Daktronics, Inc.
DAKTRONICS INC /SD/ (Form: 10-Q, Received: 03/04/2016 16:01:33)

 
 
 
 
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 30, 2016

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From   to   .
 
Commission File Number: 0-23246


Daktronics, Inc.
(Exact name of Registrant as specified in its charter)
South Dakota
(State or other jurisdiction of incorporation or organization)
 
46-0306862
(I.R.S. Employer Identification Number)
201 Daktronics Drive
Brookings SD
 
 
57006
(Address of principal executive offices)
 
(Zip Code)
(605) 692-0200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x   No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
Yes  x   No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o  (Do not check if a smaller reporting company.)
Smaller reporting company
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x   
 
The number of shares of the registrant’s common stock outstanding as of February 29, 2016 was 43,978,169 .
 
 
 
 
 




DAKTRONICS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended January 30, 2016

Table of Contents

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







Table of contents


P ART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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

 
 
January 30,
2016
 
May 2,
2015
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
31,677

 
$
57,284

Restricted cash
 
194

 
496

Marketable securities
 
24,471

 
25,346

Accounts receivable, net
 
73,430

 
80,857

Inventories, net
 
68,713

 
64,389

Costs and estimated earnings in excess of billings
 
30,815

 
35,068

Current maturities of long-term receivables
 
3,703

 
3,784

Prepaid expenses and other assets
 
5,812

 
6,663

Deferred income taxes
 
10,569

 
10,640

Income tax receivables
 
10,419

 
5,543

Total current assets
 
259,803

 
290,070

 
 
 
 
 
Long-term receivables, less current maturities
 
5,023

 
6,090

Goodwill
 
5,316

 
5,269

Intangibles, net
 
1,681

 
1,824

Investment in affiliates and other assets
 
2,186

 
2,680

Deferred income taxes
 
751

 
702

 
 
14,957

 
16,565

PROPERTY AND EQUIPMENT:
 
 

 
 

Land
 
2,138

 
2,147

Buildings
 
65,155

 
64,186

Machinery and equipment
 
86,104

 
80,664

Office furniture and equipment
 
15,840

 
15,823

Computer software and hardware
 
53,784

 
51,083

Equipment held for rental
 
803

 
803

Demonstration equipment
 
7,502

 
7,299

Transportation equipment
 
6,483

 
6,012

 
 
237,809

 
228,017

Less accumulated depreciation
 
164,431

 
155,173

 
 
73,378

 
72,844

TOTAL ASSETS
 
$
348,138

 
$
379,479

 
 
 
 
 
See notes to consolidated financial statements.
 
 

 
 


1

Table of contents


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

 
 
January 30,
2016
 
May 2,
2015
 
 
(unaudited)
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 

Accounts payable
 
$
37,903

 
$
52,747

Accrued expenses
 
23,967

 
26,063

Warranty obligations
 
14,171

 
11,838

Billings in excess of costs and estimated earnings
 
13,120

 
23,797

Customer deposits (billed or collected)
 
15,645

 
16,828

Deferred revenue (billed or collected)
 
10,145

 
9,524

Current portion of other long-term obligations
 
469

 
587

Income taxes payable
 
84

 
636

Total current liabilities
 
115,504

 
142,020

 
 
 
 
 
Long-term warranty obligations
 
14,929

 
14,643

Long-term deferred revenue (billed or collected)
 
4,464

 
3,914

Other long-term obligations, less current maturities
 
2,443

 
3,190

Long-term income tax payable
 
2,986

 
2,734

Deferred income taxes
 
1,841

 
939

Total long-term liabilities
 
26,663

 
25,420

TOTAL LIABILITIES
 
142,167

 
167,440

 
 
 
 
 
SHAREHOLDERS' EQUITY:
 
 

 
 

Common Stock, no par value, authorized 120,000,000 shares; 43,998,635 and 43,643,801 shares issued and outstanding at January 30, 2016 and May 2, 2015, respectively
 
50,498

 
48,960

Additional paid-in capital
 
34,637

 
32,693

Retained earnings
 
124,604

 
132,771

Treasury Stock, at cost, 19,680 shares
 
(9
)
 
(9
)
Accumulated other comprehensive loss
 
(3,759
)
 
(2,376
)
TOTAL SHAREHOLDERS' EQUITY
 
205,971

 
212,039

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
348,138

 
$
379,479

 
 
 
 
 
See notes to consolidated financial statements.
 
 

 
 
















2

Table of contents


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

 
Three Months Ended
 
Nine Months Ended
 
January 30,
2016
 
January 31,
2015
 
January 30,
2016
 
January 31,
2015
Net sales
$
123,816

 
$
118,123

 
$
431,705

 
$
457,856

Cost of goods sold
101,787

 
93,061

 
338,662

 
348,514

Gross profit
22,029

 
25,062

 
93,043

 
109,342

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

Selling expense
13,784

 
13,694

 
42,873

 
43,405

General and administrative
7,908

 
7,133

 
24,194

 
22,890

Product design and development
5,883

 
5,820

 
19,826

 
18,773

 
27,575

 
26,647

 
86,893

 
85,068

Operating (loss) income
(5,546
)
 
(1,585
)
 
6,150

 
24,274

 
 
 
 
 
 
 
 
Nonoperating income (expense):
 

 
 

 
 

 
 

Interest income
230

 
250

 
794

 
825

Interest expense
(113
)
 
(59
)
 
(203
)
 
(183
)
Other income (expense), net
7

 
179

 
(667
)
 
(218
)
 
 
 
 
 
 
 
 
(Loss) income before income taxes
(5,422
)
 
(1,215
)
 
6,074

 
24,698

Income tax (benefit) expense
(3,469
)
 
(1,776
)
 
1,083

 
7,655

Net (loss) income
$
(1,953
)
 
$
561

 
$
4,991

 
$
17,043

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
44,021

 
43,612

 
43,933

 
43,435

Diluted
44,021

 
43,991

 
44,357

 
44,204

 
 
 
 
 
 
 
 
(Loss) Earnings per share:
 

 
 

 
 

 
 

Basic
$
(0.04
)
 
$
0.01

 
$
0.11

 
$
0.39

Diluted
$
(0.04
)
 
$
0.01

 
$
0.11

 
$
0.39

 
 
 
 
 
 
 
 
Cash dividend declared per share
$
0.10

 
$
0.10

 
$
0.30

 
$
0.30

 
 
 
 
 
 
 
 
See notes to consolidated financial statements.
 
