UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the Quarterly Period Ended October 31, 2009
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 S 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 o No o
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 S
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 S
The
number of shares of the registrant’s common stock outstanding as of November 23,
2009 was 41,033,713.
DAKTRONICS,
INC. AND SUBSIDIARIES
FORM
10-Q
For the
Quarter Ended October 31, 2009
TABLE
OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share data)
|
|
October
31,
|
|
|
May
2,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
(note
1)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
56,363 |
|
|
$ |
36,501 |
|
Restricted
cash
|
|
|
1,392 |
|
|
|
1,083 |
|
Accounts
receivable, less allowance for doubtful accounts
|
|
|
48,517 |
|
|
|
61,412 |
|
Inventories
|
|
|
41,946 |
|
|
|
51,400 |
|
Costs
and estimated earnings in excess of billings
|
|
|
25,525 |
|
|
|
27,541 |
|
Current
maturities of long-term receivables, less allowance for
|
|
|
|
|
|
|
|
|
doubtful
accounts
|
|
|
6,673 |
|
|
|
7,962 |
|
Prepaid
expenses and other
|
|
|
5,681 |
|
|
|
5,587 |
|
Deferred
income taxes
|
|
|
15,283 |
|
|
|
15,017 |
|
Income
tax receivable
|
|
|
324 |
|
|
|
- |
|
Property
and equipment available for sale
|
|
|
250 |
|
|
|
470 |
|
Total
current assets
|
|
|
201,954 |
|
|
|
206,973 |
|
|
|
|
|
|
|
|
|
|
Advertising
rights, net
|
|
|
1,688 |
|
|
|
2,392 |
|
Long-term
receivables, less current maturities
|
|
|
14,009 |
|
|
|
15,879 |
|
Investments
in affiliates
|
|
|
430 |
|
|
|
2,541 |
|
Goodwill
|
|
|
4,658 |
|
|
|
4,549 |
|
Intangible
and other assets
|
|
|
4,212 |
|
|
|
2,804 |
|
Deferred
income taxes
|
|
|
391 |
|
|
|
311 |
|
|
|
|
25,388 |
|
|
|
28,476 |
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT:
|
|
|
|
|
|
|
|
|
Land
|
|
|
1,204 |
|
|
|
1,204 |
|
Buildings
|
|
|
50,918 |
|
|
|
50,810 |
|
Machinery
and equipment
|
|
|
52,324 |
|
|
|
50,013 |
|
Office
furniture and equipment
|
|
|
53,266 |
|
|
|
52,369 |
|
Equipment
held for rental
|
|
|
2,695 |
|
|
|
2,423 |
|
Demonstration
equipment
|
|
|
8,780 |
|
|
|
8,021 |
|
Transportation
equipment
|
|
|
4,662 |
|
|
|
5,115 |
|
|
|
|
173,849 |
|
|
|
169,955 |
|
Less
accumulated depreciation
|
|
|
90,403 |
|
|
|
80,528 |
|
|
|
|
83,446 |
|
|
|
89,427 |
|
TOTAL
ASSETS
|
|
$ |
310,788 |
|
|
$ |
324,876 |
|
DAKTRONICS,
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
(continued)
(in
thousands, except share data)
|
|
October
31,
|
|
|
May
2,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
(note
1)
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
21,541 |
|
|
$ |
30,273 |
|
Accrued
expenses and warranty obligations
|
|
|
32,023 |
|
|
|
35,548 |
|
Current
maturities of long-term debt and marketing obligations
|
|
|
479 |
|
|
|
367 |
|
Billings
in excess of costs and estimated earnings
|
|
|
8,537 |
|
|
|
13,769 |
|
Customer
deposits
|
|
|
10,427 |
|
|
|
10,007 |
|
Deferred
revenue (billed or collected)
|
|
|
7,061 |
|
|
|
6,669 |
|
Income
taxes payable
|
|
|
422 |
|
|
|
2,935 |
|
Total
current liabilities
|
|
|
80,490 |
|
|
|
99,568 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
13 |
|
|
|
23 |
|
Long-term
marketing obligations, less current maturities
|
|
|
538 |
|
|
|
759 |
|
Long-term
warranty obligations and other payables
|
|
|
4,324 |
|
|
|
4,805 |
|
Deferred
income taxes
|
|
|
4,996 |
|
|
|
4,948 |
|
Long-term
deferred revenue (billed or collected)
|
|
|
3,348 |
|
|
|
2,862 |
|
Total
long-term liabilities
|
|
|
13,219 |
|
|
|
13,397 |
|
TOTAL
LIABILITIES
|
|
|
93,709 |
|
|
|
112,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Common
stock, no par value, authorized
|
|
|
|
|
|
|
|
|
120,000,000
shares; 40,871,382 and 40,657,552 shares
|
|
|
|
|
|
|
|
|
issued
at October 31, 2009 and May 2, 2009, respectively
|
|
|
28,943 |
|
|
|
27,872 |
|
Additional
paid-in capital
|
|
|
15,610 |
|
|
|
13,898 |
|
Retained
earnings
|
|
|
173,113 |
|
|
|
170,705 |
|
Treasury
stock, at cost, 19,680 shares
|
|
|
(9 |
) |
|
|
(9 |
) |
Accumulated
other comprehensive loss
|
|
|
(578 |
) |
|
|
(555 |
) |
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
217,079 |
|
|
|
211,911 |
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$ |
310,788 |
|
|
$ |
324,876 |
|
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(in
thousands, except per share data)
(unaudited)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
October
31,
|
|
|
November
1,
|
|
|
October
31,
|
|
|
November
1,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
115,362 |
|
|
$ |
169,697 |
|
|
$ |
228,815 |
|
|
$ |
330,926 |
|
Cost
of goods sold
|
|
|
81,800 |
|
|
|
121,486 |
|
|
|
165,183 |
|
|
|
237,367 |
|
Gross
profit
|
|
|
33,562 |
|
|
|
48,211 |
|
|
|
63,632 |
|
|
|
93,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
12,888 |
|
|
|
15,526 |
|
|
|
27,255 |
|
|
|
31,890 |
|
General
and administrative
|
|
|
5,959 |
|
|
|
7,554 |
|
|
|
12,493 |
|
|
|
15,236 |
|
Product
design and development
|
|
|
5,534 |
|
|
|
5,286 |
|
|
|
11,404 |
|
|
|
11,833 |
|
|
|
|
24,381 |
|
|
|
28,366 |
|
|
|
51,152 |
|
|
|
58,959 |
|
Operating
income
|
|
|
9,181 |
|
|
|
19,845 |
|
|
|
12,480 |
|
|
|
34,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
379 |
|
|
|
511 |
|
|
|
753 |
|
|
|
1,047 |
|
Interest
expense
|
|
|
(63 |
) |
|
|
(57 |
) |
|
|
(110 |
) |
|
|
(164 |
) |
Other
income (expense), net
|
|
|
(711 |
) |
|
|
(1,334 |
) |
|
|
(1,313 |
) |
|
|
(1,679 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
8,786 |
|
|
|
18,965 |
|
|
|
11,810 |
|
|
|
33,804 |
|
Income
tax expense
|
|
|
3,937 |
|
|
|
6,768 |
|
|
|
5,529 |
|
|
|
11,881 |
|
Net
income
|
|
$ |
4,849 |
|
|
$ |
12,197 |
|
|
$ |
6,281 |
|
|
$ |
21,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
40,831 |
|
|
|
40,478 |
|
|
|
40,795 |
|
|
|
40,440 |
|
Diluted
|
|
|
41,002 |
|
|
|
41,221 |
|
|
|
41,106 |
|
|
|
41,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.12 |
|
|
$ |
0.30 |
|
|
$ |
0.15 |
|
|
$ |
0.54 |
|
Diluted
|
|
$ |
0.12 |
|
|
$ |
0.30 |
|
|
$ |
0.15 |
|
|
$ |
0.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividend paid per share
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
0.095 |
|
|
$ |
0.090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DAKTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
|
|
Six
Months Ended
|
|
|
|
October
31,
|
|
|
November
1,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
Income
|
|
$ |
6,281 |
|
|
$ |
21,923 |
|
Adjustments
to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
|
by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
11,123 |
|
|
|
11,872 |
|
Amortization
|
|
|
157 |
|
|
|
157 |
|
Gain
on sale of property and equipment
|
|
|
(26 |
) |
|
|
(977 |
) |
Stock-based
compensation
|
|
|
1,712 |
|
|
|
1,594 |
|
Equity
in losses of affiliates
|
|
|
1,347 |
|
|
|
1,266 |
|
Provision
for doubtful accounts
|
|
|
(269 |
) |
|
|
69 |
|
Loss
on sale of equity investee
|
|
|
231 |
|
|
|
- |
|
Deferred
income taxes, net
|
|
|
(299 |
) |
|
|
(191 |
) |
Change
in operating assets and liabilities
|
|
|
9,400 |
|
|
|
(20,021 |
) |
Net
cash provided by operating activities
|
|
|
29,657 |
|
|
|
15,692 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(6,247 |
) |
|
|
(16,569 |
) |
Loans
to equity investees
|
|
|
- |
|
|
|
(500 |
) |
Purchases
of receivables from equity investee, net
|
|
|
(306 |
) |
|
|
- |
|
Proceeds
from sale of property and equipment
|
|
|
104 |
|
|
|
2,947 |
|
Proceeds
from sale of equity method investments
|
|
|
535 |
|
|
|
- |
|
Net
cash used in investing activities
|
|
|
(5,914 |
) |
|
|
(14,122 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
payments on notes payable
|
|
|
(13 |
) |
|
|
(546 |
) |
Proceeds
from exercise of stock options
|
|
|
207 |
|
|
|
578 |
|
Excess
tax benefits from stock-based compensation
|
|
|
- |
|
|
|
159 |
|
Dividend
paid
|
|
|
(3,874 |
) |
|
|
(3,635 |
) |
Net
cash used in financing activities
|
|
|
(3,680 |
) |
|
|
(3,444 |
) |
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
(201 |
) |
|
|
237 |
|
INCREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
19,862 |
|
|
|
(1,637 |
) |
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS:
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
36,501 |
|
|
|
9,325 |
|
Ending
|
|
$ |
56,363 |
|
|
$ |
7,688 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
payments for:
|
|
|
|
|
|
|
|
|
Interest:
|
|
$ |
202 |
|
|
$ |
219 |
|
Income
taxes, net of refunds
|
|
|
8,375 |
|
|
|
8,346 |
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Demonstration
equipment transferred to inventory
|
|
|
929 |
|
|
|
869 |
|
Purchase
of property and equipment included in accounts payable
|
|
|
- |
|
|
|
261 |
|
Conversion
of accounts receivable to equity interest in affiliate
|
|
|
- |
|
|
|
1,947 |
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
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DAKTRONICS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
(unaudited)
Note
1. Basis of Presentation and Summary of Critical Accounting Polices
In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments)
necessary to fairly present our financial position, results of operations and
cash flows for the periods presented. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts therein. Due to the inherent
uncertainty involved in making estimates, actual results in future periods may
differ from those estimates.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. The balance
sheet at May 2, 2009 has been derived from the audited financial statements at
that date, but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. These financial
statements should be read in conjunction with our financial statements and notes
thereto for the year ended May 2, 2009, 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.
