictions both within the United States and internationally. Our annual tax rate is determined based on our income, statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes in each tax jurisdiction. Tax laws require that certain items be included in the tax returns at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary and reverse over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities and reflect the enacted income tax rates in effect for the years in which the differences are expected to reverse. We consider a valuation allowance for deferred tax assets if it is "more likely than not" that some or all of the benefits will not be realized.

Because we operate in multiple income tax jurisdictions both within the United States and internationally, management must determine the appropriate allocation of income and expenses to each of these jurisdictions based on current interpretations of complex income tax regulations.

Income tax authorities in all jurisdictions regularly perform audits of our income tax filings. Income tax audits associated with the allocation of income, expenses and other complex issues, including transfer pricing methodologies, may require an extended period of time to resolve and may result in significant income tax adjustments if changes to the income allocation are required between jurisdictions with different income tax rates.

We have no deferred tax liability recognized relating to our investment in foreign subsidiaries where the earnings have been indefinitely reinvested. If circumstances change and it becomes apparent that some or all of the undistributed untaxed earnings of a subsidiary will be remitted to the United States, we will accrue a tax expense at the time of the remittance. We have approximately $10.4 million of untaxed earnings which have indefinitely been reinvested.

Asset Impairment. Carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment in accordance with ASC 350, Intangibles - Goodwill and Other .  Our impairment review involves estimating the fair value of goodwill and indefinite-lived intangible assets using a combination of a market approach and an income (discounted cash flow) approach at the reporting unit level, requiring significant management judgment with respect to revenue and expense growth rates, changes in working capital, and the selection and use of an appropriate discount rate.  The estimates of fair value of reporting units are based on the best information available as of the date of the assessment.  The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease any impairment charge.  We use our judgment in assessing whether assets may have become impaired between annual impairment tests.  Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal an asset has become impaired.

Carrying values for long-lived tangible assets and definite-lived intangible assets, excluding goodwill and indefinite-lived intangible assets, are reviewed for possible impairment as circumstances warrant in connection with ASC 360-10-05-4, Impairment or Disposal of Long-Lived Assets.  Impairment reviews are conducted when we believe a change in circumstances in the business or external factors warrants a review.  Circumstances such as the discontinuation of a product or product line, a sudden or consistent decline in the forecast for a product, changes in technology or in the way an asset is being used, a history of negative operating cash flow, or an adverse change in legal factors or in the business climate, among others, may be indicators that trigger an impairment review.  Our initial impairment review to determine if a potential impairment charge is required is based on an undiscounted cash flow analysis at the lowest level for which identifiable cash flows exist.  The analysis requires judgment with respect to changes in technology, the continued success of product lines, future volume, revenue and expense growth rates, and discount rates.

Share-based compensation.   We use the Black-Scholes standard option pricing model (“Black-Scholes model”) to determine the fair value of stock options and stock purchase rights.  The determination of the fair value of the awards on the date of grant using the Black-Scholes model is affected by our stock price as well as by assumptions regarding other variables, including projected employee stock option exercise behaviors, risk-free interest rate, expected volatility of our stock price in future periods, and expected dividend yield.

We analyze historical employee exercise and termination data to estimate the expected life assumption of a new employee option.  We believe historical data currently represents the best estimate of the expected life of a new employee option.  The risk-free interest rate we use is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected life of the options.  We estimate the expected volatility of our stock price in future periods by using the implied volatility in market traded options.  Our decision to use expected volatility was based on the availability of actively traded options for our common stock, and our assessment of expected volatility is more representative of future stock price trends than the historical volatility of our common stock.  We use an expected dividend yield consistent with our dividend yield over the period of time we have paid dividends in the Black-Scholes option valuation

17

Table of contents


model.  The amount of share-based compensation expense we recognize during a period is based on the portion of the awards ultimately expected to vest.  We estimate pre-vesting option forfeitures at the time of grant by analyzing historical data, and we revise those estimates in subsequent periods if actual forfeitures differ from those estimates.
 
If factors change and we employ different assumptions for estimating share-based compensation expense in future periods or if we decide to use a different valuation model, the expense in future periods may differ significantly from what we have recorded in the current period and could materially affect our net earnings and net earnings per share in a future period.

RECENT ACCOUNTING PRONOUNCEMENTS

For a summary of recently issued accounting pronouncements and the effects those pronouncements would have on our financial results, see " Note 1. Nature of Business and Summary of Significant Accounting Policies " of the Notes to our Consolidated Financial Statements included in this Form 10-K.

RESULTS OF OPERATIONS

Daktronics Inc. operates on a 52 or 53 week fiscal year, with our fiscal year ending on the Saturday closest to April 30 of each year. When April 30 falls on a Wednesday, the fiscal year ends on the preceding Saturday. Within each fiscal year, each quarter is comprised of 13 week periods following the beginning of each fiscal year. In each 53 week year, an additional week is added to the first quarter and each of the last three quarters is comprised of a 13 week period. Fiscal 2015 is a 53 -week year; therefore, the fiscal year ended May 2, 2015 contained operating results for 53 weeks while the fiscal years ended April 26, 2014 and April 27, 2013 contained operating results for 52 weeks.

Net Sales
 
 
 
May 2, 2015
 
April 26, 2014
 
2015 vs 2014
 
April 27, 2013
 
2014 vs 2013
(dollars in thousands)
Amount
 
Amount
 
Dollar Change
Percent Change
 
Amount
 
Dollar Change
Percent Change
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
165,793

 
$
154,754

 
$
11,039

7.1
 %
 
$
144,596

 
$
10,158

7.0
 %
Live Events
231,877

 
197,246

 
34,631

17.6
 %
 
158,562

 
38,684

24.4
 %
High School Park and Recreation
67,657

 
59,531

 
8,126

13.7
 %
 
66,128

 
(6,597
)
(10.0
)%
Transportation
48,333

 
54,861

 
(6,528
)
(11.9
)%
 
73,270

 
(18,409
)
(25.1
)%
International
102,282

 
85,578

 
16,704

19.5
 %
 
75,766

 
9,812

13.0
 %
 
$
615,942

 
$
551,970

 
$
63,972

11.6
 %
 
$
518,322

 
$
33,648

6.5
 %
Orders:
 