 
 

 
 

 
 


3

Table of contents


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

 
 
Three Months Ended
 
Nine Months Ended
 
 
January 30, 2016
 
January 31,
2015
 
January 30,
2016
 
January 31,
2015
 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(1,953
)
 
$
561

 
$
4,991

 
$
17,043

 
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
 
Cumulative translation adjustments
 
(628
)
 
(1,386
)
 
(1,388
)
 
(2,501
)
Unrealized income (loss) on available-for-sale securities, net of tax
 
8

 
8

 
5

 
(3
)
Total other comprehensive loss, net of tax
 
(620
)
 
(1,378
)
 
(1,383
)
 
(2,504
)
Comprehensive (loss) income
 
$
(2,573
)
 
$
(817
)
 
$
3,608

 
$
14,539

 
 
 
 
 
 
 
 
 
See notes to consolidated financial statements.
 
 
 
 
 
 
 
 


4

Table of contents


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

 
Nine Months Ended
 
January 30,
2016
 
January 31,
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
4,991

 
$
17,043

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

 
 

Depreciation
12,381

 
11,056

Amortization
104

 
169

Amortization of premium/discount on marketable securities
77

 
132

Gain on sale of property, equipment and other assets
(50
)
 
(1,192
)
Share-based compensation
2,244

 
2,341

Gain on sale of equity investee
(119
)
 

Excess tax benefits from share-based compensation
(4
)
 
(35
)
Provision for doubtful accounts
(110
)
 
(295
)
Deferred income taxes, net
860

 
353

Change in operating assets and liabilities
(18,181
)
 
(2,255
)
Net cash provided by operating activities
2,193

 
27,317

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchases of property and equipment
(13,389
)
 
(15,328
)
Proceeds from sale of property, equipment and other assets
111

 
4,011

Purchases of marketable securities
(18,273
)
 
(10,647
)
Proceeds from sales or maturities of marketable securities
19,069

 
10,256

Acquisitions, net of cash acquired
(2,183
)
 
(6,223
)
Proceeds from sale of equity method investment
377

 

Net cash used in investing activities
(14,288
)
 
(17,931
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Payments on notes payable
(33
)
 
(42
)
Proceeds from exercise of stock options
610

 
2,424

Excess tax benefits from share-based compensation
4

 
35

Principal payments on long-term obligations
(15
)
 
(1,185
)
Dividends paid
(13,158
)
 
(13,016
)
Net cash used in financing activities
(12,592
)
 
(11,784
)
 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(920
)
 
(905
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(25,607
)
 
(3,303
)
 
 
 
 
CASH AND CASH EQUIVALENTS:
 

 
 

Beginning of period
57,284

 
45,054

End of period
$
31,677

 
$
41,751

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash payments for:
 

 
 

Interest
$
283

 
$
256

Income taxes, net of refunds
5,466

 
9,961

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 

 
 

Demonstration equipment transferred to inventory
220

 
69

Purchase of property and equipment included in accounts payable
280

 
1,025

Contributions of common stock under the employee stock purchase plan
927

 
1,737

 
 
 
 
See notes to consolidated financial statements.
 

 
 


5

Table of contents


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

Note 1. Basis of Presentation and Summary of Critical Accounting Policies

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present our financial position, results of operations and cash flows for the periods presented.  The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions affecting the reported amounts therein.  Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.  The balance sheet at May 2, 2015 has been derived from the audited financial statements at that date, but it does not include all of the information and footnotes required by GAAP for complete financial statements.   These financial statements should be read in conjunction with our financial statements and notes thereto for the year ended May 2, 2015 , which are contained in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission.  The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

Daktronics, Inc. operates on a 52 to 53 week fiscal year, with our fiscal year ending on the Saturday closest to April 30 of each year. When April 30 falls on a Wednesday, the fiscal year ends on the preceding Saturday. Within each fiscal year, each quarter is comprised of 13 week periods following the beginning of each fiscal year. In each 53 week year, an additional week is added to the first quarter and each of the last three quarters is comprised of a 13 week period. Fiscal 2015 was a 53-week year; therefore, the nine months ended January 30, 2016 contained operating results for 39 weeks while the nine months ended January 31, 2015 contained operating results for 40 weeks.

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

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) , which provides new guidance related to accounting for leases and supercedes existing U.S. GAAP on lease accounting. The main difference between the existing guidance on accounting for leases and the new standard is that operating leases will not be recorded in the statement of financial position as assets and liabilities. The new guidance is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the effect that adopting this new accounting guidance will have on our consolidated results of operations, cash flows, and financial position.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities , which affects accounting for equity investments and financial liabilities where the fair value option has been elected. The new guidance is effective for interim and annual periods beginning after December 15, 2017, which early adoption permitted. We are currently evaluating the effect that adopting this new accounting guidance will have on our consolidated results of operations, cash flows, and financial position.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes , which simplifies the presentation of deferred income taxes. Under the new accounting standard, deferred tax assets and liabilities are required to be classified as noncurrent, eliminating the prior requirement to separate deferred tax assets and liabilities into current and noncurrent. The new guidance is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. The standard may be adopted prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We are currently evaluating the effect that adopting ASU 2015-17 will have on our consolidated results of operations, cash flows, and financial position.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory , which changes the measurement principle of inventory from the lower of cost or market to the lower of cost and net realizable value. The guidance will require prospective application at the beginning of our first quarter of fiscal 2018, but it permits adoption in an earlier period. We have evaluated the effect of adopting ASU 2015-11 and will adopt the standard at the beginning of fiscal year 2017. There will be no material impact to our consolidated results of operations, cash flows, and financial position.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which was issued as a new topic, Accounting Standards Codification ("ASC") 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer

6



of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard will also result in enhanced disclosures about revenue, providing guidance for transactions that were not previously addressed comprehensively and improving guidance for multiple-element arrangements. The FASB recently announced plans to defer the effective adoption date for one year. ASU 2014-09 is effective for us beginning in fiscal 2019 and can be adopted by the Company either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the effect that adopting ASU 2014-09 will have on our consolidated results of operations, cash flows, and financial position.