The
consolidated financial statements include our accounts and those of our
wholly-owned subsidiaries, Daktronics France SARL; Daktronics Shanghai, Ltd.;
Daktronics GmbH; Star Circuits, Inc.; Daktronics Media Holdings, Inc.; MSC
Technologies, Inc.; Daktronics UK, Ltd.; Daktronics Hong Kong, Ltd.; Daktronics
Canada, Inc.; Daktronics Hoist, Inc.; Daktronics Beijing, Ltd; Daktronics
Australia Pty Ltd; and Daktronics FZE. Intercompany balances and
transactions have been eliminated in consolidation.
Investments
in affiliates are accounted for by the equity method. We have evaluated our
relationships with affiliates and have determined that these entities are either
not variable interest entities or, in the case of variable interest entities, we
are not the primary beneficiary and therefore they are not required to be
consolidated in our Consolidated Financial Statements. Accordingly, our
proportional share of the respective affiliate’s earnings or losses is included
in other income (expense) in our consolidated statement of income.
We have a
variable interest in OutCast Media International, Inc. (“OutCast”). The results
of the variable interest analysis we completed indicated that we are not the
primary beneficiary of this variable interest entity and, as a result, we are
not required to consolidate it. Our interest in OutCast consists of a 37% equity
interest, debt owed by OutCast in the amount of $1.6 million, and a guarantee of
debt in as described in Note 10. OutCast operates the largest pumptop display
network in the United States. Our maximum exposure to loss related to OutCast is
approximately $3.4 million.
Use of
estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
significantly from those estimates. Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of the estimated total costs on long-term construction contracts
(“construction-type contracts”), estimated costs to be incurred for product
warranties, excess and obsolete inventory, the reserve for doubtful accounts,
stock-based compensation, goodwill impairment and income taxes. Changes in
estimates are reflected in the periods in which they become known.
Reclassifications: Certain
reclassifications have been made to the fiscal year 2009 consolidated financial
statements to conform to the presentation used in the fiscal 2010 consolidated
financial statements. These reclassifications had no affect on
shareholders’ equity or net income as previously reported. We
reclassified certain maintenance agreements from deferred revenue (billed or
collected) to long-term deferred revenue (billed or collected).
Restricted
Cash: Restricted cash consists of deposits to secure bank guarantees
issued by our Chinese subsidiary.
Software
Costs: We
capitalize certain costs incurred in connection with developing or obtaining
internal-use software. Capitalized software costs are included in
Property and Equipment on our consolidated balance sheets. Software
costs that do not meet capitalization criteria are expensed
immediately.
Insurance: We
are self-insured for certain losses related to health and liability claims and
workers’ compensation, although we obtain third-party insurance to limit our
exposure to these claims. We estimate our self-insured liabilities
using a number of factors, including historical claims
experience. Our self-insurance liability was $3,046 and $2,506 at
October 31, 2009 and May 2, 2009, respectively, and is included in accrued
expenses and warranty obligations in our consolidated balance
sheets.
-6-
Foreign
currency translation:
Our foreign subsidiaries use the local currency of their respective
countries as their functional currency. The assets and liabilities of
foreign operations are generally translated at the exchange rates in effect at
the balance sheet date. The operating results of foreign operations
are translated at weighted average exchange rates. The related translation gains
or losses are reported as a separate component of shareholders’
equity.
Product
design and development: All expenses related to product design
and development are charged to operations as incurred. Our product development
activities include the enhancement of existing products and the development of
new products.
Shipping
and handling costs:
Shipping and handling costs that are collected from our customers in
connection with our sales are recorded as revenue. We record shipping
and handling costs as a component of cost of sales at the time the product
is shipped.
Receivables:
Accounts receivable are reported net of an allowance for doubtful accounts of
$1,895 and $2,164 at October 31, 2009 and May 2, 2009,
respectively.
We make
estimates regarding the collectability of our accounts receivable, long-term
receivables, costs and estimated earnings in excess of billings and other
receivables. In evaluating the adequacy of our allowance for doubtful accounts,
we analyze specific balances, customer creditworthiness, changes in customer
payment cycles, and current economic trends. If the financial condition of any
customer was to deteriorate, resulting in an impairment of its ability to make
payments, additional allowances may be required. We charge off receivables at
such time as it is determined that collection will not occur.
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 upon the
installation and acceptance of the equipment, and profit is recognized to the
extent that the present value is in excess of cost. We generally retain a
security interest in the equipment or in the cash flow generated by the
equipment until the contract is paid.
Note 2. Recently Issued Accounting
Pronouncements
In
June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Accounting Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles (codified as “ASC 105”). ASC 105 establishes the
Accounting Standards Codification (“ASC”) as the source of authoritative
accounting literature recognized by the FASB to be applied by nongovernmental
entities in addition to rules and interpretive releases of the Securities
and Exchange Commission (“SEC”), which are sources of authoritative generally
accepted accounting principles (“GAAP”) for SEC registrants. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification will become non-authoritative. ASC 105 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of the financial statements. Following this
statement, the FASB will issue new standards in the form of Accounting Standards
Updates (“ASU”). This standard became effective for financial
statements for interim and annual reporting periods ending after
September 15, 2009. We began to use the new guidelines and numbering
system prescribed by the Codification when referring to GAAP in the second
quarter of fiscal 2010. As the Codification was not intended to change or alter
existing GAAP, it did not have any impact on our consolidated financial
statements.
In
September 2006, the FASB issued ASC 820, Fair Value Measurements and
Disclosures. ASC 820 establishes a framework for measuring fair
value, clarifies the definition of fair value, and requires additional
disclosures about fair value measurements that are already required or permitted
by other accounting standards (except for measurements of share-based payments)
and is expected to increase the consistency of those measurements. ASC 820,
as issued, is effective for fiscal years beginning after November 15,
2007. In February 2008, the effective date of ASC 820 was deferred for one
year for certain nonfinancial assets and nonfinancial liabilities.
Accordingly, we adopted certain parts of ASC 820 at the beginning of fiscal year
2009, and the remaining parts of ASC 820 were adopted by us at the beginning of
fiscal year 2010. The implementation of ASC 820 did not have a material
impact on our consolidated financial statements at either date.
In
December 2007, the FASB issued ASC 805 Business Combinations. ASC
805 provides revised guidance for recognizing and measuring identifiable assets
and goodwill acquired, liabilities assumed, and any noncontrolling interest in
the acquiree. Some of the revised guidance of ASC 805 includes initial
capitalization of acquired in-process research and development, expensing
transaction and acquired restructuring costs and recording contingent
consideration payments at fair value, with subsequent adjustments recorded to
net earnings. It also provides disclosure requirements to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. We adopted ASC 805 on May 3, 2009, and any
acquisitions we make in fiscal 2010 and future periods will be subject to this
new accounting guidance.
-7-
In
December 2007, the FASB issued ASC 810, Noncontrolling Interests in
Consolidated Financial Statements. ASC 810 establishes new standards that
will govern the accounting for and reporting of noncontrolling interests in
partially owned subsidiaries. ASC 810 is effective for fiscal years beginning on
or after December 15, 2008 and requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests. All
other requirements shall be applied prospectively. We adopted ASC 810
on May 3, 2009. As of that date, we did not have any partially owned
consolidated subsidiaries and, therefore, the adoption of this accounting
standard had no effect on our consolidated financial statements.
In March
2008, the FASB issued ASC 815, Derivatives and Hedging,
which changes the disclosure requirements for derivative instruments and hedging
activities. ASC 815 requires companies to provide enhanced qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair values and amounts of gains and losses on derivative
instruments, and disclosures about contingent features related to credit risk in
derivative agreements. We adopted ASC 815 on May 3, 2009. The
adoption of ASC 815 had no effect on our consolidated financial
statements.
In April
2008, the FASB issued ASC 350, Intangibles – Goodwill and
Other. ASC 350 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. ASC 350 is effective for fiscal years beginning
after December 15, 2008. We adopted ASC 350 on May 3, 2009. The
adoption of ASC 350 had no effect on our consolidated financial
statements.
In June
2008, the FASB issued ASC Subtopic 260-10-45, Earnings Per Share – Other
Presentation Matters. ASC 260-10-45 provides that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share (“EPS”) pursuant to the
two-class method. ASC Subtopic 260-10-45 is effective for fiscal
years beginning after December 15, 2008. Upon adoption, all prior-period EPS
data is required to be adjusted retrospectively (including interim financial
statements, summaries of earnings, and selected financial data) to conform to
the provisions of ASC Subtopic 260-10-45. We adopted ASC Subtopic
260-10-45 on May 3, 2009. Because we do not have any share-based
payments that would be considered to be participating securities under these
provisions, the implementation will not have any impact on our computation of
EPS unless we issue such securities in the future.