 
 

 


 
 
 
 




Commercial
$
170,209

 
$
155,840

 
$
14,369

9.2
 %
 
$
152,028

 
$
3,812

2.5
 %
Live Events
226,354

 
225,331

 
1,023

0.5
 %
 
161,602

 
63,729

39.4
 %
High School Park and Recreation
69,188

 
59,812

 
9,376

15.7
 %
 
64,796

 
(4,984
)
(7.7
)%
Transportation
50,845

 
49,057

 
1,788

3.6
 %
 
73,426

 
(24,369
)
(33.2
)%
International
114,977

 
87,094

 
27,883

32.0
 %
 
80,158

 
6,936

8.7
 %
 
$
631,573

 
$
577,134

 
$
54,439

9.4
 %
 
$
532,010

 
$
45,124

8.5
 %


18



Sales and orders were impacted as a result of the 53-week fiscal year ended May 2, 2015 compared to the more common 52 week fiscal year. The fiscal years ended April 26, 2014 and April 27, 2013 contained 52 weeks. The additional week of sales constituted approximately 2% of the increase in sales for the 2015 fiscal year.

Fiscal Year 2015 as compared to Fiscal Year 2014

Commercial: The increase in net sales for fiscal 2015 compared to fiscal 2014 was the net result of an increase in sales in the billboard niche due to the timing of orders and shipments. Weather related issues at our customers' billboard construction sites caused delayed shipments and moved sales from fiscal 2014 into early fiscal 2015. Sales in our spectacular niche increased due to increased market activity, which was offset by decreases in our on-premise and national account niches caused by the soft economic market.

The increase in orders for fiscal 2015 compared to fiscal 2014 was primarily the net result of an increase in orders in our large custom video contract niche due to increased market activity in this area. There was a slight increase in orders in our billboard niche, which was offset by decreases in our on-premise and national account niches due to the soft economic market.

We continue to see adoption of video solutions in our Commercial business unit marketplace. We see opportunity for orders and sales in our billboard, on-premise, and national account niches due to replacement cycles. A number of large custom video contract opportunities are available in the marketplace. Due to a number of factors, such as the discretionary nature of customers committing to a system, economic dependencies, and competitive factors, it is difficult to predict orders and net sales for fiscal 2016 . We expect growth in this business unit over the long-term, assuming favorable economic conditions.

Live Events:   The increase in net sales for fiscal 2015 compared to fiscal 2014 was primarily due to an increase the number of multi-million dollar projects in professional sports stadiums used by Major League Baseball ("MLB"), the National Basketball Association ("NBA"), the National Football League ("NFL"), and the National Hockey League ("NHL"), which was offset by decreases in multi-sport arenas and sales related to college and university venues.

Orders for fiscal 2015 compared to fiscal 2014 were relatively flat.

We continue to see ongoing interest from venues at all levels to increase the size and capability of their display system in our Live Events business unit marketplace. A number of factors, such as the discretionary nature of customers committing to upgrade systems, long replacement cycles, and competitive factors make forecasting fiscal 2016 orders and net sales difficult. We expect growth in this business unit over the long-term, assuming favorable economic conditions and that we are successful at counteracting competitive pressures.

High School Park and Recreation:   The increase in net sales for fiscal 2015 compared to fiscal 2014 was primarily the result of a difference in order timing. We experienced many orders that were pushed out from our fourth quarter of fiscal 2014 into the first six months of fiscal 2015. The increase in sales also is due to production and delivery on a higher volume of orders and an increase in service agreements. Order transaction size also increased due to larger display sizes, which increased sales prices.

The increase in orders for fiscal 2015 compared to fiscal 2014 was primarily due to higher orders of video and sound systems as some orders pushed into the first six months of fiscal 2015 from the fourth quarter of fiscal 2014 due to customer timing, increased opportunities in the market place, and an increase in the size of the display systems.

We continue to see opportunities to sell larger video systems and our classic scoring and message centers in fiscal 2016 , primarily in high school facilities which benefit from our sports marketing services that generate advertising revenue to fund the display systems and because of schools' desires to communicate with students and parents.  For the long term, we believe this market presents growth opportunities as the economy continues to improve and larger video systems are adopted.

Transportation:   The decrease in net sales for fiscal 2015 compared to fiscal 2014 was primarily the result of sales recognized during fiscal 2014 for three significant state transportation authorities and a significant transit project with no sales from recurring projects of a similar size recognized during fiscal 2015. We believe some of the sales decline is due to the uncertainty in this market because of the lack of clarity on the approval, timing and funding levels of the federal Highway and Transportation Funding Act of 2014.

The increase in orders for fiscal 2015 compared to fiscal 2014 was primarily due to the timing of orders received from state transportation authorities.

For fiscal 2016 , we believe that the Transportation business unit's sales will increase due to a strong backlog going into fiscal 2016. A number of factors, such as transportation funding, the competitive environment and various other factors, make forecasting orders and net sales difficult. However, highways and public transit show growth in capital improvement projects that include dynamic message signs. Without transportation funding, payments to states could be reduced and could have a negative impact on our sales and financial results in the Transportation business unit.

19



  
International:   The increase in net sales for fiscal 2015 compared to fiscal 2014 was the net result of sales recognized for sports projects in Europe and Australia, retail spectaculars, and OOH billboard and street furniture products. We believe the increased sales is a result of our ongoing strategy to grow our international presence. In addition, Data Display's sales in the International business unit were approximately $5.0 million for fiscal 2015; Data Display was not part of the International business unit in fiscal 2014.

The increase in orders for fiscal 2015 compared to fiscal 2014 was primarily due to the increased amount of orders booked during the fourth quarter of fiscal 2015. These orders are related to all of our international markets; however, a major portion was due to an order in the transportation market for over $12.0 million.