Note 2. Earnings Per Share ("EPS")

Basic EPS is computed by dividing income attributable to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution which may occur if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock which share in our earnings.

The following is a reconciliation of the income and common share amounts used in the calculation of basic and diluted EPS for the three and nine months ended January 30, 2016  and January 31, 2015
 
Net income (loss)
 
Shares
 
Per share income (loss)
For the three months ended January 30, 2016
 
 
 
 
 
Basic (loss) earnings per share
$
(1,953
)
 
44,021

 
$
(0.04
)
    Dilution associated with stock compensation plans

 

 

Diluted (loss) earnings per share
$
(1,953
)
 
44,021

 
$
(0.04
)
For the three months ended January 31, 2015
 
 
 
 
 
Basic earnings per share
$
561

 
43,612

 
$
0.01

    Dilution associated with stock compensation plans

 
379

 

Diluted earnings per share
$
561

 
43,991

 
$
0.01

For the nine months ended January 30, 2016
 
 
 
 
 
Basic earnings per share
$
4,991

 
43,933

 
$
0.11

    Dilution associated with stock compensation plans

 
424

 

Diluted earnings per share
$
4,991

 
44,357

 
$
0.11

For the nine months ended January 31, 2015
 
 
 
 
 
Basic earnings per share
$
17,043

 
43,435

 
$
0.39

    Dilution associated with stock compensation plans

 
769

 

Diluted earnings per share
$
17,043

 
44,204

 
$
0.39

 
Options outstanding to purchase 2,166 shares of common stock with a weighted average exercise price of $14.63 for the three months ended January 30, 2016  and 1,457 shares of common stock with a weighted average exercise price of $18.39 for the three months ended January 31, 2015 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive and because of the loss recorded for the 2016 period.

Options outstanding to purchase 2,180 shares of common stock with a weighted average exercise price of $15.01 for the nine months ended January 30, 2016  and 1,479 shares of common stock with a weighted average exercise price of $18.38 for the nine months ended January 31, 2015 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

Note 3. Segment Disclosure

We have organized our business into five segments which meet the definition of reportable segments under ASC 280-10, Segment Reporting : Commercial, Live Events, High School Park and Recreation, Transportation, and International. These segments are based on the type of customer or geography and are the same as our business units.
 
Our Commercial business unit primarily consists of sales of our video display systems, digital billboards, and Galaxy ® and Fuelight product lines to resellers (primarily sign companies), out-of-home ("OOH") companies, national retailers, quick-serve restaurants, casinos and petroleum retailers.  Our Live Events business unit primarily consists of sales of integrated scoring and video display systems to college and professional sports facilities and convention centers and sales of our mobile display technology to video rental organizations and other live events type venues.  Our High School Park and Recreation business unit primarily consists of sales of scoring systems, Galaxy ® displays and video display systems to primary and secondary education facilities.  Our Transportation business unit primarily consists of sales of our Vanguard ® and Galaxy ® product lines to governmental transportation departments, airlines and other transportation related customers.  Our International business unit consists of sales of all product lines outside the United States and Canada. We focus

7



on product lines that relate to integrated scoring and video display systems for sports and commercial applications, out-of-home advertising products, and European transportation related products.

Segment reports present results through contribution margin, which is comprised of gross profit less selling costs. Segment profit excludes general and administration expense, product development expense, interest income and expense, non-operating income and income tax expense.  Assets are not allocated to the segments.  Depreciation and amortization are allocated to each segment based on various financial measures; however, some depreciation and amortization are corporate in nature and remain unallocated.  In general, our segments follow the same accounting policies as those described in Note 1 of our Annual Report on Form 10-K for the fiscal year ended May 2, 2015 .  Unabsorbed costs of domestic field sales and services infrastructure, including most field administrative staff, are allocated to the Commercial, Live Events, Transportation, and High School Park and Recreation business units based on cost of sales.  Shared manufacturing, buildings and utilities, and procurement costs are allocated based on payroll dollars, square footage and various other financial measures.

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

The following table sets forth certain financial information for each of our five operating segments for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
January 30,
2016
 
January 31,
2015
 
January 30,
2016
 
January 31,
2015
Net sales:
 
 
 
 
 
 
 
    Commercial
$
29,385

 
$
37,762

 
$
112,661

 
$
121,472

    Live Events
51,067

 
33,496

 
149,750

 
171,811

    High School Park and Recreation
10,940

 
10,771

 
54,152

 
55,125

    Transportation
11,698

 
9,479

 
38,759

 
34,807

    International
20,726

 
26,615

 
76,383

 
74,641

 
123,816

 
118,123

 
431,705

 
457,856

 
 
 
 
 
 
 
 
Contribution margin:
 
 
 
 
 
 
 
    Commercial
696

 
5,702

 
10,802

 
21,822

    Live Events
4,046

 
2,072

 
17,031

 
20,629

    High School Park and Recreation
143

 
27

 
7,703

 
9,616

    Transportation
2,694

 
1,317

 
9,057

 
7,027

    International
666

 
2,250

 
5,577

 
6,843

 
8,245

 
11,368

 
50,170

 
65,937

 
 
 
 
 
 
 
 
Non-allocated operating expenses:
 
 
 
 
 
 
 
    General and administrative
7,908

 
7,133

 
24,194

 
22,890

    Product design and development
5,883

 
5,820

 
19,826

 
18,773

Operating (loss) income
(5,546
)
 
(1,585
)
 
6,150

 
24,274

 
 
 
 
 
 
 
 
Nonoperating (expense) income:
 
 
 
 
 
 
 
    Interest income
230

 
250

 
794

 
825

    Interest expense
(113
)
 
(59
)
 
(203
)
 
(183
)
Other income (expense), net
7

 
179

 
(667
)
 
(218
)
 
 
 
 
 
 
 
 
(Loss) income before income taxes
(5,422
)
 
(1,215
)
 
6,074

 
24,698

Income tax (benefit) expense
(3,469
)
 
(1,776
)
 
1,083

 
7,655

Net (loss) income
$
(1,953
)
 