In
November 2008, the FASB ratified ASC Subtopic 323-10-65-1, Equity Method Investment Accounting
Considerations. ASC Subtopic 323-10-65-1 applies to all investments
accounted for under the equity method and clarifies the accounting for certain
transactions and impairment considerations involving equity method investments.
We adopted ASC 323-10-65-1 on May 3, 2009. The adoption of ASC
Subtopic 323-10-65-1 did not have a material impact on our consolidated
financial statements.
In
November 2008, the FASB ratified ASC Subtopic 350-30-35-5A, Accounting for Defensive Intangible
Assets. ASC Subtopic 350-30-35-5A applies to defensive intangible assets,
which are acquired intangible assets that an entity does not intend to actively
use but does intend to prevent others from obtaining access to the asset. ASC
350-30-35-5A requires an entity to account for defensive intangible assets as a
separate unit of accounting. Defensive intangible assets should not
be included as part of the cost of an entity’s existing intangible assets
because the defensive intangible assets are separately
identifiable. Defensive intangible assets must be recognized at fair
value in accordance with ASC 805 Business Combinations and ASC
820 Fair Value Measurement and
Disclosure. ASC 350-30-35-5A is effective for intangible assets acquired
for fiscal years beginning after December 15, 2008. We adopted ASC
350-30-35-5A on May 3, 2009, and any intangible asset acquired after that date
will be subject to this new accounting guidance.
In
April 2009, the FASB issued three ASC Topics intended to provide additional
application guidance and enhanced disclosures regarding fair value measurements
and impairments of securities. ASC Subtopic 820-10-65-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, provides
additional guidelines for estimating fair value in accordance with ASC Subtopic
820-10-50, Fair Value
Measurements. ASC 320, Debt and Equity Securities,
provides additional guidance related to the disclosure of impairment losses on
securities and the accounting for impairment losses on debt securities. ASC 320
does not amend existing guidance related to other-than-temporary impairments of
equity securities. ASC Topic 825 and 270, Interim Disclosures about Fair Value
of Financial Instruments, increases the frequency of fair value
disclosures. These ASC topics and subtopics are effective for fiscal years and
interim periods ending after June 15, 2009. We adopted these ASC
topics and subtopics on May 3, 2009. The adoption of these ASC
topics and subtopics did not have a material impact on our consolidated
financial statements.
In
May 2009, the FASB issued ASC 855, Subsequent Events. ASC 855 is
intended to establish general standards of accounting for and disclosures of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, ASC 855 sets forth the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date. ASC 855 is effective for fiscal years and interim periods
ending after June 15, 2009. We adopted ASC 855 on May 3,
2009. The adoption of ASC 855 did not have a material impact on our
consolidated financial statements.
-8-
In
October 2009, the FASB issued ASC Subtopic 605-25, Revenue Recognition-Multiple-Element
Arrangements. ASC Subtopic 605-25 provides principles for
allocation of consideration among its multiple-elements, allowing more
flexibility in identifying and accounting for separate deliverables under an
arrangement. ASC Subtopic 6005-25 introduces an estimated selling
price method for allocating revenue to the elements of a bundled arrangement if
vendor-specific objective evidence or third-party evidence of selling price is
not available, and significantly expands related disclosure
requirements. This standard is effective on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. We are currently assessing the
impact of ASC Subtopic 605-25 on our consolidated financial
statements.
In August
2009, the FASB issued ASU 2009-05, which amends ASC 820, Fair Value Measurements and
Disclosures. ASU 2009-05 provides amendments for fair value
measurements of liabilities. It provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more techniques. ASU 2009-05 also clarifies that when
estimating fair value of a liability, a reporting entity is not required to
include a separate input or adjustment to other inputs relating to the existence
of a restriction that prevents the transfer of the liability. ASU
2009-05 is effective for the first reporting period (including interim periods)
beginning after issuance. We are currently assessing the impact of
ASU 2009-05 on our consolidated financial statements.
Note
3. Revenue Recognition
Multiple-element
arrangements: We generate revenue from the sale of equipment
and related services, including customization, installation and maintenance
services. In some instances, we provide some or all of such equipment
and services to our customers under the terms of a single multiple-element sales
arrangement. These arrangements typically involve the sale of
equipment bundled with some or all of these services, but may also involve
instances in which we have contracted to deliver multiple pieces of equipment
over time, rather than at a single point in time.
When a
sales arrangement involves multiple elements, the items included in the
arrangement (deliverables) are evaluated pursuant to ASC Subtopic 605-25-25,
Revenue Arrangements with
Multiple Deliverables, to determine whether they represent separate units
of accounting. We perform this evaluation at the inception of an
arrangement and as we deliver each item in the
arrangement. Generally, we account for a deliverable (or a group of
deliverables) separately if the delivered item(s) has standalone value to the
customer, there is objective and reliable evidence of the fair value of the
undelivered items included in the arrangement, and, if we have given the
customer a general right of return relative to the delivered item(s), delivery
or performance of the undelivered item(s) or service(s) is probable and
substantially in our control.
When
items included in a multiple-element arrangement represent separate units of
accounting and there is objective and reliable evidence of fair value for all
items included in the arrangement, we allocate the arrangement consideration to
the individual items based on their relative fair values. If there is
objective and reliable evidence of the fair value(s) of the undelivered item(s)
in an arrangement, but no such evidence for the delivered item(s), we use the
residual method to allocate the arrangement consideration. In either
case, the amount of arrangement consideration allocated to the delivered item(s)
is limited to the amount that is not contingent on us delivering additional
products or services. Once we have determined the amount, if any, of
arrangement consideration allocable to the delivered item(s), we apply the
applicable revenue recognition policy, as described elsewhere herein, to
determine when such amount may be recognized as revenue.
We
generally determine if objective and reliable evidence of fair value for the
items included in a multiple-element arrangement exists based on whether we have
vendor-specific objective evidence (VSOE) of the price for which we sell an item
on a standalone basis. If we do not have VSOE for the item, we will
use the price charged by a competitor selling a comparable product or service on
a standalone basis to similarly situated customers, if available.
If we
cannot account for the items included in a multiple-element arrangement as
separate units of accounting, they are combined and accounted for as a single
unit of accounting, generally resulting in a delay in the recognition of revenue
for the delivered item(s) until we have provided the undelivered item(s) or
service(s) to the customer.
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. Operating expenses are charged to operations as incurred
and are not allocated to contract costs. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses are
probable and estimable.
Equipment other than
construction-type contracts: We recognize revenue on equipment
sales, other than construction-type contracts, when title passes, which is
usually upon shipment and then only if the terms of the arrangement are fixed
and determinable and collectability is reasonably assured. We record
estimated sales returns and discounts as a reduction of net sales in the same
period revenue is recognized.
Long-term receivables and
advertising rights: We occasionally sell and install our
products at facilities in exchange for the rights to sell or to retain future
advertising revenues. For these transactions, we recognize revenue
for the amount of the present value of the future advertising payments if enough
advertising is sold to obtain normal margins on the contract, and we record the
related receivable in long-term receivables. On those transactions
where we have not sold the advertising for the full value of the equipment at
normal margins, we record the related cost of equipment as advertising rights.
Revenue to the extent of the present value of the advertising payments is
recognized in long-term receivables when it becomes fixed and determinable under
the provisions of the applicable advertising contracts. At the time
the revenue is recognized, costs of the equipment are recognized based on an
estimate of overall margin expected.
-9-
In cases
where we receive advertising rights as opposed to only cash payments in exchange
for the equipment, revenue is recognized as it becomes earned and the related
costs of the equipment are amortized over the term of the advertising rights,
which are owned by us. On these transactions, advance collections of advertising
revenues are recorded as deferred revenue.
The cost
of advertising rights, net of amortization, was $1,688 as of October 31, 2009
and $2,392 as of May 2, 2009.
Product
maintenance: In connection with the sale of our products, we
also occasionally sell separately priced extended warranties and product
maintenance contracts. The revenue related to such contracts is
deferred and recognized ratably as net sales over the terms of the contracts,
which vary up to 10 years. We record unrealized revenue in the
deferred revenue (billed or collected) in the liability section of the balance
sheet. Deferred revenue (billed or collected) excludes unrealized
revenue from contractual obligations that will be billed by us in future
periods.
Software: We
typically sell our proprietary software bundled with video displays and certain
other products, but we also sell our software separately. Pursuant to
ASC 985-605, Software/Revenue
Recognition, revenues from software license fees on sales, other than
construction-type contracts, are recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, the fee is fixed and
determinable and collection is probable. For sales of software
included in construction-type contracts, the revenue is recognized under the
percentage-of-completion method starting when all of the above-mentioned
criteria have been met.
Services: Revenues
generated by us for services such as event support, control room design, on-site
training, equipment service and technical support for our equipment are
recognized as net sales when the services are performed. Net sales
from services offerings which are not included in construction-type contracts
approximated 8.0% and 4.9% of net sales for the six months ended October 31,
2009 and November 1, 2008, respectively.
Rentals: We rent
display equipment to our customers under short-term rental agreements, generally
for periods no longer than 12 months. Revenues generated by us for
equipment rentals are recognized over the period of the rental
agreement.
Derivatives: We
utilize derivative financial instruments to manage the economic impact of
fluctuations in currency exchange rates on those transactions that are
denominated in currency other than our functional currency, which is the U.S.
dollar. We enter into currency forward contracts to manage these
economic risks. ASC 815, Accounting for Derivative
Instruments and Hedging Activities, as amended, requires us to recognize
all derivatives on the balance sheet at fair value. Derivatives that
do not qualify for hedge accounting must be adjusted to fair value through
earnings. If a derivative qualifies for hedge accounting, depending
on the nature of the hedge, changes in the fair value of derivatives are either
offset against the change in the fair value of the hedged assets, liabilities or
firm commitments through earnings or recognized in accumulated other
comprehensive gain (loss) until the hedged item is recognized in
earnings.