For fiscal 2016 , we believe the International business unit has potential for sales growth as we penetrate markets with our established sales networks and the pipeline of projects increases. In addition, the third-party advertising business continues to be strong worldwide, and we see a definite shift to digital as prices for displays have come down. We continue to see an increase in our pipeline for large video projects in sports and commercial applications and an increase in the projects using architectural lighting solutions. As with our other business units, large video system projects cause difficulty in projecting fiscal 2016 results.

Backlog: The product order backlog as of May 2, 2015 was $190.5 million as compared to $171.6 million as of April 26, 2014 .  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 decreased from one year ago in our Live Events and High School Park and Recreation business units and increased in our other business units. Approximately $30.0 million of the backlog is expected to be realized in fiscal 2017 for a Live Events project.

Fiscal Year 2014 as compared to Fiscal Year 2013

Commercial: The increase in net sales for fiscal 2014 compared to fiscal 2013 was the net result of:

An increase of $6.0 million in sales of large custom video contracts. The level of large custom contract orders and sales in this niche is subject to volatility.
An increase of $4.7 million in sales in our reseller niche resulting from increased contract orders in shopping centers and malls and civic and nonprofit niches.
Relatively flat sales in our billboard niche.

Live Events:   The increase in net sales for fiscal 2014 compared to fiscal 2013 was the net result of:

An increase of $40.0 million in sales in our large sports venue segment, resulting from $26.5 million in sales to NFL stadiums, $18.4 million in sales to multi-sport arenas, and $4.3 million in sales to MLB stadiums. This was offset by decrease in sales to minor league stadiums, NHL stadiums, and other various niches.
A $1.3 million decrease in sales to mobile and modular customers.

High School Park and Recreation:   The decrease in net sales for fiscal 2014 compared to fiscal 2013 was the result of:

Lower volume of sales from large video systems as a result of a decrease in the size and corresponding selling price of the video displays ordered during fiscal 2014. The opportunities to book large video system orders vary from year to year, and it is hard to predict. A number of factors, such as the discretionary nature of customers committing to upgrade products, impact order volumes.
The timing of purchase decisions that is impacted by economic factors.

Transportation:   The decrease in net sales for fiscal 2014 compared to fiscal 2013 was the result of:

Recognized sales in the amount of $30.5 million during fiscal 2013 for two significant projects with no sales from recurring projects of a similar size recognized during fiscal 2014.
A slight increase in sales related to traditional transportation business in fiscal 2014.

International:   The increase in net sales for fiscal 2014 compared to fiscal 2013 was the net result of a higher beginning backlog for fiscal 2014 compared to fiscal 2013 and an increase of orders booked during fiscal 2014 converting into sales and progress on large projects. We have been successful in sports application systems and commercial applications internationally. We completed the acquisition of OPEN during the first quarter of fiscal 2014. OPEN's sales were included in the International business unit results and contributed $4.2 million of net sales during fiscal 2014.


20



Gross Profit
 
 
Year Ended
 
 
May 2, 2015
 
April 26, 2014
 
April 27, 2013
 
(dollars in thousands)
 Amount
 
As a Percent of Net Sales
 
 Amount
 
As a Percent of Net Sales
 
 Amount
 
As a Percent of Net Sales
 
 
Commercial
$
44,344

 
26.7
%
 
$
44,974

 
29.1
%
 
$
38,123

 
26.4
%
 
Live Events
40,945

 
17.7

 
43,019

 
21.8

 
31,718

 
20.0

 
High School Park and Recreation
21,561

 
31.9

 
16,202

 
27.2

 
18,601

 
28.1

 
Transportation
14,647

 
30.3

 
16,126

 
29.4

 
24,552

 
33.5

 
International
23,082

 
22.6

 
21,389

 
25.0

 
20,900

 
27.6

 
 
$
144,579

 
23.5
%
 
$
141,710

 
25.7
%
 
$
133,894

 
25.8
%

Fiscal Year 2015 as compared to Fiscal Year 2014

The gross profit percentage decreased for fiscal 2015 compared to fiscal 2014 . This decline was due to the mix of business; a number of multi-million dollar projects that generally are more competitive and have lower profit margins and include a higher level of subcontracted installations; additional spending due to capacity constraints in our second quarter; an increase in expenses for our acquisition of Data Display during the year; and competitive pressures in the marketplace.

It is difficult to project gross profit levels for fiscal 2016 because of the uncertainty regarding the level of sales, the sales mix and timing, and the competitive factors in our business. We are focused on improving our gross profit margins as we execute our strategies for improved profitability which include enhanced capacity planning, releasing new product designs, and improved operational effectiveness in the installation and services delivery areas. Although there are ways to improve profitability, we are experiencing cost pressures in wages and benefits and increased pay in our U.S. manufacturing facilities at the beginning of fiscal 2016.

Commercial:   The gross profit percent decrease in the Commercial business unit for fiscal 2015 compared to fiscal 2014 was the result of the product mix of sales and manufacturing utilization, partially offset by lower warranty costs as a percent of sales.

Live Events:   The gross profit percent decrease in the Live Events business unit for fiscal 2015 compared to fiscal 2014 was due to the effects of an increased mix of large custom contracts, the related increased mix of subcontracted installation activity, and the higher volume of business during the second quarter which stretched our capacity. In order to meet critical event dates for our sports customers, we had additional costs related to overtime, expediting, and shipping. The installation activity generally lowers margins as we outsource subcontracted on-site work at general contracting rates which have lower margins than in-house video equipment production.

High School Park and Recreation:   The gross profit percent increase in the High School Park and Recreation business unit for fiscal 2015 compared to fiscal 2014 primarily was the result of overall gross margin improvement on contracts due to higher percentages of Daktronics Sports Marketing ("DSM") projects and improved manufacturing utilization. In addition, in the first quarter of fiscal 2015, we recognized a $1.3 million gain on the sale of our theatre rigging division.
 
Transportation:  The gross profit percent increase in the Transportation business unit for fiscal 2015 compared to fiscal 2014 was primarily the result of improved gross margins on contracts and standard orders and lower warranty costs as a percent of sales, partially offset by a decline in our manufacturing utilization.