$
561

 
$
4,991

 
$
17,043

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
    Commercial
$
1,208

 
$
1,205

 
$
3,599

 
$
3,630

    Live Events
1,258

 
1,145

 
3,676

 
3,460

    High School Park and Recreation
436

 
460

 
1,294

 
1,381

    Transportation
344

 
297

 
1,012

 
840

    International
310

 
254

 
908

 
809

    Unallocated corporate depreciation
673

 
363

 
1,996

 
1,105

 
$
4,229

 
$
3,724

 
$
12,485

 
$
11,225

 

8



No single geographic area comprises a material amount of our net sales or property and equipment, net of accumulated depreciation, other than the United States.  The following table presents information about net sales and property and equipment, net of accumulated depreciation, in the United States and elsewhere:
 
Three Months Ended
 
Nine Months Ended
 
January 30,
2016
 
January 31,
2015
 
January 30,
2016
 
January 31,
2015
Net sales:
 
 
 
 
 
 
 
United States
$
101,200

 
$
90,127

 
$
347,278

 
$
370,168

Outside U.S.
22,616

 
27,996

 
84,427

 
87,688

 
$
123,816

 
$
118,123

 
$
431,705

 
$
457,856

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 30,
2016
 
May 2,
2015
 
 
 
 
Property and equipment, net of accumulated depreciation:
 
 
 
 
 
 


United States
$
68,640

 
$
67,882

 
 
 


Outside U.S.
4,738

 
4,962

 
 
 
 
 
$
73,378

 
$
72,844

 
 
 


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

Note 4. Marketable Securities

We have a cash management program which provides for the investment of cash balances not used in current operations.  We classify our investments in marketable securities as available-for-sale in accordance with the provisions of ASC 320, Investments – Debt and Equity Securities.   Marketable securities classified as available-for-sale are reported at fair value with unrealized gains or losses, net of tax, reported in accumulated other comprehensive loss .  As it relates to fixed income marketable securities, we do not intend to sell any of these investments, and it is not likely we will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of January 30, 2016 , we anticipate we will recover the entire amortized cost basis of such fixed income securities, and we have determined no other-than-temporary impairments associated with credit losses were required to be recognized. The cost of securities sold is based on the specific identification method. Where quoted market prices are not available, we use the market price of similar types of securities traded in the market to estimate fair value.  

As of January 30, 2016  and May 2, 2015 , our available-for-sale securities consisted of the following:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Balance as of January 30, 2016
 
 
 
 
 
 
 
Certificates of deposit
$
15,420

 
$

 
$

 
$
15,420

U.S. Government sponsored entities
6,574

 

 
(5
)
 
6,569

Municipal obligations
2,480

 
2

 

 
2,482

 
$
24,474

 
$
2

 
$
(5
)
 
$
24,471

Balance as of May 2, 2015
 

 
 

 
 

 
 

Certificates of deposit
$
11,409

 
$

 
$

 
$
11,409

U.S. Government securities
1,000

 
1

 

 
1,001

U.S. Government sponsored entities
7,951

 

 
(9
)
 
7,942

Municipal obligations
4,989

 
5

 

 
4,994

 
$
25,349

 
$
6

 
$
(9
)
 
$
25,346


Realized gains or losses on investments are recorded in our consolidated statements of operations as other income (expense), net. Upon the sale of a security classified as available-for-sale, the security’s specific unrealized gain (loss) is reclassified out of " accumulated other comprehensive loss ” into earnings based on the specific identification method. In the nine months ended January 30, 2016 and January 31, 2015 , the reclassifications from accumulated other comprehensive loss to earnings were immaterial.


9



All available-for-sale securities are classified as current assets, as they are readily available to support our current operating needs. The contractual maturities of available-for-sale debt securities as of January 30, 2016  were as follows:
 
Less than 12 months
 
1-5 Years
 
Total
Certificates of deposit
$
6,564

 
$
8,856

 
$
15,420

U.S. Government sponsored agencies

 
6,569

 
6,569

Municipal obligations
1,251

 
1,231

 
2,482

 
$
7,815

 
$
16,656

 
$
24,471


Note 5. Business Combination

We acquired 100 percent ownership in Data Display, a European transportation display company, on August 11, 2014 for an undisclosed amount. The results of its operations have been included in our consolidated financial statements since the date of acquisition. We have not made pro forma disclosures because the results of its operations are not material to our consolidated financial statements.

Data Display is a European based company focused on the design and manufacture of transportation displays. This acquisition allows our organization to better service transportation customers world-wide and broaden our leadership position on a global scale. This acquisition included a manufacturing plant in Ireland to manufacture transportation displays. This acquisition was funded with cash on hand.

During the second quarter of fiscal 2015, we prepared the preliminary fair value measurements of assets acquired and liabilities assumed as of the acquisition date using independent appraisals and other analysis. A final measurement was completed during the first quarter of fiscal 2016, and the fair values of the consideration paid and contingent consideration were finalized.

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

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

$
364

$
1,463

Trademarks and Technology
480


480

Customer Relationships
84


84

Property and Equipment
1,433


1,433

Investment for Affiliates
437


437

Inventory
2,773

(149
)
2,624

Accounts Receivable
3,380

(317
)
3,063

Other Current Assets
1,869

23

1,892

Current Liabilities
3,616

79

3,695

Long-term Obligations
950


950


Note 6. Sale of Theatre Rigging Manufacturing

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

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

Note 7. Goodwill

The changes in the carrying amount of goodwill related to each reportable segment for the nine months ended January 30, 2016  were as follows: 

10


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

 
$
721

 
$
91

 
$
2,136

 
$
5,269

Acquisition, net of cash required

 

 

 
213

 
213

Foreign currency translation
(60
)
 
(4
)
 
(58
)
 
(44
)
 
(166
)
Balance as of January 30, 2016
$
2,261

 
$
717

 
$
33

 
$
2,305

 
$
5,316

 
We perform an analysis of goodwill on an annual basis. We performed our annual analysis based on the goodwill amount as of the first business day of our third quarter in fiscal 2016, which was November 1, 2015. The result of the analysis indicated no goodwill impairment existed as of that date.

Note 8. Inventories

Inventories consisted of the following: 
 
January 30,
2016
 
May 2,
2015
Raw materials
$
29,486

 
$
28,325

Work-in-process
8,480

 
7,512

Finished goods
30,747

 
28,552

 
$
68,713

 
$
64,389

 
Note 9. Receivables

Accounts receivable are reported net of an allowance for doubtful accounts of $2,206 and $2,316 at January 30, 2016 and May 2, 2015 , respectively.