To
protect against the reduction in value of forecasted foreign currency cash flows
resulting from export sales over the next year, we have instituted a foreign
currency cash flow hedging program which requires us to hedge currency risk
whenever funds are expected to be converted to US Dollars. Actual
forward contracts that satisfy this requirement occur
infrequently. We hedge portions of our forecasted revenue denominated
in foreign currencies with forward contracts. When the dollar
strengthens significantly against the foreign currencies, the decline in value
of future foreign currency revenue is partially offset by gains in the value of
the forward contracts. Conversely, when the dollar weakens, the
increase in the value of future foreign currency cash flows is partially offset
by losses in the value of the forward contracts.
There
were no derivatives outstanding as of October 31, 2009.
Note
4. Earnings Per Share (“EPS”)
Basic EPS
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that would occur if securities or other
obligations to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in our
earnings.
A
reconciliation of the income and common share amounts used in the calculation of
basic and diluted EPS for the three and six months ended October 31, 2009 and
November 1, 2008 follows:
|
|
Net
Income
|
|
Shares
|
|
Per
Share Amount
|
For
the three months ended October 31, 2009:
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
4,849
|
|
40,831
|
|
$
|
0.12
|
Dilution
associated with stock compensation plans
|
|
-
|
|
171
|
|
|
-
|
Diluted
earnings per share
|
|
$
|
4,849
|
|
41,002
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
For
the three months ended November 1, 2008:
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
12,197
|
|
40,478
|
|
$
|
0.30
|
Dilution
associated with stock compensation plans
|
|
-
|
|
743
|
|
|
-
|
Diluted
earnings per share
|
|
$
|
12,197
|
|
41,221
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
For
the six months ended October 31, 2009:
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
6,281
|
|
40,795
|
|
$
|
0.15
|
Dilution
associated with stock compensation plans
|
|
-
|
|
311
|
|
|
-
|
Diluted
earnings per share
|
|
$
|
6,281
|
|
41,106
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
For
the six months ended November 1, 2008:
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
21,923
|
|
40,440
|
|
$
|
0.54
|
Dilution
associated with stock compensation plans
|
|
-
|
|
846
|
|
|
(0.01)
|
Diluted
earnings per share
|
|
$
|
21,923
|
|
41,286
|
|
$
|
0.53
|
Note
5. Goodwill and Other Intangible Assets
We
account for goodwill and other intangible assets in accordance with ASC 350,
Goodwill and Other Intangible
Assets, and we complete an impairment analysis on at least an annual
basis and more frequently if circumstances warrant.
Goodwill
was $4,658 at October 31, 2009 and $4,549 at May 2, 2009. We perform
an impairment test of goodwill annually as of the first day of the third
quarter. In addition, due to the then current economic conditions,
the effects of the recession on our markets and the decline in our stock price,
we performed an additional goodwill impairment test as of May 2,
2009. The result of the test at each time indicated that no goodwill
impairment existed as of those dates.
As
required by ASC 350, intangibles with finite lives are amortized. Included in
intangible assets are non-compete agreements, various patents and trademarks.
The net value of intangible assets is included as a component of intangible and
other assets in the accompanying consolidated balance
sheets. Estimated amortization expense based on intangibles as of
October 31, 2009 is $315, $288, $245, $228, $228 for the fiscal years ending
2010, 2011, 2012, 2013 and 2014, respectively, and $552
thereafter. The following table sets forth the gross carrying amount
and accumulated amortization of intangible assets by major intangible class as
of October 31, 2009:
|
|
Gross
Carrying
|
|
Accumulated
|
|
Net
Carrying
|
|
|
|
Amount
|
|
Amortization
|
|
Value
|
|
Patents
|
|
$ |
2,282 |
|
$ |
704 |
|
$ |
1,578 |
|
Non-compete
agreements
|
|
|
348 |
|
|
245 |
|
|
103 |
|
Registered
trademarks
|
|
|
401 |
|
|
- |
|
|
401 |
|
Other
|
|
|
87 |
|
|
71 |
|
|
16 |
|
|
|
$ |
3,118 |
|
$ |
1,020 |
|
$ |
2,098 |
|
-11-
Note
6. Inventories
Inventories
consist of the following:
|
|
October
31,
|
|
|
May
2,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
14,269 |
|
|
$ |
20,644 |
|
Work-in-process
|
|
|
6,717 |
|
|
|
7,561 |
|
Finished
goods
|
|
|
19,450 |
|
|
|
23,195 |
|
Finished
goods subject to
|
|
|
|
|
|
|
|
|
deferred
revenue arrangements
|
|
|
1,510 |
|
|
|
- |
|
|
|
$ |
41,946 |
|
|
$ |
51,400 |
|
Finished
goods subject to deferred revenue arrangements represent inventory provided to
customers on a trial basis and contain contractual provisions which make a
purchase probable.
Note
7. Segment Disclosure
We have
five markets which meet the definition of reportable segments under ASC
280, Segment Reporting:
Commercial, Live Events, Schools and Theatres, Transportation and
International.
Our
Commercial segment primarily consists of sales of our PS-X, HD-X, Galaxy® and
Valo™ product lines to resellers (primarily sign companies), outdoor
advertisers, national retailers, quick-serve restaurants, casinos and petroleum
retailers. Our Live Events segment primarily consists of sales of
integrated scoring and video display systems to college and professional sports
facilities and mobile PST display technology to video rental organizations and
other live events type venues. Our Schools and Theatres segment
primarily consists of sales of scoring systems, Galaxy® and PS-X display systems
to primary and secondary education facilities and sales of our Vortek® automated
rigging systems for theatre applications. Our Transportation segment
primarily consists of sales of our Vanguard® and Galaxy® product lines to
governmental transportation departments, airlines and other transportation
related customers. Finally, our International segment primarily
consists of sales of all product lines to geographies outside the United States
and Canada.
Segment
reports present results through contribution margin, which is comprised of gross
profit less selling costs. Segment profit excludes general and administration
expense, product development expense, interest income and expense, non-operating
income and income tax expense. Assets are not allocated to the
segments. Depreciation and amortization, excluding that portion related to
non-allocated costs, are allocated to each segment based on various financial
measures. In general, segments follow the same accounting policies as
those described in Note 1. Costs of domestic field sales and services
infrastructure, including most field administrative staff, are allocated to the
Commercial, Live Events and Schools and Theatres segments based on cost of
sales. Shared manufacturing, building and utilities and procurement
costs are allocated based on direct hours, square footage and other various
financial measures. Beginning in fiscal 2010, we ceased allocation of
general and administrative and product development expenses to reflect our
management approach to these costs. Fiscal 2009 segment results have been
retrospectively adjusted to conform to these changes.
We do not
maintain information on sales by products and, therefore, disclosure of such
information is not practical.
The
following table sets forth certain financial information for each of our five
functional operating segments:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
October
31,
|
|
|
November
1,
|
|
|
October
31,
|
|
|
November
1,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
24,873 |
|
|
$ |
47,794 |
|
|
$ |
48,108 |
|
|
$ |
96,184 |
|
Live
Events
|
|
|
48,949 |
|
|
|
78,403 |
|
|
|
102,844 |
|
|
|
141,491 |
|
Schools
& Theatres
|
|
|
18,766 |
|
|
|
22,680 |
|
|
|
37,200 |
|
|
|
39,661 |
|
Transportation
|
|
|
10,590 |
|
|
|
8,727 |
|
|
|
23,220 |
|
|
|
18,299 |
|
International
|
|
|
12,184 |
|
|
|
12,093 |
|
|
|
17,443 |
|
|
|
35,291 |
|
Net
Sales
|
|
|
115,362 |
|
|
|
169,697 |
|
|
|
228,815 |
|
|
|
330,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution
margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
3,470 |
|
|
|
8,770 |
|
|
|
4,369 |
|
|
|
17,512 |
|
Live
Events
|
|
|
10,358 |
|
|
|
21,992 |
|
|
|
20,232 |
|
|
|
36,495 |
|
Schools
& Theatres
|
|
|
2,193 |
|
|
|
3,040 |
|
|
|
4,656 |
|
|
|
3,824 |
|
Transportation
|
|
|
2,764 |
|
|
|
545 |
|
|
|
6,249 |
|
|
|
1,419 |
|
International
|
|
|
1,889 |
|
|
|
(1,661 |
) |
|
|
871 |
|
|
|
2,419 |
|
Total
Contribution Margin
|
|
|
20,674 |
|
|
|
32,686 |
|
|
|
36,377 |
|
|
|
61,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-allocated
operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
& Administrative
|
|
|
5,959 |
|
|
|
7,555 |
|
|
|
12,493 |
|
|
|
15,236 |
|
Product
Development
|
|
|
5,534 |
|
|
|
5,286 |
|
|
|
11,404 |
|
|
|
11,833 |
|
Operating
income
|
|
|
9,181 |
|
|
|
19,845 |
|
|
|
12,480 |
|
|
|
34,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
379 |
|
|
|
511 |
|
|
|
753 |
|
|
|
1,047 |
|
Interest
expense
|
|
|
(63 |
) |
|
|
(57 |
) |
|
|
(110 |
) |
|
|
(164 |
) |
Other
income (expense), net
|
|
|
(711 |
) |
|
|
(1,334 |
) |
|
|
(1,313 |
) |
|
|
(1,679 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
8,786 |
|
|
|
18,965 |
|
|
|
11,810 |
|
|
|
33,804 |
|
Income
tax expense
|
|
|
3,937 |
|
|
|
6,768 |
|
|
|
5,529 |
|
|
|
11,881 |
|
Net
income
|
|
$ |
4,849 |
|
|
$ |
12,197 |
|
|
$ |
6,281 |
|
|
$ |
21,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
1,779 |
|
|
$ |
1,976 |
|
|
$ |
3,650 |
|
|
$ |
3,938 |
|
Live
Events
|
|
|
1,901 |
|
|
|
2,215 |
|
|
|
3,736 |
|
|
|
4,345 |
|
Schools
& Theatres
|
|
|
714 |
|
|
|
822 |
|
|
|
1,450 |
|
|
|
1,641 |
|
Transportation
|
|
|
419 |
|
|
|
475 |
|
|
|
909 |
|
|
|
981 |
|
International
|
|
|
230 |
|
|
|
156 |
|
|
|
440 |
|
|
|
319 |
|
Unallocated
corporate depreciation
|
|
|
521 |
|
|
|
422 |
|
|
|
1,095 |
|
|
|
805 |
|
|
|
$ |
5,564 |
|
|
$ |
6,066 |
|
|
$ |
11,280 |
|
|
$ |
12,029 |
|
No single
geographic area comprises a material amount of net sales or long-lived assets
other than the United States. The following table presents
information about us in the United States and elsewhere:
|
|
United
States
|
|
|
Others
|
|
|
Total
|
|
Net
sales for three months ended:
|
|
|
|
|
|
|
|
|
|
October
31, 2009
|
|
$ |
101,017 |
|
|
$ |
14,345 |
|
|
$ |
115,362 |
|
November
1, 2008
|
|
|
151,092 |
|
|
|
18,605 |
|
|
|
169,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales for six months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
October
31, 2009
|
|
$ |
207,619 |
|
|
$ |
21,196 |
|
|
$ |
228,815 |
|
November
1, 2008
|
|
|
285,922 |
|
|
|
45,004 |
|
|
|
330,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived
assets at:
|
|
|
|
|
|
|
|
|
|
|
|
|
October
31, 2009
|
|
$ |
82,317 |
|
|
$ |
1,301 |
|
|
$ |
83,618 |
|
May
2, 2009
|
|
|
88,302 |
|
|
|
1,125 |
|
|
|
89,427 |
|
Note
8. Share-Based Compensation
Stock
incentive plans: During
fiscal 2008, we established the 2007 Stock Incentive Plan (“2007 Plan”) and
ceased granting options under the 2001 Incentive Stock Option Plan, the 2001
Outside Directors Option Plan (“2001 Plans”), the 1993 Incentive Stock Option
Plan, as amended, and the 1993 Outside Directors Option Plan, as amended (“1993
Plans”). The 2007 Plan provides for the issuance of stock-based
awards, including stock options, restricted stock, restricted stock units and
deferred stock, to employees, directors and consultants. Stock options issued to
employees under the plans generally have a ten-year life, an exercise price
equal to the fair market value on the grant date and a five-year vesting period.