International:   The gross profit percent decrease in the International business unit for fiscal 2015 compared to fiscal 2014 was the net result of an overall gross margin decline on our large custom contracts, which generally have lower margins due to their competitive nature and low utilization of our international manufacturing facilities, including the factory and related costs acquired with the Data Display acquisition.


21



Fiscal Year 2014 as compared to Fiscal Year 2013

The gross profit percentage remained flat for fiscal 2014 compared to fiscal 2013.

Commercial:   The gross profit percent increase in the Commercial business unit for fiscal 2014 compared to fiscal 2013 was the result of overall gross margin improvement on product sales mix and manufacturing utilization, which was offset by increased warranty costs.

Live Events:   The gross profit percent increase in the Live Events business unit for fiscal 2014 compared to fiscal 2013 was the result of improved manufacturing utilization from increased sales, offset by slightly higher warranty costs. Large live events video projects are competitively bid and generally result in lower overall margins from a sales mix perspective.

High School Park and Recreation:   The gross profit percent decrease in the High School Park and Recreation business unit for fiscal 2014 compared to fiscal 2013 primarily was the result of lower volume of sales from video projects and increased warranty and manufacturing costs.
 
Transportation:  The gross profit percent decrease in the Transportation business unit for fiscal 2014 compared to fiscal 2013 was primarily the result of a lower volume of large custom projects and increased manufacturing costs, which was partially offset by lower warranty costs.

International:   The gross profit percent decrease in the International business unit for fiscal 2014 compared to fiscal 2013 was the net result of a decrease in the gross margin on product sales and an increase in manufacturing costs related to our new manufacturing plant in Belgium for third-party advertising displays, which was partially offset by lower warranty costs.

Selling Expenses
 
Year Ended
 
May 2, 2015
 
April 26, 2014
 
April 27, 2013
(dollars in thousands)
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
Commercial
$
15,802

 
9.5
%
 
7.8
 %
 
$
14,662

 
9.5
%
 
5.6
 %
 
$
13,882

 
9.6
%
Live Events
13,611

 
5.9

 
8.8

 
12,515

 
6.3

 
(1.0
)
 
12,647

 
8.0

High School Park and Recreation
10,436

 
15.4

 
(2.7
)
 
10,727

 
18.0

 
2.6

 
10,451

 
15.8

Transportation
4,244

 
8.8

 
28.0

 
3,316

 
6.0

 
2.9

 
3,222

 
4.4

International
13,870

 
13.6

 
10.3

 
12,574

 
14.7

 
0.1

 
12,557

 
16.6

 
$
57,963

 
9.4
%
 
7.7
 %
 
$
53,794

 
9.7
%
 
2.0
 %
 
$
52,759

 
10.2
%

All areas of selling expenses were impacted as a result of the 53-week fiscal year ended May 2, 2015 compared to the more common 52 week fiscal year. The fiscal years ended April 26, 2014 and April 27, 2013 contained 52 weeks.

Fiscal Year 2015 as compared to Fiscal Year 2014

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, Live Events, Transportation, and International business units increase d for fiscal 2015 compared to fiscal 2014 primarily due to increases in personnel expenses, travel and entertainment expense, marketing expense, the implementation of a sales opportunity management tool, the additional costs associated with the Data Display sales teams, and various other expenses, with a reduction of bad debt and commission expenses.

Selling expense in our High School Park and Recreation business unit remained relatively flat for fiscal 2015 compared to fiscal 2014 .
  
We expect selling expenses will increase slightly in dollars in fiscal 2016 as compared to fiscal 2015 but remain flat as a percentage of net sales.

Fiscal Year 2014 as compared to Fiscal Year 2013


22



Selling expense in our Commercial, High School Park and Recreation, Transportation, and International business units increased slightly in fiscal 2014 compared to fiscal 2013 primarily due to increases in personnel costs, including taxes and benefits, and travel and entertainment for sales activities, partially offset by a decrease in bad debt expense for potentially uncollectable accounts receivable primarily from sales derived from our International business unit not recurring in fiscal 2014.

Selling expense in our Live Events business unit remained relatively flat for fiscal 2014 compared to fiscal 2013.

Other Operating Expenses
 
Year Ended
 
May 2, 2015
 
April 26, 2014
 
April 27, 2013
(dollars in thousands)
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
General and administrative
$
30,679

 
5.0
%
 
9.6
%
 
$
27,984

 
5.1
%
 
2.1
%
 
$
27,404

 
5.3
%
Product design and development
$
24,652

 
4.0
%
 
5.5
%
 
$
23,375

 
4.2
%
 
1.1
%
 
$
23,131

 
4.5
%

All areas of operating expenses were impacted as a result of the 53-week fiscal year ended May 2, 2015 compared to the more common 52 week fiscal year. The fiscal years ended April 26, 2014 and April 27, 2013 contained 52 weeks.

Fiscal Year 2015 as compared to Fiscal Year 2014

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 fiscal 2015 increase d as compared to fiscal 2014 primarily due to an increase in professional services costs, personnel expenses, IT maintenance, and various other expenses. These expenses included one-time costs incurred in the second quarter of fiscal 2015 for professional services to support the expansion of our International business and other on-going costs to support our anticipated business growth. We incurred $0.4 million in general and administration expense for professional fees related to the Data Display acquisition.

We expect general and administrative expenses to increase slightly in dollars for fiscal 2016 as compared to fiscal 2015 but remain flat as a percentage of net sales.

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 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 is included in cost of goods sold. Product development expenses in fiscal 2015 increase d compared to fiscal 2014 primarily due to an increase in materials used in the development of new products and labor costs assigned to product development projects.

We expect product design and development expenses will increase slightly in dollars in fiscal 2016 as compared to fiscal 2015 but remain flat as a percentage of sales.

Fiscal Year 2014 as compared to Fiscal Year 2013

General and administrative expenses in fiscal 2014 as compared to fiscal 2013 was the result of an increase of $0.8 million in professional fees, travel and entertainment, IT maintenance, advertising, and other expense, which was offset by decreases in various other general and administrative expenses.

Product design and development expenses in fiscal 2014 as compared to fiscal 2013 remained relatively flat.