In connection with certain sales transactions, we have entered into sales contracts with installment payments exceeding six months and sales-type leases.  The present value of these contracts and leases is recorded as a receivable as the revenue is recognized in accordance with U.S. GAAP, and profit is recognized to the extent the present value is in excess of cost.  We generally retain a security interest in the equipment or in the cash flow generated by the equipment until the contract is paid.  The present value of long-term contracts and lease receivables, including accrued interest and current maturities, was $8,726 and $9,874 as of January 30, 2016 and May 2, 2015 , respectively.  Contract and lease receivables bearing annual interest rates of 4.8 to 10.0 percent are due in varying annual installments through August 2024.  The face amount of long-term receivables was $9,148 as of January 30, 2016 and $10,976 as of May 2, 2015 .  Included in accounts receivable as of January 30, 2016 and May 2, 2015 was $836 and $385 , respectively, of retainage on construction-type contracts, all of which is expected to be collected within one year.

Note 10. Commitments and Contingencies

Litigation:   We are a party to legal proceedings and claims which arise during the ordinary course of business. We review our legal proceedings and claims; regulatory reviews and inspections; and other legal matters on an ongoing basis and follow appropriate accounting guidance when making accrual and disclosure decisions. We establish accruals for those contingencies when the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. We do not record an accrual when the likelihood of loss being incurred is probable, but the amount cannot be reasonably estimated, or when the loss is believed to be only reasonably possible or remote, although disclosures will be made for material matters as required by ASC 450-20, Contingencies - Loss Contingencies . Our assessment of whether a loss is reasonably possible or probable is based on our assessment and consultation with legal counsel regarding the ultimate outcome of the matter following all appeals.

As of January 30, 2016 and May 2, 2015 , we did not believe there was a reasonable probability any material loss for these various claims or legal actions, including reviews, inspections or other legal proceedings, if any, will be incurred. Accordingly, no accrual or disclosure of a potential range of loss has been made related to these matters. In the opinion of management, the ultimate liability of all unresolved legal proceedings is not expected to have a material effect on our financial position, liquidity or capital resources.

Warranties:   We offer a standard parts coverage warranty for periods varying from one to five years for most of our products.  We also offer additional types of warranties to include on-site labor, routine maintenance and event support.  In addition, the terms of warranties on some installations can vary from one to 10 years.  The specific terms and conditions of these warranties vary primarily depending on the type of the product sold.  We estimate the costs which may be incurred under the warranty obligations and record a liability in the amount of such estimated costs at the time the revenue is recognized.  Factors affecting our estimate of the cost of our warranty obligations

11



include historical experience and expectations of future conditions.  We continually assess the adequacy of our recorded accrued warranty obligations and, to the extent we experience any changes in warranty claim activity or costs associated with servicing those claims, our warranty obligations are adjusted accordingly.

During fiscal 2016, we discovered a warranty issue caused by a mechanical device failure within a module for displays primarily in our out-of-home applications built prior to fiscal 2013. The device failure causes a visual defect in the display. We are deploying preventative maintenance to sites impacted and can repair the device in our repair center. When certain site locations have exceeded an acceptable failure rate, we have refurbished the display to meet customers’ expectations under contractual obligations. We have increased our accrued warranty obligations by $5.6 million during fiscal 2016 and $1.2 million during fiscal 2015 for probable and reasonably estimable costs to remediate this issue. As of January 30, 2016, we had $3.5 million remaining in accrued warranty obligations for the estimate of probable future claims related to this issue. Because failure rates are unpredictable, the final outcome of this matter is dependent on many factors that are difficult to predict. Accordingly, it is possible that the ultimate cost to resolve this matter may increase and materially different than the amount of the current estimate and accrual.

Changes in our warranty obligation for the nine months ended January 30, 2016 consisted of the following:
 
 
 
Amount
Beginning accrued warranty obligations
 
 
$
26,481

      Warranties issued during the period
 
 
8,696

      Settlements made during the period
 
 
(13,769
)
      Changes in accrued warranty obligations for pre-existing warranties during the period, including expirations
 
 
7,692

Ending accrued warranty obligations
 
 
$
29,100

 
Performance guarantees:   We have entered into standby letters of credit and surety bonds with financial institutions relating to the guarantee of our future performance on contracts, primarily construction type contracts.  As of January 30, 2016 , we had outstanding letters of credit and surety bonds in the amount of $8,183 and $64,302 , respectively.  Performance guarantees are issued to certain customers to guarantee the operation and installation of the equipment and our ability to complete a contract.  These performance guarantees have various terms, which are generally one year.

Leases:   We lease vehicles, office space and equipment for various global sales and service locations, including manufacturing space in the United States and China. Some of these leases, including the lease for manufacturing facilities in Sioux Falls, South Dakota, include provisions for extensions or purchase.  The lease for the facilities in Sioux Falls, South Dakota can be extended for an additional three years past its current term, which ends December 31, 2016, and it contains an option to purchase the property subject to the lease from January 1, 2015 to December 31, 2016 for $8,400 , which approximates fair value.  If the lease is extended, the purchase option increases to $8,600 for the year ending December 31, 2017 and $8,800 for the year ending December 31, 2018.  Rental expense for operating leases was $2,023 and $2,048 for the nine months ended January 30, 2016 and January 31, 2015 , respectively.  

Future minimum payments under noncancelable operating leases, excluding executory costs such as management and maintenance fees, with initial or remaining terms of one year or more consisted of the following at January 30, 2016 :
Fiscal years ending
 
Amount
2016
 
$
692

2017
 
1,859

2018
 
789

2019
 
354

2020
 
196

 
 
$
3,890


Purchase commitments:   From time to time, we commit to purchase inventory, advertising, information technology maintenance and support services, and various other products and services over periods that extend beyond one year.  As of January 30, 2016 , we were obligated under the following conditional and unconditional purchase commitments, which included $600 in conditional purchase commitments:

12



Fiscal years ending
 
Amount
2016
 
$
1,276

2017
 
1,090

2018
 
295

2019
 
100

2020
 

 
 
$
2,761


Note 11. Income Taxes

We are subject to U.S. Federal income tax as well as income taxes of multiple state jurisdictions.  As a result of the completion of examinations by the Internal Revenue Service on prior years and the expiration of statutes of limitations, our fiscal years 2013, 2014, and 2015 are the remaining years open under statutes of limitations.  Certain subsidiaries are also subject to income tax in several foreign jurisdictions which have open tax years varying by jurisdiction beginning in fiscal 2005.
As of January 30, 2016 , we had $2,986 of unrecognized tax benefits which would reduce our effective tax rate if recognized.  