Stock options granted to outside directors under these plans have a seven-year
life, an exercise price equal to the fair market value on the date of grant and
a three-year vesting period, provided that they remain on the
Board. The restricted stock granted to members of the Board of
Directors vests in one year, provided that they remain on the Board. As with
stock options, restricted stock cannot be transferred during the vesting
period.
The total
number of shares of stock reserved and available for distribution under the 2007
Plan is 4,000 shares.
We also
have an employee stock purchase plan (“ESPP”), which enables employees to
contribute up to 10% of their compensation toward the purchase of our common
stock at the end of the participation period at a purchase price equal to 85% of
the lower of the fair market value of the common stock on the first or last day
of the participation period.
A summary
of the share-based compensation expense for stock options, restricted stock and
our ESPP that we recorded in accordance with ASC 718 Compensation-Stock
Compensation is as follows:
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
October
31,
|
|
November
1,
|
|
October
31,
|
|
November
1,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Cost
of sales
|
|
$ |
120 |
|
|
$ |
83 |
|
|
$ |
251 |
|
|
$ |
201 |
|
Selling
|
|
|
263 |
|
|
|
244 |
|
|
|
533 |
|
|
|
535 |
|
General
and administrative
|
|
|
297 |
|
|
|
306 |
|
|
|
614 |
|
|
|
579 |
|
Product
development and design
|
|
|
152 |
|
|
|
124 |
|
|
|
314 |
|
|
|
279 |
|
|
|
$ |
832 |
|
|
$ |
757 |
|
|
$ |
1,712 |
|
|
$ |
1,594 |
|
As of
October 31, 2009, there was $5,380 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under all of
our equity compensation plans. Total unrecognized compensation cost may be
adjusted for future changes in estimated forfeitures. We expect to recognize
that cost over a weighted average period of five years.
Note
9. Comprehensive Income
We follow
the provisions of ASC 220, Reporting Comprehensive
Income, which establishes standards for reporting and displaying
comprehensive income and its components. Comprehensive income reflects the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. For us, comprehensive
income represents net income adjusted for foreign currency translation
adjustments and net unrealized gains and losses on derivative instruments, as
applicable. The foreign currency translation adjustment included in
comprehensive income has not been tax affected, as the investments in foreign
affiliates are deemed to be permanent.
A summary
of comprehensive income is as follows:
|
Six
Months Ended
|
|
|
October
31,
|
|
November
1,
|
|
|
2009
|
|
2008
|
|
Net
income
|
|
$ |
6,281 |
|
|
$ |
21,923 |
|
Net
foreign currency translation adjustment
|
|
|
(23 |
) |
|
|
(100 |
) |
Total
comprehensive income
|
|
$ |
6,258 |
|
|
$ |
21,823 |
|
Note 10. Commitments and
Contingencies
Securities litigation: Our
company and two of our executive officers are named as defendants in a
consolidated class action filed in the U.S. District Court for the District of
South Dakota in November 2008 on behalf of a class of investors who purchased
our stock in the open market between November 15, 2006 and April 5, 2007.
In an Amended Consolidated Complaint filed on April 13, 2009 (“Complaint”), the
plaintiffs allege that the defendants made false and misleading statements of
material facts about our business and expected financial performance in the
company’s press releases, its filings with the Securities and Exchange
Commission, and conference calls, thereby inflating the price of the company’s
common stock. The Complaint alleges claims under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, as amended (“Exchange Act”). The
Complaint seeks compensatory damages on behalf of the alleged class in an
unspecified amount, reasonable fees and costs of litigation, and such other and
further relief as the Court may deem just and proper. On June 5,
2009, we filed a motion to dismiss the Complaint. In July 2009, the
plaintiffs filed a memorandum of law in opposition to our motion to
dismiss. In September 2009, we filed a reply memorandum in support of
the notice to dismiss. Briefing on the motion is
underway.
We
believe that we, and the other defendants, have meritorious defenses to the
claims made in the Complaint, and we intend to contest these actions vigorously.
We are not able to predict the ultimate outcome of this litigation, but
regardless of the merits of the claims, it may be costly and disruptive. The
total costs cannot be reasonably estimated at this time. Securities class action
litigation can result in substantial costs and divert our management’s attention
and resources, which may have a material adverse effect on our business,
financial condition and results of operations, including our cash
flow.
In the
third quarter of fiscal 2008, our Board of Directors received letters from
lawyers acting on behalf of three of our shareholders. The letters
demanded that our company pursue claims against our officers, directors, and
unspecified others for allegedly wrongful conduct based upon the same general
events as are alleged in the Complaint. The Board referred the demands to
a special committee of independent directors for investigation and action.
The special committee concluded its investigation and determined that it would
not be in the best interests of the company to take any action on the
allegations contained in the demands at this time and that it will continue to
monitor the matter and revisit the demands if more information becomes
available.
Other
litigation: We are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, based upon consultation with legal counsel, the ultimate disposition
of these matters will not have a material adverse effect on our consolidated
financial statements.
Guarantees: In
connection with the sale of equipment to a financial institution, we entered
into a contractual arrangement whereby we agreed to repurchase equipment at the
end of the lease term at a fixed price of approximately $1,100. We
have recognized a guarantee liability in the amount of $200 under the provisions
of ASC 460, Guarantees,
in the accompanying financial statements.
In
connection with our investment in OutCast we have guaranteed outstanding
debt of approximately $3,688. This debt matures at various times
through calendar year 2012, at which time our guarantee will expire subject to
the debt being repaid by OutCast. We would be obligated to perform
under the terms of the guarantee should OutCast default under the leases. Our
guarantee obligation is generally limited to 50% of the amounts outstanding, and
we would have recourse back to OutCast under a reimbursement
agreement. The guarantee was undertaken to support the rollout of LCD
displays in connection with the core business of OutCast. The total
amount accrued relating to the guarantee liability under the provisions
of ASC 460 was $80 as of October 31, 2009. In addition to the
foregoing, OutCast is obligated to pay us on loans maturing during the third
quarter of fiscal 2010 of approximately $1,600. OutCast’s ability to pay
these debts is contingent on obtaining funding or a renegotiation of the
debt. We have entered into a non-binding letter of intent whereby OutCast
is obtaining funding to pay off this debt and to release us from the foregoing
guarantee and therefore we have not reserved any amounts against these loans or
the guarantee. If OutCast is unable to close on this funding, we may incur
losses to the extent of the loans and the guarantees. Approximately $1,060
is secured by the assets of OutCast, which we believe adequately secures that
debt; however, the ultimate recovery cannot be certain if OutCast cannot satisfy
its obligations.
Warranties: We
offer a standard parts coverage warranty for periods varying from one to five
years for all of our products. We also offer additional types of
warranties that include on-site labor, routine maintenance and event
support. In addition, the length of warranty 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 that may be incurred under the warranty
and record a liability in the amount of such costs at the time the product
revenue is recognized. Factors that affect our warranty liability
include historical and anticipated claims costs. We periodically
assess the adequacy of our recorded warranty liabilities and adjust the amounts
as necessary.