23



Other Income and Expenses
 
Year Ended
 
May 2, 2015
 
April 26, 2014
 
April 27, 2013
(dollars in thousands)
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
Interest income, net
$
896

 
0.1
 %
 
(13.8
)%
 
$
1,039

 
0.2
 %
 
(11.0
)%
 
$
1,168

 
0.2
 %
Other (expense) income, net
$
(498
)
 
(0.1
)%
 
40.3
 %
 
$
(355
)
 
(0.1
)%
 
(57.7
)%
 
$
(839
)
 
(0.2
)%

Fiscal Year 2015 as compared to Fiscal Year 2014

Interest income, 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 decrease d slightly for fiscal 2015 as compared to fiscal 2014 due to lower installment receivables. 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. We expect our cash balances will increase during fiscal 2016 .
 
Other (expense) income, net The change in other income and expense, net for fiscal 2015 as compared to fiscal 2014 , is primarily due to unrealized foreign currency gains from the volatility of the Euro, Australian dollar, and Canadian dollar.

Fiscal Year 2014 as compared to Fiscal Year 2013

Interest income, net:   Interest income declined slightly for fiscal 2014 as compared to fiscal 2013 due to a lower level of income on investments due to lower yields available in the market when reinvesting available cash.

Other (expense) income, net:  The decrease in other expenses for fiscal 2014 as compared to fiscal 2013 was due to the recognition in fiscal 2013 of a $0.5 million settlement of a dispute relating to a past acquisition; no similar transaction was recorded in fiscal 2014.

Income Taxes

The effective tax rate was approximately 34.1 percent , 40.4 percent and 26.4 percent for fiscal 2015 , fiscal 2014 , and fiscal 2013 , respectively.

The effective income tax rate for fiscal 2015 includes the impact of The Tax Increase Prevention Act of 2014 signed by the President in December 2014, which extended the research tax credits for one year to December 31, 2014. Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts paid or incurred on or before December 31, 2013. The extension of the research credit is retroactive and includes amounts paid or incurred after December 31, 2013. As a result of the retroactive extension, we recognized approximately $1.3 million in tax benefits during fiscal 2015.

The effective income tax rate for fiscal 2014 includes the impact of a $2.3 million valuation allowance against a deferred tax asset related to losses on an equity investment when it became more likely than not we would not realize the benefit. The rate was also impacted by the research credit being effective for only a portion of the year. For a more detailed description of the valuation allowance, please see " Note 13. Income Taxes " of the Notes to our Consolidated Financial Statements included in this Form 10-K.

The effective income tax rate for fiscal 2013 included the positive impact of a non-recurring international tax charge.

Fiscal Year 2015 Fourth Quarter Summary

During the fourth quarter of fiscal 2015 , net sales increase d approximately 16.0 percent to $158.1 million as compared to $136.2 million in the fourth quarter of fiscal 2014 .  Net sales increased in the Commercial, Live Events, High School Park and Recreation, and International business units and remained relatively flat in the Transportation business unit. Commercial business unit net sales increased due to increases in the net sales for billboard and large custom video contracts, offset by a decrease in sales in on-premise and national account niches. Live Events business unit net sales increased due an increase in orders related to video displays for MLB stadiums. High School Park and Recreation business unit net sales increased due to an increase in sales and service orders. International business unit net sales increased due to sales recognized for sports projects in Europe and Australia, retail spectaculars, and OOH billboard and street furniture products.


24



Gross margin percentage decrease d to approximately 22.3 percent in the fourth quarter of fiscal 2015 from approximately 24.8 percent in the fourth quarter of fiscal 2014 .  The decrease in gross profit percentage was the net result of the product mix of sales and the increased mix of subcontracted installation activity.

Selling expenses increase d to $14.6 million in the fourth quarter of fiscal 2015 compared to $13.7 million in the fourth quarter of fiscal 2014 .  The increase was primarily due to increased personnel expenses, including taxes and benefits, marketing expenses, and bad debt expense which were partially offset by decreases of commissions and other expenses.

General and administrative costs increase d by approximately 8.2 percent in the fourth quarter of fiscal 2015 to $7.8 million as compared to $7.2 million in the fourth quarter of fiscal 2014 .   The increase was primarily due to increased personnel expenses, including taxes and benefits, and information technology, including software and hardware expenses, and partially offset by a decrease in professional fees.

Product development costs decrease d by approximately 2.7 percent in the fourth quarter of fiscal 2015 to $5.9 million as compared to $6.0 million in the fourth quarter of fiscal 2014 .  The decrease was the result of reduced engineering costs and small changes in non-engineering costs, the cost of materials to produce prototypes or test materials, and legal fees related to patent work.

The effective tax rate was 45.0 percent in the fourth quarter of fiscal 2015 compared to 74.3 percent in the fourth quarter of fiscal 2014 .  The effective income tax rate for fiscal 2014 includes the impact of a $2.3 million valuation allowance against a deferred tax asset related to losses in an equity in investment when it became more likely than not we would not realize the benefit.

25



LIQUIDITY AND CAPITAL RESOURCES
 
Year Ended
 
May 2,
2015
 
April 26,
2014
 
Percent Change
(dollars in thousands)
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
53,168

 
$
36,199

 
46.9
 %
Investing activities
(24,227
)
 
(16,358
)
 
48.1

Financing activities
(16,070
)
 
(15,321
)
 
4.9

Effect of exchange rate changes on cash
(641
)
 
(94
)
 
581.9

Net increase in cash and cash equivalents
$
12,230

 
$
4,426

 
(176.3
)%

Cash flows from operating activities:   Operating cash flows result primarily from cash received from customers, which is offset by cash payments for inventories, income taxes, market and warranty obligations, and employee compensation.

Cash provided by operating activities was $53.2 million for fiscal 2015 compared to $36.2 million in fiscal 2014 . The increase in cash from operating activities of $17.0 million was the net result of an increase for changes in net operating assets and liabilities of $18.2 million , an increase of $0.6 million in our deferred income taxes, a $0.5 million increase in depreciation and amortization, and a $0.1 million increase in other non-cash items, net, offset by a decrease of $1.3 million in net income and a $1.1 million gain on the sale of property and equipment.