On December 18, 2015, the President signed into law The Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”). Under prior law, a taxpayer was not entitled to a research tax credit for qualifying amounts paid or incurred after December 31, 2014.  However, under the PATH Act, a taxpayer is now entitled to a research tax credit for qualifying amounts paid or incurred after December 31, 2014 with no expiration.  As a result of the retroactive reinstatement and permanent extension, we recognized in the third quarter of fiscal 2016 approximately $2.0 million in tax benefits for the credit.
On December 19, 2014, the President signed into law The Tax Increase Prevention Act of 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 2014 Tax Increase Prevention Act extended the research credit for one year to December 31, 2014. The extension of the research credit was retroactive and included amounts paid or incurred after December 31, 2013. As a result of the retroactive extension, we recognized in the third quarter of fiscal 2015 approximately $1.3 million in tax benefits for the credit.

Note 12. Fair Value Measurement

ASC 820, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.  It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The fair value hierarchy within ASC 820 distinguishes between the following three levels of inputs which may be utilized when measuring fair value.

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

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

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

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


13



The following table sets forth by Level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at January 30, 2016 and May 2, 2015 according to the valuation techniques we used to determine their fair values. There have been no transfers of assets or liabilities among the fair value hierarchies presented.
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Total
Balance as of January 30, 2016
 
 
 
 
 
Cash and cash equivalents
$
31,677

 
$

 
$
31,677

Restricted cash
194

 

 
194

Available-for-sale securities:
 

 
 

 
 
Certificates of deposit

 
15,420

 
15,420

U.S. Government sponsored entities

 
6,569

 
6,569

Municipal obligations

 
2,482

 
2,482

Derivatives - currency forward contracts

 
187

 
187

 
$
31,871

 
$
24,658

 
$
56,529

Balance as of May 2, 2015
 

 
 

 
 

Cash and cash equivalents
$
57,284

 
$

 
$
57,284

Restricted cash
496

 

 
496

Available-for-sale securities:
 

 
 

 
 
Certificates of deposit

 
11,409

 
11,409

U.S. Government securities
1,001

 

 
1,001

U.S. Government sponsored entities

 
7,942

 
7,942

Municipal obligations

 
4,994

 
4,994

Derivatives - currency forward contracts

 
(283
)
 
(283
)
 
$
58,781

 
$
24,062

 
$
82,843


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

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

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

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

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

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

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

Derivatives – currency forward contracts : Consists of currency forward contracts trading with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.  The fair value of these securities was measured based on a valuation from a third-party bank. See Note 13. Derivative Financial Instruments for more information regarding our derivatives.
 
The fair value measurement standard also applies to certain non-financial assets and liabilities measured at fair value on a nonrecurring basis.  For example, certain long-lived assets such as goodwill, intangible assets and property, plant and equipment are measured at fair value in connection with business combinations or when an impairment is recognized and the related assets are written down to fair

14



value.  We utilized the fair value measurement standard, using primarily Level 3 inputs, to value the assets and liabilities for the business combination involving Data Display and the determination of goodwill associated with the sale of our automated rigging systems business for theatre applications. See Note 5. Business Combination s and Note 6. Sale of Theatre Rigging Manufacturing for more information.

Note 13. Derivative Financial Instruments

We utilize derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates on those transactions denominated in currencies other than our functional currency, which is the U.S. dollar.  We enter into currency forward contracts to manage these economic risks.  We account for all derivatives on the balance sheet within accounts receivable or accounts payable measured at fair value, and changes in fair values are recognized in earnings unless specific hedge accounting criteria are met for cash flow or net investment hedges. As of January 30, 2016  and May 2, 2015 , we had not designated any of our derivative instruments as accounting hedges, and thus we recorded the changes in fair value in other income (expense), net.

The foreign currency exchange contracts in aggregated notional amounts in place to exchange U.S. Dollars at January 30, 2016  and May 2, 2015 were as follows:
 
January 30, 2016
 
May 2, 2015
 
U.S. Dollars
 
Foreign
Currency
 
U.S.
Dollars
 
Foreign
Currency
Foreign Currency Exchange Forward Contracts:
 
 
 
 
 
 
 
U.S. Dollars/Australian Dollars
4,014

 
5,696

 
1,487

 
1,918

U.S. Dollars/Japanese Yen

 

 
764

 
91,282

U.S. Dollars/Canadian Dollars
304

 
411

 
4,129

 
4,923

U.S. Dollars/British Pounds
1,799

 
1,185

 
1,679

 
1,123

U.S. Dollars/Singapore Dollars
261

 
356

 
1,176

 
1,601

U.S. Dollars/New Zealand Dollars
52

 
83

 

 

U.S. Dollars/Euros
405

 
360

 
(229
)
 
(174
)
U.S Dollars/Swiss Franc
724

 
696

 
5,662

 
5,500


As of January 30, 2016 and May 2, 2015 , there was a net asset and liability of $187 and $283 , respectively, representing the fair value of foreign currency exchange forward contracts, which were determined using Level 2 inputs from a third-party bank.

Note 14. Subsequent Events

On February 29, 2016 , our Board of Directors declared a quarterly dividend of $0.10 per share payable on March 22, 2016 to shareholders of record of our common stock on March 11, 2016 .


15


Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (including exhibits and any information incorporated by reference herein) contains both historical and forward-looking statements that involve risks, uncertainties and assumptions. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21B of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for the future.  These statements appear in a number of places in this Report and include all statements that are not historical statements of fact regarding the intent, belief or current expectations with respect to, among other things: (i.) our competition; (ii.) our financing plans; (iii.) trends affecting our financial condition or results of operations; (iv.) our growth strategy and operating strategy; (v.) the declaration and payment of dividends; (vi.) the timing and magnitude of future contracts; (vii.) parts shortages and lead times; (viii.) fluctuations in margins; (ix.) the seasonality of our business; (x.) the introduction of new products and technology; and (xi.) the timing and magnitude of any acquisitions or dispositions.  The words “may,” “would,” “could,” “should,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plans” and similar expressions and variations thereof are intended to identify forward-looking statements.  Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond our ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein, including those discussed in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended May 2, 2015 in the section entitled “Item 1A. Risk Factors” and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," and those factors discussed in detail in our other filings with the Securities and Exchange Commission.