During
the third quarter of fiscal 2009, we discovered a warranty issue caused by our
finishing process for certain products which causes the paint on aluminum
surfaces to peel under certain conditions. This issue related to various
products painted during the period beginning in January 2008 and extending
through December 2008. In January 2008, as a result of changes in
environmental laws and regulations, we changed our painting process and the
products used to clean and prime aluminum, which is the key component used in
displays. The products and processes we implemented were based on
representations from certain suppliers and testing that we performed.
During the third quarter of fiscal 2009, we discovered an unusually high level
of displays built from January 2008 through December 2008 on which the paint was
peeling. During the second quarter of fiscal 2010, we were able to
quantify the claim and determined that the actual costs incurred or expected to
be incurred are at the low end of the range of estimates accrued in previous
periods. As of October 31, 2009, we had accrued $205 for remaining
claims.
Changes
in our product warranties for the six months ended October 31, 2009 consisted of
the following:
|
|
Amount
|
|
Beginning
accrued warranty costs
|
|
$ |
19,724 |
|
Warranties
issued during the period
|
|
|
1,992 |
|
Settlements
made during the period
|
|
|
(5,232 |
) |
Changes
in accrued warranty costs for pre-existing
|
|
|
|
|
warranties
during the period, including expirations
|
|
|
1,721 |
|
Ending
accrued warranty costs
|
|
$ |
18,205 |
|
Leases: We lease
office space for sales and service locations, vehicles and equipment, primarily
office equipment. Rental expense for operating leases was $1,473 and $1,608 for
the six months ended October 31, 2009 and November 1, 2008,
respectively. Future minimum payments under noncancelable operating
leases, excluding executory costs such as management and maintenance fees, with
initial or remaining terms of one year or more consisted of the following at
October 31, 2009:
Fiscal
years ending
|
|
Amount
|
|
2010
|
|
$ |
1,708 |
|
2011
|
|
|
3,080 |
|
2012
|
|
|
2,102 |
|
2013
|
|
|
1,443 |
|
2014
|
|
|
1,027 |
|
Thereafter
|
|
|
1,871 |
|
Total
|
|
$ |
11,231 |
|
Purchase
commitments: From time to time, we commit to purchase
inventory and advertising rights over periods that extend beyond a
year. As of October 31, 2009, we were obligated to purchase inventory
and advertising rights through fiscal 2013 as follows:
Fiscal
years ending
|
|
Amount
|
|
2010
|
|
$ |
850 |
|
2011
|
|
|
1,288 |
|
2012
|
|
|
1,119 |
|
2013
|
|
|
985 |
|
2014
|
|
|
336 |
|
Total
|
|
$ |
4,578 |
|
In fiscal
2007, we committed to purchase a building in Brookings, South Dakota, for
approximately $3,000. The purchase is planned to close in the third
quarter of fiscal 2010. The building would have been used for both
manufacturing and office expansion and is located adjacent to our existing
facilities. However, we do not expect to require use of the building
in fiscal 2010 and are evaluating alternatives for the
building.
In
October 2009, our subsidiary Star Circuits, Inc., which produces circuit boards
for use in our products, had a fire which damaged or destroyed its key
production equipment and building mechanical and structural
components. Operations have been stopped in this facility until new
equipment is installed and building repair is completed, which is estimated to
be in the fourth quarter of fiscal 2010. Our insurance policies and
coverages entitle us to receive payments for business interruption, as well as
recoveries for damage to the building and equipment as a result of the fire.
Income resulting from business interruption insurance, if any, and property
damage insurance will not be recognized until all contingencies are resolved.
The total extent of the property damage and other expected costs to rebuild and
cover losses are estimated to be between approximately $2.0 to $4.0
million. Although there are assets included within inventory and
property and equipment that have been impaired, we believe that insurance
proceeds will be sufficient to cover substantially all of the losses and the
additional expenses incurred and therefore we have not recognized any losses as
of October 31, 2009. This estimate is subject to change based on the
final insurance settlement and analysis of losses. We have been able to source
the circuit boards from an outside vendor.
Note
11. Income Taxes
As of
October 31, 2009, we did not have material unrecognized tax benefits that would
affect our effective tax rate if recognized. We recognize interest and penalties
related to income tax matters in income tax expense. We do not expect our
unrecognized tax benefits to change significantly over the next
12 months.
Our
company, along with our subsidiaries, is subject to U.S. Federal income tax as
well as income taxes of multiple state jurisdictions. As a result of the
completion of exams by the Internal Revenue Service on prior years, fiscal years
2006, 2007, 2008 and 2009 are the only years remaining open under statutes of
limitations. Certain subsidiaries are also subject to income tax in
foreign jurisdictions which have open tax years varying by jurisdiction
extending back to 2003. We operate under a tax holiday in China that
will expire in fiscal 2012. At this time, we are unable to predict
how the expiration of the tax holiday will impact us in the future.
Note
12. Fair Value Measurement
The
carrying amounts reported on our consolidated balance sheets for cash and cash
equivalents approximate their fair values due to the highly liquid nature of the
instruments. The fair values for fixed-rate contracts receivable are
estimated using discounted cash flow analyses 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. The fair
value on these notes approximates their carrying values. The carrying
amounts reported for variable rate long-term debt and marketing obligations
approximate fair value. Fair values for fixed-rate long-term debt are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered for debt with similar terms and underlying
collateral. The total carrying value of long-term debt and marketing
obligations reported on our consolidated balance sheets approximates fair
value.
In
September 2006, the FASB issued ASC 820, which defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles and establishes a hierarchy that categorizes and
prioritizes the sources to be used to estimate fair value. ASC 820 also expands
disclosures about fair-value measurements. We adopted ASC 820 on April 27, 2008
for all financial assets and liabilities and any other assets and liabilities
that are recognized or disclosed at fair value on a recurring basis. Although
the adoption of ASC 820 did not impact our financial condition, results of
operations or cash flows, ASC 820 requires us to provide additional disclosures
within our condensed consolidated financial statements.
ASC 820
defines fair value as the price that would be received to sell an asset or paid
to transfer the liability (an exit price) in an orderly transaction between
market participants and 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 three levels of inputs that may be utilized when
measuring fair value, consisting of level 1 inputs (using quoted prices in
active markets for identical assets or liabilities), level 2 inputs (using
inputs other than level 1 prices, such as quoted prices for similar assets and
liabilities in active markets or inputs that are observable for the asset or
liability), and level 3 inputs (unobservable inputs supported by little or no
market activity based on our own assumptions used to measure assets and
liabilities). A financial asset or liability’s classification within this
hierarchy is determined based on the lowest level input that is significant to
the fair value measurement.
Our
financial assets as of October 31, 2009 measured at fair value on a recurring
basis were $50,300, which consisted of money market funds. We used
level 1 inputs to determine the fair value of our financial
assets. We have no assets and liabilities measured at fair value on a
recurring basis that used level 2 or level 3 inputs.
Note
13. Exit or Disposal Costs
During
the second quarter of fiscal 2009, we closed our Canadian manufacturing
facilities. This plant was engaged primarily in the manufacture of
our portable Vanguard displays for roadside traffic management. We
have also discontinued these Vanguard products. In the second quarter
of fiscal 2009, we recorded the costs associated with this closure of
approximately $1,100 on a pre-tax basis. This included approximately $700
related to inventory reserves, approximately $200 in severance costs and
approximately $100 in lease termination costs, all of which have been included
in cost of goods sold within our Transportation market. All costs related to the
closure were settled in fiscal year 2009.
Note
14. SUBSEQUENT EVENTS
We have
evaluated the existence of both recognized and unrecognized subsequent events
through November 25, 2009, the filing date of this Quarterly Report on Form
10-Q.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q (including exhibits and any information
incorporated by reference herein) contains both historical and forward-looking
statements that involve risks, uncertainties and assumptions. The statements
contained in this report that are not purely historical are forward-looking
statements that are subject to the safe harbors created under the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended,
including statements regarding our expectations, beliefs, intentions and
strategies for the future. These statements appear in a number of
places in this Report and include all statements that are not historical
statements of fact regarding our intent, belief or current expectations with
respect to, among other things: (i) our financing plans; (ii) trends affecting
our financial condition or results of operations; (iii) our growth strategy and
operating strategy; and (iv) the declaration and payment of
dividends. 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 detail in our filings with the
Securities and Exchange Commission, including in our Annual Report on Form 10-K
for the fiscal year ended May 2, 2009 in the section entitled “Item 1A. Risk
Factors.”
The
following discussion highlights the principal factors affecting changes in
financial condition and results of operations. This discussion should
be read in conjunction with the accompanying consolidated financial statements
and notes to the consolidated financial statements.
OVERVIEW
We
design, manufacture and sell a wide range of display systems to customers in a
variety of markets throughout the world. We focus our sales and
marketing efforts on markets, geographical regions and products. The
primary markets consist of Live Events, Commercial, Schools and Theatres,
International and Transportation.
Our net
sales and profitability historically have fluctuated due to the impact of large
product orders, such as display systems for professional sport facilities and
colleges and universities, as well as the seasonality of the sports market. Net
sales and gross profit percentages also have fluctuated due to other seasonality
factors, including the impact of holidays, which primarily affect our third
quarter. Our gross margins on large product orders tend to fluctuate
more than those for smaller standard orders. Large product orders
that involve competitive bidding and substantial subcontract work for product
installation generally have lower gross margins. Although we follow
the percentage of completion method of recognizing revenues for large custom
orders, we nevertheless have experienced fluctuations in operating results and
expect that our future results of operations will be subject to similar
fluctuations.
Orders
are booked only upon receipt of a firm contract and after receipt of any
required deposits. As a result, certain orders for which we have
received binding letters of intent or contracts will not be booked until all
required contractual documents and deposits are received. In
addition, order bookings can vary significantly as a result of the timing of
large orders.