The most significant drivers of cash used from operating activities were changes in accounts payable, customer deposits and construction-type contracts, offset by cash generated from accounts receivable, inventory, and long-term marketing obligations and payables. Changes in accounts receivables generated $6.4 million of cash in fiscal 2015 compared to consuming $18.3 million in fiscal 2014 . Changes in inventory consumed $1.9 million of cash in fiscal 2015 compared to consuming $12.8 million in fiscal 2014 . Changes in long-term marketing obligations and payables generated $3.3 million of cash in fiscal 2015 compared to consuming $0.1 million in fiscal 2014 . Changes in construction-type contracts, customer deposits, and accounts payable generated $6.8 million of cash in fiscal 2015 compared to generating $26.0 million in fiscal 2014 .

Overall, changes in operating assets and liabilities can be impacted by the timing of cash flow on large orders, which can cause significant fluctuations in the short term in inventory, accounts receivables, accounts payable, customer deposits, costs and earnings in excess of billings and various other operating assets and liabilities. Variability in costs and earnings in excess of billings and billings in excess of costs relates to the timing of billings on construction-type contracts and revenue recognition, which can vary significantly depending on contractual payment terms and build and installation schedules. Balances are also impacted by the seasonality of the sports markets.
 
Cash flows from investing activities:   Cash used in investing activities totaled $24.2 million for fiscal 2015 compared to $16.4 million in fiscal 2014 . Purchases of property and equipment totaled $21.8 million in fiscal 2015 compared to $13.5 million in fiscal 2014 . The change from the prior year is due to the expansion of our Minnesota manufacturing facility, the purchase of new manufacturing equipment for various new product lines as well as machine upgrades, and additions to our information technology infrastructure.

A net cash inflow of $4.0 million was recognized during fiscal 2015 from the disposition of our automated rigging systems division for theatre applications.

A net cash outlay of $6.3 million was recognized during fiscal 2015 compared to $1.5 million in fiscal 2014 for acquisitions, investments in affiliates and equity investments.

Cash flows from financing activities:   Cash used in financing activities was $16.1 million for fiscal 2015 compared to $15.3 million in fiscal 2014 . Dividends of $17.4 million , or $40.0 cents per share, were paid to Daktronics shareholders during fiscal 2015 compared to $16.7 million , or $39.0 cents per share, paid to Daktronics shareholders during fiscal 2014 . During fiscal 2015 and fiscal 2014 , payments of $1.2 million and $3.7 million were made on the debt assumed in the acquisitions of Data Display and OPEN, respectively.

Other Liquidity and Capital Resources Discussion: Although we have $2.7 million of retainage on long-term contracts included in receivables and costs in excess of billings as of May 2, 2015 , we expect all of it to be collected within one year.

Working capital was $149.1 million at May 2, 2015 and $140.5 million at April 26, 2014 .  The increase in working capital was primarily the result of higher sales and increases in cash and inventories, and decreases in warranty obligations, which were partially offset by increases among accounts payable, accrued expenses, and deferred revenue. We have historically financed working capital needs through a combination of cash flow from operations and borrowings under bank credit agreements.


26



We have used and expect to continue to use cash reserves and, to a lesser extent, bank borrowings to meet our short-term working capital requirements.  On large product orders, the time between order acceptance and project completion may extend up to and exceed 24 months depending on the amount of custom work and a customer’s delivery needs.  We often receive down payments or progress payments on these product orders.  To the extent these payments are not sufficient to fund the costs and other expenses associated with these orders, we use working capital and bank borrowings to finance these cash requirements. We are sometimes required to obtain performance bonds for display installations, and we have a bonding line available through a surety company for an aggregate of $150.0 million in bonded work outstanding. If we were unable to complete the work and our customer would call upon the bond for payment, the surety company would subrogate their loss to Daktronics. At May 2, 2015 , we had $42.7 million of bonded work outstanding against this line. For additional information on financing agreements, see, " Note 10. Financing Agreements " of the Notes to our Consolidated Financial Statements included in this Form 10-K.

Our business growth and profitability improvement strategies depend on investments in capital expenditures. We are projecting capital expenditures to be approximately $25 million for fiscal 2016 for manufacturing equipment for new or enhanced product production, expanded capacity, investments in quality and reliability equipment, and continued information infrastructure investments.

We utilize cash to pay dividends to our investors. The following table summarizes the quarterly dividend declared and paid since the fiscal year end of April 26, 2014 :
Date Declared
Record Date
Payment Date
Amount per Share
May 22, 2014
June 2, 2014
June 13, 2014
$0.10
September 4, 2014
September 15, 2014
September 26, 2014
$0.10
December 4, 2014
December 15, 2014
December 26, 2014
$0.10
March 5, 2015
March 16, 2015
March 27, 2015
$0.10
May 29, 2015
June 12, 2015
June 23, 2015
$0.10

Although we expect to continue to pay dividends for the foreseeable future, any and all subsequent dividends will be reviewed regularly and declared by the Board of Directors at its discretion.

We believe our working capital available from all sources will be adequate to meet the cash requirements of our operations in the foreseeable future. If our growth extends beyond current expectations, or if we make any strategic investments, we may need to increase our credit facilities or seek other means of financing.  We anticipate we will be able to obtain any needed funds under commercially reasonable terms from our current lenders or other sources.  


27



OFF-BALANCE-SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

We enter into various lease, purchase and marketing obligations that require payments in future periods.  Operating lease obligations relate primarily to leased manufacturing space, office space, furniture, and vehicles.  Long-term marketing obligations relate to amounts due in future periods for payments on net sales where we sold and installed our equipment in exchange for future advertising revenue.  When certain advertising revenue thresholds are met, all or a portion of excess cash is owed back to the customer.  Conditional and unconditional purchase obligations represent future payments for inventory, advertising rights and various other products and services purchase commitments.

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. 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.

Guarantees include transactions in connection with the sale of equipment to various customers.  Under these transactions, 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 $1.1 million as of May 2, 2015 and April 26, 2014 . In accordance with the provisions of ASC 460, Guarantees , there is no guarantee liability in accrued expenses that must be recognized, in connection with these arrangements.
 