The following discussion highlights the principal factors impacting our financial condition and further describes our results of operations.  This discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in this Report.

The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments affecting the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate our estimates, including those related to total costs on long-term construction-type contracts, costs to be incurred for product warranties and extended maintenance contracts, bad debts, excess and obsolete inventory, income taxes, share-based compensation and contingencies. Our estimates are based on historical experience and on various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates.

OVERVIEW

We design, manufacture and sell a wide range of display systems to customers throughout the world.  We focus our sales and marketing efforts on markets, geographical regions and products.  Our five business segments consist of four domestic business units and the International business unit.  The four domestic business units consist of Commercial, Live Events, High School Park and Recreation (formerly known as Schools and Theatres), and Transportation, all of which include the geographic territories of the United States and Canada. Disclosures related to our business segments are provided in Note 3. Segment Disclosure of the Notes to the Consolidated Financial Statements included elsewhere in this Report.

Our net sales and profitability historically have fluctuated due to the impact of large project orders, such as display systems for professional sports facilities, colleges and universities, and spectacular projects in the commercial area, as well as the seasonality of the sports market. Large project orders can include a number of displays, controllers, and subcontracted structure builds, each of which can occur on varied schedules according to the customer's needs. Net sales and gross profit percentages also have fluctuated due to other seasonal factors, including the impact of holidays, which primarily affects our third quarter.  Our gross margins on large custom and large standard orders tend to fluctuate more than on small standard orders.  Large product orders involving competitive bidding and substantial subcontract work for product installation generally have lower gross margins.  Although we follow the percentage of completion method of recognizing revenues for large custom orders, we nevertheless have experienced fluctuations in operating results and expect our future results of operations will be subject to similar fluctuations.

Orders are booked and included in backlog only upon receipt of an executed contract and any required deposits.  As a result, certain orders for which we have received binding letters of intent or contracts will not be booked until all required contractual documents and deposits are received.  In addition, order bookings can vary significantly on a quarterly basis as a result of the timing of large orders.


16

Table of contents


For a summary of recently issued accounting pronouncements and the effects of those pronouncements on our financial results, refer to Note 1. Basis of Presentation and Summary of Critical Accounting Policies of the Notes to the Consolidated Financial Statements included elsewhere in this Report.

GENERAL

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

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

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 funding, primarily by the federal government, along with the continuing acceptance of private/public partnerships as an alternative funding source.

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

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

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

RESULTS OF OPERATIONS

Daktronics, Inc. operates on a 52 to 53 week fiscal year, with our fiscal year ending on the Saturday closest to April 30 of each year. When April 30 falls on a Wednesday, the fiscal year ends on the preceding Saturday. Within each fiscal year, each quarter is comprised of 13 week periods following the beginning of each fiscal year. In each 53 week year, an additional week is added to the first quarter and each of the last three quarters is comprised of a 13 week period. Fiscal 2015 was a 53-week year; therefore, the nine months ended January 30, 2016 contain operating results for 39 weeks while the nine months ended January 31, 2015 contained operating results for 40 weeks.

COMPARISON OF THE THREE MONTHS ENDED JANUARY 30, 2016 AND JANUARY 31, 2015

Net Sales
 
Three Months Ended
(in thousands)
January 30,
2016
 
January 31,
2015
 
Dollar Change
 
Percent Change
Net sales:
 
 
 
 
 
 
 
    Commercial
$
29,385

 
$
37,762

 
$
(8,377
)
 
(22.2
)%
    Live Events
51,067

 
33,496

 
17,571

 
52.5

    High School Park and Recreation
10,940

 
10,771

 
169

 
1.6

    Transportation
11,698

 
9,479

 
2,219

 
23.4

    International
20,726

 
26,615

 
(5,889
)
 
(22.1
)
 
$
123,816

 
$
118,123

 
$
5,693

 
4.8
 %
Orders:
 

 
 

 
 
 
 

    Commercial
$
29,922

 
$
39,327

 
$
(9,405
)
 
(23.9
)%
    Live Events
43,075

 
46,158

 
(3,083
)
 
(6.7
)
    High School Park and Recreation
15,131

 
11,480

 
3,651

 
31.8

    Transportation
12,401

 
13,522

 
(1,121
)
 
(8.3
)
    International
16,368

 
15,226

 
1,142

 
7.5

 
$
116,897

 
$
125,713

 
$
(8,816
)
 
(7.0
)%

Commercial: The decrease in net sales for the three months ended January 30, 2016 compared to the same period one year ago was the result of a decrease of sales in our billboard niche due to volatility of order timing and general market delay in placing orders as compared to prior periods partially due to customer capital allocation decisions and due to high overall satisfaction with our product lifetime, leading to increased product replacement cycles. Sales in our spectacular niche were also down compared to last year due to the timing of projects. Sales in our on-premise account niche were down due to order timing.

The decrease in orders for the three months ended January 30, 2016 compared to the same period one year ago was the result of order timing variability and general project decision delays in our billboard and spectacular niches. Orders increased in our on-premise account niches.


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Live Events:   The increase in net sales for the three months ended January 30, 2016 compared to the same period one year ago was primarily due to production of some orders originally delayed to take advantage of newly-released product enhancements.

Orders decrease d for the three months ended January 30, 2016 compared to the same period one year ago due to order timing variability of large projects.

High School Park and Recreation: Net sales for the three months ended January 30, 2016 compared to the same period one year ago remained relatively flat.

Orders increase d for the three months ended January 30, 2016 compared to the same period one year ago due to winning a number of sports video projects.

Transportation: Net sales for the three months ended January 30, 2016 compared to the same period one year ago increase d because of a strong order backlog coming into third quarter of fiscal 2016.

Orders for the three months ended January 30, 2016 compared to the same period one year ago decrease d primarily due to the timing of orders received.

International:   Net sales for the three months ended January 30, 2016 compared to the same period one year ago decrease d due to lower volume of orders received during the second quarter of fiscal 2016.