We
operate on a 52 to 53 week fiscal year, with our fiscal year ending on the
Saturday closest to April 30 of each year. Within each fiscal year,
each quarter is comprised of 13 week periods following the beginning of each
fiscal year. In each 53 week year, each of the last three quarters is
comprised of a 13 week period, and an additional week is added to the first
quarter of that fiscal year. When April 30 falls on a Wednesday, the
fiscal year ends on the preceding Saturday. Fiscal 2010 contains 52
weeks, and fiscal 2009 contained 53 weeks.
For a
summary of recently issued accounting pronouncements and the effects of those
pronouncements on our financial results, refer to note 2 of the notes to our
consolidated financial statements, which are included elsewhere in this
report.
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 that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On a regular basis, we evaluate our estimates, including those
related to estimated total costs on long-term construction-type contracts,
estimated costs to be incurred for product warranties and extended maintenance
contracts, bad debts, excess and obsolete inventory, income taxes, stock-based
compensation and contingencies. Our estimates are based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
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. Provisions for estimated losses on
uncompleted contracts are made in the period in which 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 that there
will be a material change in future estimates or assumptions we use to determine
these estimates.
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. We do not believe
there is a reasonable likelihood that there will be a material change in the
future estimates or assumptions we use to determine the allowance for doubtful
accounts. As of October 31, 2009 and May 2, 2009, we had an allowance
for doubtful accounts balance of approximately $1.9 million and $2.2 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 that there will be a material change in
the future estimates or assumptions we use to determine our reserve for
warranties. As of October 31, 2009 and May 2, 2009, we had
approximately $18.2 million and $19.8 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 that to the deferred revenue. We do not believe
there is a reasonable likelihood that there will be a material change in the
future estimates or assumptions we use to determine estimated costs under these
agreements. As of October 31, 2009 and May 2, 2009, we had
$10.0 million and $9.5 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 that market may not exceed the net realizable
value (that is, 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
levels, forecasted demand and technological obsolescence. We do not
believe there is a reasonable likelihood that 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, components used in our products or in expected sales, we
may be exposed to unforeseen losses that could be material.
Income taxes. As part of the
process of preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating the actual current tax
expense as well as assessing temporary differences in the treatment of items for
tax and financial reporting purposes. These timing differences result
in deferred tax assets and liabilities, which are included in our consolidated
balance sheets. We must then assess the likelihood that our deferred
tax assets will be recovered from future taxable income in each jurisdiction,
and to the extent we believe that recovery is not likely, a valuation allowance
must be established. We review deferred tax assets, including net
operating losses, and for those not expecting to be realized, we have recognized
a valuation allowance. If our estimates of future taxable income are
not met, a valuation allowance for some of these deferred tax assets would be
required.
We
operate within multiple taxing jurisdictions, both domestic and international,
and are subject to audits in these jurisdictions. These audits can
involve complex issues, including challenges regarding the timing and amount of
deductions and the allocation of income amounts to various tax
jurisdictions. At any one time, multiple tax years are subject to
audit by various tax authorities.
We record
our income tax provision based on our knowledge of all relevant facts and
circumstances, including the existing tax laws, the status of current
examinations and our understanding of how the tax authorities view certain
relevant industry and commercial matters. In evaluating the exposures
associated with our various tax filing positions, we record reserves for
probable exposures, consistent with ASC 740 Income Taxes. A
number of years may elapse before a particular matter for which we have
established a reserve is audited and fully resolved or clarified. We
adjust our income tax provision in the period in which actual results of a
settlement with tax authorities differs from our established reserve, when the
statute of limitations expires for the relevant taxing authority to examine the
tax position, or when more information becomes available. Our tax
contingencies reserve contains uncertainties because management is required to
make assumptions and to apply judgment to estimate the exposure associated with
our various filing positions. We believe that any potential tax
assessments from various tax authorities that are not covered by our income tax
provision will not have a material adverse impact on our consolidated financial
position, results of operations or cash flow.
Some of
the countries in which we are located allow tax holidays or provide other tax
incentives to attract and retain business. We have obtained holidays or other
incentives where available and practicable. Our taxes could increase if certain
tax holidays or incentives are retracted (which in some cases could occur if we
fail to satisfy the conditions on which such holidays or incentives are based),
they are not renewed upon expiration, or tax rates applicable to us in such
jurisdictions are otherwise increased. It is anticipated that tax holidays and
incentives with respect to our Chinese operations will expire within the next
three years. However, due to the possibility of changes in existing tax law and
our operations, we are unable to predict how these expirations will impact us in
the future. In addition, any acquisitions may cause our effective tax rate to
increase, depending on the jurisdictions in which the acquired operations are
located.
Stock-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 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 that 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 implied volatility was based on the availability of
actively traded options for our common stock and our assessment that implied
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 model. The amount of
stock-based compensation expense we recognize during a period is based on the
portion of the awards that are 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 stock-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.
RESULTS
OF OPERATIONS
The
following table sets forth the percentage of net sales represented by items
included in our consolidated statements of income for the periods
indicated:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
October
31,
|
|
November
1,
|
|
October
31,
|
|
November
1,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Net
sales
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
Cost
of goods sold
|
70.9%
|
|
71.6%
|
|
72.2%
|
|
71.7%
|
|
Gross
profit
|
29.1%
|
|
28.4%
|
|
27.8%
|
|
28.3%
|
Operating
expenses
|
21.1%
|
|
16.7%
|
|
22.3%
|
|
17.9%
|
|
Operating
income
|
8.0%
|
|
11.7%
|
|
5.5%
|
|
10.4%
|
Interest
income
|
0.3%
|
|
0.3%
|
|
0.3%
|
|
0.3%
|
Income
expense
|
-0.1%
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
Other
income (expense), net
|
-0.6%
|
|
-0.8%
|
|
-0.6%
|
|
-0.5%
|
|
Income
before income taxes
|
7.6%
|
|
11.2%
|
|
5.2%
|
|
10.2%
|
Income
tax expense
|
3.4%
|
|
4.0%
|
|
2.4%
|
|
3.6%
|
|
Net
income
|
4.2%
|
|
7.2%
|
|
2.8%
|
|
6.6%
|
NET
SALES
Net sales
decreased 30.9% to $228.8 million for the six months ended October 31, 2009 as
compared to $330.9 million for the same period of fiscal 2009. Net
sales decreased 32.0% to $115.4 million for the three months ended October 31,
2009 as compared to $169.7 million for the same period of fiscal
2009. The first quarter and six months of fiscal 2009 had one more
week than the first quarter and six months of fiscal 2010, which impacts the
comparison between the periods.
A
following table sets forth net sales and orders by customer market for the
periods indicated:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
October
31,
|
|
|
November
1,
|
|
|
October
31,
|
|
|
November
1,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
24,873 |
|
|
$ |
47,794 |
|
|
$ |
48,108 |
|
|
$ |
96,184 |
|
Live
Events
|
|
|
48,949 |
|
|
|
78,403 |
|
|
|
102,844 |
|
|
|
141,491 |
|
Schools
& Theatres
|
|
|
18,766 |
|
|
|
22,680 |
|
|
|
37,200 |
|
|
|
39,661 |
|
Transportation
|
|
|
10,590 |
|
|
|
8,727 |
|
|
|
23,220 |
|
|
|
18,299 |
|
International
|
|
|
12,184 |
|
|
|
12,093 |
|
|
|
17,443 |
|
|
|
35,291 |
|
Total
Net Sales
|
|
$ |
115,362 |
|
|
$ |
169,697 |
|
|
$ |
228,815 |
|
|
$ |
330,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
22,546 |
|
|
$ |
38,962 |
|
|
$ |
43,663 |
|
|
$ |
89,672 |
|
Live
Events
|
|
|
37,102 |
|
|
|
61,157 |
|
|
|
81,450 |
|
|
|
120,322 |
|
Schools
& Theatres
|
|
|
16,172 |
|
|
|
12,281 |
|
|
|
37,796 |
|
|
|
36,642 |
|
Transportation
|
|
|
8,234 |
|
|
|
7,761 |
|
|
|
16,070 |
|
|
|
17,920 |
|
International
|
|
|
12,694 |
|
|
|
11,798 |
|
|
|
23,708 |
|
|
|
24,673 |
|
Total
Orders
|
|
$ |
96,748 |
|
|
$ |
131,959 |
|
|
$ |
202,687 |
|
|
$ |
289,229 |
|
Commercial Market. Net sales
in the Commercial market declined during the second quarter and first six months
of fiscal year 2010 as compared to the same periods of fiscal year
2009. For the second quarter of fiscal year 2010, net sales decreased
48.0%, and for the first six months of fiscal year 2010, net sales decreased
50.0% as compared to the same periods of last fiscal year. For the
second quarter of fiscal 2010, net sales to outdoor advertising (digital
billboard) customers decreased by approximately $21.9 million or approximately
82.3% as compared to the second quarter of fiscal 2009, and for the first six
months of fiscal year 2010, net sales declined $43.7 million or approximately
81.7% as compared to the first six months of fiscal 2009. Net sales
in our reseller niche, which includes primarily sales of our Galaxy® products
and sales for large custom contracts, declined by approximately $1.7 million or
approximately 11.5% for the second quarter of fiscal year 2010 and $3.4 million
or approximately 11.6% for the first six months of fiscal 2010.
In the
early part of the third quarter of fiscal 2009, we were notified that our
largest customer in our outdoor advertising niche was decreasing its spending on
digital billboards from approximately $100 million annually to approximately $15
million annually, effective for calendar year 2009. We were one of
two primary vendors of digital billboards for this customer. This
corresponded to a decline in our orders overall from outdoor advertising
customers, which started to become evident late in the second quarter of fiscal
2009. It is our belief that the current economic conditions and
limited credit availability caused this overall decline. Although we
believe that this niche still represents a long-term growth opportunity, we do
not expect to see it rebound until sometime in calendar year 2011, based on
industry reports. It is also important to note that the outdoor
advertising business has a number of constraints in addition to the current
economic conditions, primarily the challenges of achieving adequate returns on
investments on digital displays, which limit locations suitable for digital
displays, and regulatory constraints, which we expect to be a long-term factor
that limits deployment of digital displays.