As of May 2, 2015 , our contractual obligations were as follows (in thousands):
Contractual Obligations
 
Total
 
Less than 1 year
 
1-3 Years
 
4-5 Years
 
After 5 Years
Cash commitments:
 
 
 
 
 
 
 
 
 
 
Long-term obligations and accrued interest
 
$
2,391

 
$
555

 
$
1,263

 
$
573

 
$

Operating leases
 
4,245

 
2,490

 
1,649

 
106

 

Unconditional purchase obligations
 
2,758

 
1,773

 
985

 

 

Conditional purchase obligations
 
700

 
200

 
400

 
100

 

Unrecognized tax benefits
 
2,891

 
157

 
2,734

 

 

Total
 
$
12,985

 
$
5,175

 
$
7,031

 
$
779

 
$

Other commercial commitments:
 
 

 
 

 
 

 
 

 
 

Standby letters of credit
 
$
13,615

 
$
10,930

 
$
1,155

 
$
1,530

 
$

Lines of credit interest
 
$
62

 
$
62

 
$

 
$

 
$

Surety bonds
 
$
42,720

 
$
38,052

 
$
4,668

 
$

 
$

Guarantees
 
$
1,100

 
$
1,100

 
$

 
$

 
$


INFLATION

We believe inflation has not had a material effect on our operations or our financial condition, although it could in the future.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Rates

Through May 2, 2015 , most of our net sales were denominated in U.S. dollars, and our exposure to foreign currency exchange rate changes on net sales has not been significant. For the fiscal year 2015 , net sales originating outside the United States were 20 percent of total net sales, of which a portion was denominated in Canadian dollars, Euros, Chinese renminbi, British pounds, Australian dollars, Brazilian reais or other currencies.  We manufacture our products in the United States, China, Belgium, and Ireland. Our results of operations could be affected by factors such as changes in foreign currency rates or weak economic conditions in foreign markets. If we believed currency risk in any foreign location is significant, we would utilize foreign exchange hedging contracts to manage our exposure to the currency fluctuations.  

Over the long term, net sales to international markets are expected to increase as a percentage of net sales and, consequently, a greater portion of our business could be denominated in foreign currencies.  In addition, we may fund our foreign subsidiaries’ operating cash needs in the form of loans denominated in U.S. dollars.  As a result, operating results may become subject to fluctuations based upon changes in the exchange rates of certain currencies in relation to the United States dollar.  To the extent we engage in international sales denominated in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets.  This effect is also impacted by the sources of raw materials from international sources.  We estimate that a 10 percent change in all foreign exchange rates would impact our reported income before taxes by approximately $2.0 million .

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Table of contents


This sensitivity analysis disregards the possibilities that rates can move in opposite directions and that losses from one geographic area may be offset by gains from another geographic area. We will continue to monitor and minimize our exposure to currency fluctuations and, when appropriate, use financial hedging techniques, including foreign currency forward contracts and options, to minimize the effect of these fluctuations.  However, exchange rate fluctuations as well as differing economic conditions, changes in political climates, differing tax structures and other rules and regulations could adversely affect our ability to effectively hedge exchange rate fluctuations in the future.

We have foreign currency forward agreements in place to offset changes in the value of intercompany receivables from certain foreign subsidiaries due to changes in foreign exchange rates. The notional amount of these derivatives is $14.7 million , and all contracts mature within 10 months. These contracts are marked to market each balance sheet date and are not designated as hedges. See " Note 16. Derivative Financial Instruments " of the Notes to our Consolidated Financial Statements included in this Form 10-K for further details.

Interest Rate Risks

Our exposure to market rate risk for changes in interest rates relates primarily to our marketing obligations and long-term accounts receivable.  As of May 2, 2015 , our outstanding marketing obligations were $0.7 million , all of which were in fixed rate obligations.

In connection with the sale of certain display systems, we have entered into various types of financing with customers.  The aggregate amounts due from customers include an imputed interest element.  The majority of these financings carry fixed rates of interest.  As of May 2, 2015 , our outstanding long-term receivables were $9.9 million .  Each 25 basis point increase in interest rates would have an associated annual opportunity benefit of $38 thousand .

The following table provides maturities and weighted average interest rates on our financial instruments sensitive to changes in interest rates.
 
Fiscal Years (dollars in thousands)
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
Assets:
 
 
 
 
 
 
 
 
 
 
 
Long-term receivables, including current maturities:
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate
$
3,785

 
$
2,209

 
$
1,674

 
$
1,113

 
$
435

 
$
658

Average interest rate
8.7
%
 
8.6
%
 
8.5
%
 
8.5
%
 
9.0
%
 
9.0
%
Liabilities:
 

 
 

 
 

 
 

 
 

 
 

Long- and short-term debt:
 

 
 

 
 

 
 

 
 

 
 

Variable-rate
$
389

 
$
607

 
$
409

 
$
427

 
$

 
$

Average interest rate
4.5
%
 
4.5
%
 
4.5
%
 
4.5
%
 
%
 
%
Long-term marketing obligations, including current portion:
 

 
 

 
 

 
 

 
 

 
 

Fixed-rate
$
344

 
$
141

 
$
107

 
$
91

 
$
55

 
$

Average interest rate
8.7
%
 
8.8
%
 
8.9
%
 
9.0
%
 
9.0
%
 
%

Of our $57.3 million in cash balances at May 2, 2015 , $49.9 million were denominated in United States dollars.  Cash balances in foreign currencies are operating balances maintained in accounts of our foreign subsidiaries.  A portion of the cash held in foreign accounts is used to collateralize outstanding bank guarantees issued by the foreign subsidiaries.


29

Table of contents


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Daktronics Inc.