Orders increase d for the three months ended January 30, 2016 compared to the same period one year ago was primarily due to order timing variability of large projects; a major portion of the orders were in commercial and sports video projects.
Backlog

The product order backlog as of January 30, 2016 was $176.3 million as compared to $150.2 million as of January 31, 2015 and $184.2 million at the end of the second quarter of fiscal 2016 .  Historically, our backlog varies due to the seasonality of our business, the timing of large projects, and customer delivery schedules for these orders.  The backlog as of January 30, 2016 increased from January 31, 2015 in our Live Events, High School Park and Recreation, and Transportation business units and decreased in our Commercial and International business units. As of January 30, 2016 , Live Events backlog included approximately $43 million that we expect to realize after fiscal 2016 because of the timing of new stadium builds.  

Gross Profit
 
Three Months Ended
 
January 30, 2016
 
 
 
January 31, 2015
 
 Amount
 
As a Percent of Net Sales
 
 
 
 Amount
 
As a Percent of Net Sales
(in thousands)
Commercial
$
4,235

 
14.4
%
 

 
$
9,236

 
24.5
%
Live Events
7,374

 
14.4

 

 
5,657

 
16.9

High School Park and Recreation
2,579

 
23.6

 

 
2,334

 
21.7

Transportation
3,710

 
31.7

 

 
2,326

 
24.5

International
4,131

 
19.9

 

 
5,509

 
20.7

 
$
22,029

 
17.8
%
 

 
$
25,062

 
21.2
%

The decrease in our gross profit   percentage for the three months ended January 30, 2016 compared to the same period one year ago was primarily due to an additional warranty charge in the third quarter of fiscal 2016, an increase in sales mix to larger projects with lower gross margins as compared to other quarters. The following describes the overall impact by business unit:

Commercial:   The gross profit percent decrease for the three months ended January 30, 2016 compared to the same period one year ago was primarily the result of a $2.3 million warranty charge in our OOH product application, which decreased our gross profit percentage by 7.9% during the quarter. This warranty charge relates to the costs of refurbishing displays. Gross profit also declined due to the product mix of sales, decrease in utilization of the fixed infrastructure due to lower sales, and overall competitive pressures in the marketplace.

Live Events: The gross profit percent decrease for the three months ended January 30, 2016 compared to the same period one year ago was the result of the increased mix of larger custom contracts with lower margins and increased warranty costs as a percent of sales, offset by improved manufacturing utilization because of improved throughput.


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High School Park and Recreation:   The gross profit percent increase for the three months ended January 30, 2016 as compared to the same period one year ago was primarily due to improved manufacturing utilization because of improved throughput.
 
Transportation:   The gross profit percent increase for the three months ended January 30, 2016 compared to the same period one year ago was primarily due to improved gross margins on contracts and standard orders and improved manufacturing utilization because of improved throughput.

International:   The gross profit percent decrease for the three months ended January 30, 2016 compared to the same period one year ago was primarily the result of a decrease in warranty costs as a percent of sales.

Selling Expense
 
Three Months Ended
 
January 30, 2016
 
 
 
January 31, 2015
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
(in thousands)
 
 
 
 
Commercial
$
3,539

 
12.0
%
 
0.1
 %
 
$
3,534

 
9.4
%
Live Events
3,328

 
6.5

 
(7.2
)
 
3,585

 
10.7

High School Park and Recreation
2,436

 
22.3

 
5.6

 
2,307

 
21.4

Transportation
1,015

 
8.7

 
0.5

 
1,010

 
10.7

International
3,466

 
16.7

 
6.4

 
3,258

 
12.2

 
$
13,784

 
11.1
%
 
0.7
 %
 
$
13,694

 
11.6
%
 
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 High School Park and Recreation and International business units increased in the third quarter of fiscal 2016 compared to the same quarter a year ago, which was mainly related to increases in bad debt expense, marketing expenses, and third-party commissions, partially offset by decreases in personnel expenses.

Selling expenses in our Live Events business unit decreased in the three months ended January 30, 2016 compared to the same period one year ago primarily due to lower travel and entertainment expenses and marketing expenses.

Selling expenses in our Commercial and Transportation units remained relatively flat in the three months ended January 30, 2016 compared to the same period one year ago.

Other Operating Expenses
 
Three Months Ended
 
January 30, 2016
 
 
 
January 31, 2015
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
(in thousands)
General and administrative
$
7,908

 
6.4
%
 
10.9
%
 
$
7,133

 
6.0
%
Product design and development
$
5,883

 
4.8
%
 
1.1
%
 
$
5,820

 
4.9
%

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, and the costs of supplies.

General and administrative expenses   in the third quarter of fiscal 2016 increase d as compared to the same period one year ago primarily due to increases in information technology and personnel expenses.

Product design and development expenses consist primarily of salaries, other employee-related costs, facilities cost and equipment-related costs and supplies. Product development investments in the near term are focused on developing video technology with a range of pixel pitches for outdoor applications using LED surface mount technology, which offers improved performance at a lower cost point as compared to our current offerings. In addition, we continue to focus on various other products to standardize display components and control systems for both single site and network displays.  


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Our costs for product development represent an allocated amount of costs based on time charges, materials costs and the overhead of our engineering departments.  Generally, a significant portion of our engineering time is spent on product development while the rest is allocated to large contract work and included in cost of goods sold. Product development expenses in the third quarter of fiscal 2016 as compared to the same period one year ago were relatively flat.

Other Income and Expenses  
 
Three Months Ended
 
January 30, 2016
 
 
 
January 31, 2015
 
Amount
 
As a Percent of Net Sales
 
Percent Change
 
Amount
 
As a Percent of Net Sales
(in thousands)
Interest income (expense), net
$
117

 
0.1
%
 
(38.7
)%
 
$
191

 
0.2
%
Other income (expense), net
$
7

 
%
 
(96.1
)%
 
$
179

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

Interest income (expense), net in the third quarter of fiscal 2016 compared to the same period one year ago decreased as a result of increased interest expense from an interest accrual for an on-going sales tax audit.

Other income (expense), net :   The change in other income and expense, net for the third quarter of fiscal 2016 as compared to the same period one year ago was primarily due to foreign currency gains from the volatility of the Euro, Australian dollar, and Canadian dollar.

Income Taxes