We have audited the accompanying consolidated balance sheets of Daktronics Inc. and subsidiaries (the Company) as of May 2, 2015 and April 26, 2014 , and the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended May 2, 2015 . Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Daktronics Inc. and subsidiaries at May 2, 2015 and April 26, 2014 , and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 2, 2015 , in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Daktronics Inc.’s internal control over financial reporting as of May 2, 2015 , based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated June 22, 2015 , expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 22, 2015



30



DAKTRONICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
 
May 2,
2015
 
April 26,
2014
ASSETS
 
 
 
 
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
57,284

 
$
45,054

Restricted cash
 
496

 
514

Marketable securities
 
25,346

 
25,398

Accounts receivable, net
 
80,857

 
82,500

Inventories, net
 
64,389

 
62,228

Costs and estimated earnings in excess of billings
 
35,068

 
33,400

Current maturities of long-term receivables
 
3,784

 
5,235

Prepaid expenses and other assets
 
7,688

 
6,758

Deferred income taxes
 
10,640

 
10,694

Income tax receivables
 
5,543

 
2,459

Total current assets
 
291,095

 
274,240

 
 
 
 
 
Property and equipment, net
 
72,844

 
65,270

Long-term receivables, less current maturities
 
6,090

 
7,877

Goodwill
 
5,269

 
4,558

Intangibles, net
 
1,824

 
2,680

Investment in affiliates and other assets
 
1,655

 
826

Deferred income taxes
 
702

 
2,000

TOTAL ASSETS
 
$
379,479

 
$
357,451

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 

 
 

CURRENT LIABILITIES:
 
 
 
 
Accounts payable
 
$
52,747

 
$
45,913

Accrued expenses
 
26,063

 
23,462

Warranty obligations
 
11,838

 
14,476

Billings in excess of costs and estimated earnings
 
23,797

 
22,483

Customer deposits (billed or collected)
 
16,828

 
17,654

Deferred revenue (billed or collected)
 
9,524

 
7,722

Current portion of other long-term obligations
 
587

 
809

Income taxes payable
 
636

 
1,162

Deferred income taxes
 

 
27

Total current liabilities
 
142,020

 
133,708

 
 
 
 
 
Long-term warranty obligations
 
14,643

 
12,774

Long-term deferred revenue (billed or collected)
 
3,914

 
4,978

Other long-term obligations, less current maturities
 
3,190

 
2,871

Long-term income tax payable
 
2,734

 

Deferred income taxes
 
939

 
1

Total long-term liabilities
 
25,420

 
20,624

 
 
 
 
 
SHAREHOLDERS' EQUITY:
 
 

 
 

Common Stock, no par value, authorized 120,000,000 shares; 43,643,801 and 43,166,731 shares issued at May 2, 2015 and April 26, 2014, respectively
 
48,960

 
43,935

Additional paid-in capital
 
32,693

 
29,923

Retained earnings
 
132,771

 
129,266

Treasury Stock, at cost, 19,680 shares
 
(9
)
 
(9
)
Accumulated other comprehensive (loss) income
 
(2,376
)
 
4

TOTAL SHAREHOLDERS' EQUITY
 
212,039

 
203,119

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
379,479

 
$
357,451

 
 
 
 
 
See notes to consolidated financial statements.
 
 

 
 



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Table of contents


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

 
Year Ended
 
May 2,
2015
 
April 26,
2014
 
April 27,
2013
Net sales
$
615,942

 
$
551,970

 
$
518,322

Cost of goods sold
471,363

 
410,260

 
384,428

Gross profit
144,579

 
141,710

 
133,894

 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

Selling expense
57,963

 
53,794

 
52,759

General and administrative
30,679

 
27,984

 
27,404

Product design and development
24,652

 
23,375

 
23,131

 
113,294

 
105,153

 
103,294

Operating income
31,285

 
36,557

 
30,600

 
 
 
 
 
 
Nonoperating income (expense):
 

 
 

 
 

Interest income
1,119

 
1,294

 
1,523

Interest expense
(223
)
 
(255
)
 
(355
)
Other (expense) income, net
(498
)
 
(355
)
 
(839
)
 
 
 
 
 
 
Income before income taxes
31,683

 
37,241

 
30,929

Income tax expense
10,801

 
15,035

 
8,150

Net income
$
20,882

 
$
22,206

 
$
22,779

 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 

Basic
43,514

 
42,886

 
42,280

Diluted
44,443

 
43,762

 
42,621

 
 
 
 
 
 
Earnings per share:
 

 
 

 
 

Basic
$
0.48

 
$
0.52

 
$
0.54

Diluted
$
0.47

 
$
0.51

 
$
0.53

 
 
 
 
 
 
Cash dividends declared per share
$
0.40

 
$
0.39

 
$
0.73

 
 
 
 
 
 
See notes to consolidated financial statements.
 
 
 

 
 



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Table of contents


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

 
 
Year Ended
 
 
May 2,
2015
 
April 26,
2014
 
April 27,
2013
 
 
 
 
 
 
 
Net income
 
$
20,882

 
$
22,206

 
$
22,779

 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
Cumulative translation adjustments
 
(2,358
)
 
147

 
(102
)
Unrealized loss on available-for-sale securities, net of tax
 
(22
)
 
(25
)
 
(49
)
Total other comprehensive (loss) income, net of tax
 
(2,380
)
 
122

 
(151
)
Comprehensive income
 
$
18,502

 
$
22,328

 
$
22,628

 
 
 
 
 
 
 
See notes to consolidated financial statements.
 
 
 
 
 
 


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Table of contents


DAKTRONICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance as of April 28, 2012:
$
34,631

 
$
24,320

 
$
131,830

 
$
(9
)
 
$
33

 
$
190,805

Net income

 

 
22,779

 

 

 
22,779

Cumulative translation adjustments

 

 

 

 
(102
)
 
(102
)
Unrealized loss on available-for-sale securities, net of tax

 

 

 

 
(49
)
 
(49
)
Share-based compensation

 
3,037

 

 

 

 
3,037

Exercise of stock options
1,316

 
(163
)
 

 

 

 
1,153

Employee savings plan activity
1,482

 

 

 

 

 
1,482

Dividends paid

 

 
(30,859
)
 

 

 
(30,859
)
Balance as of April 27, 2013:
37,429

 
27,194

 
123,750

 
(9
)
 
(118
)
 
188,246

Net income

 

 
22,206

 

 

 
22,206

Cumulative translation adjustments

 

 

 

 
147