The
decline in the reseller niche both for the second quarter and year to date in
fiscal 2010 was due primarily to a lower level of sales of standard Galaxy
displays. We attribute the decline in sales of Galaxy displays to the
weaker economic conditions in the first half of fiscal 2010 as compared to the
same period of fiscal 2009. We are beginning to see increases in
order volumes of these types of products, which we believe is due to improving
economic conditions and improved lead times. Large contract orders in
this niche have increased approximately 11.5% on a year to date basis compared
to the same period one year ago. The level of custom contract orders
in this niche is subject to volatility as described elsewhere and therefore it
is difficult to project; however, we are seeing a growing number of
opportunities. Overall in the Commercial market, we have seen net
sales decline sequentially each quarter since the first quarter of fiscal 2009
until the second quarter of fiscal 2010. Although it appears as
though sales may be on an upward trend, we cannot be certain that this will
continue given the volatile nature of the current economic conditions and
competitive forces. For the long-term, we believe that this market
will be a growth area for the company.
Subject
to the foregoing, our Commercial market generally benefits from increasing
product acceptance, lower cost of displays, our distribution network and a
better understanding by our customers of the product as a revenue generation
tool.
In the
past, the seasonality of the outdoor advertising niche has been a factor in the
fluctuation of our net sales over the course of the fiscal year because the
deployment of displays slows in the winter months in the colder climate regions
of the United States. Generally speaking, seasonality is not a
material factor in the rest of the Commercial market. Our outlook for
sales and orders in the Commercial market could vary significantly depending on
economic and credit factors and our ability to capture business in our national
account niche.
Order
bookings in the Commercial market were down approximately 42.1% for the second
quarter of fiscal 2010 as compared to the second quarter of fiscal
2009. For the first six months of fiscal 2010, orders declined by
approximate 51.3% as compared to the same period of fiscal 2009. The
decline was caused by declines in both the reseller and outdoor advertising
market for the same reasons as described above. Orders for the first
six months of fiscal 2010 were positively impacted by orders of Galaxy displays
for a large convenience store chain based in the Midwest, which helped offset
the overall decline.
Live Events Market. Net sales
in the Live Events market decreased by approximately 37.6% in the second quarter
of fiscal 2010 as compared to the same quarter of fiscal 2009 and on a
year-to-date basis are down approximately 27.3%. The decrease in net
sales for the second quarter and year to date for fiscal 2010 as compared to the
same periods in fiscal 2009 was the result of a decline in revenues from large
new construction contracts exceeding $5 million as explained in prior filings,
which led to the significant growth during fiscal year 2009. These
large contracts, each of which exceeded $5 million, contributed more than $11.2
million and $28.2 million in net sales during the second quarter and first six
months of fiscal year 2010 compared to approximately $20.7 million and $49.2
million for the same periods in fiscal 2009.
During
the fourth quarter of fiscal 2009, we began to see more significant competitive
pressure, primarily aggressive pricing by multiple competitors in the Live
Events marketplace, that we believe is not sustainable for the
long-term. Until these pressures are reduced, they are likely to
adversely affect our ability to book orders and our gross profit margin. As a
result of these competitive factors, it is difficult to forecast net sales for
the rest of fiscal 2010; however, we realize that given the unusually high level
of net sales related to large new construction projects in fiscal 2009, it is
likely that net sales will decline significantly in fiscal 2010. In addition,
although our Live Events business is typically resistant to economic conditions,
the severity of the current economic environment causes us to be less optimistic
about how the economy may impact this business. There have been transactions
which have been delayed due to economic conditions, but the impact to date has
not been material. This could change in the future; however, over the long-term
we expect to see growth assuming that the economy improves and we are successful
at counteracting competitive pressures.
Order
bookings in the Live Events market were down more than 39.3% in the second
quarter of fiscal 2010 as compared to the same period in fiscal 2009 and on a
year-to-date basis are down approximately 32.3% due to the decrease in large
orders as explained above, competitive pressures, which we believe have caused
us to lose orders we otherwise would have earned, and various other factors as
explained above.
Our
expectations regarding growth over the long-term in large sports venues is due
to a number of factors, including the expanding market, with facilities
historically spending more on larger display systems; our product and services
offerings, which remains the most integrated and comprehensive offerings in the
industry; and our field sales and service network, which is important to support
our customers. In addition, we benefit from the competitive nature of sports
teams, which strive to out-perform their competitors with display systems. This
impact has and is expected to continue to be a driving force in increasing
transaction sizes in new construction and major renovations. Growth in the large
sports venues is also driven by the desire for high-definition video displays,
which typically drives larger displays or higher resolution displays, both of
which increase the average transaction size. We believe that the effects of the
economy have a lesser impact on the sports market as compared to our other
markets because our products are generally revenue-generation tools (through
advertising) for facilities, and the sports business is generally considered to
be less sensitive to economic cycles, although the severity of the current
economic conditions are somewhat unprecedented. Net sales in our sports
marketing and mobile and modular portion of this market were less than 1% of
total net sales and thus were not material in both the second quarters of fiscal
2010 and fiscal 2009.
Schools and Theatres
Market. Net sales in the Schools and Theatres market decreased
17.3% in the second quarter of fiscal 2010 as compared to the same quarter in
fiscal 2009 and on a year-to-date basis are down approximately 6.2% compared to
the same period one year ago. Orders for the market have increased 31.7%
for the second quarter of fiscal 2010 as compared to the second quarter of
fiscal 2009 and on a year-to-date basis are up approximately
3.1%. Sales decreased principally as a result of the timing of orders
in fiscal 2010 as compared to the same periods of fiscal 2009. During
the first quarter of fiscal 2009, many orders were delayed due to execution
issues within manufacturing, which caused orders to be cancelled or pushed out
into the second quarter of fiscal 2009. These execution issues did
not occur in the first half of fiscal 2010 and therefore we did not have the
unusually large backlog at the beginning of the second quarter of fiscal 2010
that we had at the same time in fiscal 2009, which led to greater sales in the
second quarter of fiscal 2009. As a result, we saw lower sales in the
second quarter of fiscal 2010 as compared to the second quarter of fiscal
2009. Although it appears that we are seeing improvement in orders
and sales in this market, it is generally too early to conclude that this market
has begun to rebound from the downturn in the economy. For the
long-term, we believe that this business presents growth
opportunities. Based on the forgoing, we expect that orders and net
sales will be less in fiscal 2010 as compared to fiscal 2009 within this
market.
Transportation Market. Net
sales in the Transportation market increased approximately 21.3% in the second
quarter of fiscal 2010 as compared to the same period in fiscal 2009 and on a
year-to-date basis are up approximately 26.9% compared to the same period one
year ago. Orders for the second quarter of fiscal 2010 are up
approximately 6.1% over the same period in fiscal 2009 and on a year-to-date
basis are down approximately 10.3% over the same period in fiscal
2009. The decrease in orders on a year-to-date basis does not appear
to be a reflection of the current poor economic conditions in the United
States. Rather, we believe it is more a reflection of timing
differences on when the orders have been or are expected to be booked and
competitive changes in the marketplace. The increase in net sales is
the result of the factors impacting orders and timing as driven by our customers
and our larger backlog going into fiscal 2010 as compared to fiscal year
2009. Similar to other markets, it appears that the competitive
environment has become more intense as a limited number of competitors have
become more aggressive in pricing. Although we do not expect that
this pricing pressure is sustainable, it is likely to have an adverse impact on
our net sales and gross profit margins in the current fiscal
year. Notwithstanding the foregoing, we expect that net sales in the
Transportation market will grow in fiscal 2010 as compared to fiscal 2009;
however, orders may not increase, depending on the effects of federal stimulus
spending, the competitive environment and our ability to earn that business as
it occurs.
International
Market. Net sales in the International market in the second
quarter of fiscal 2010 as compared to the second quarter of fiscal 2009 were up
approximately 0.8% and on a year-to-date basis are down approximately
50.6%. Orders were up approximately 7.6% for the second quarter of
fiscal 2010 as compared to the second quarter of fiscal 2009 and on a
year-to-date basis are down approximately 3.9%. The decrease in net
sales for the first six months of fiscal 2010 as compared to the first six
months of fiscal 2009 was attributable, in part, to large orders booked in the
fourth quarter of fiscal 2008 for a rail station in Beijing and a network of
displays in the U.K. that converted to net sales in the first quarter of fiscal
2009. Due to the focus on large contracts in this market and the
small number of contracts actually booked, volatility is not
unusual. Overall, we have made considerable investments in growing
our business internationally, where we do not have the same market share as we
do domestically. As stated in prior filings, in the second half of
fiscal 2009 we began to see more competitive pressures in this area similar to
the competitive pressures described above in the Live Events market because the
competitors tend to overlap. We believe that this had an adverse
impact on our order bookings in the second half of fiscal 2009, which continued
in the first half of fiscal 2010. In spite of the foregoing, it
appears that this market may be seeing some strengthening, as our opportunities
seem to be increasing. If this strengthening converts to additional
orders in the future, we expect that they will be at lower contract gross profit
levels as compared to the prior fiscal year.
Advertising
Revenues. We occasionally sell products in exchange for the
advertising revenues generated from use of the products. These sales
represented less than 1% and 2% of net sales for the first six months of fiscal
2010 and 2009, respectively. The gross profit percent on these
transactions have typically been higher than the gross profit percent on other
transactions of similar size, although the selling expenses associated with
these transactions also are typically higher.
Backlog. The order
backlog as of October 31, 2009 was approximately $90 million as compared to $134
million as of November 1, 2008 and $113 million at the beginning of the second
quarter of fiscal 2010. Historically, our backlog varies due to the
timing of large orders. The decline in backlog is the result of the
lower level of order bookings as previously described across all markets coupled
with the differences in net sales during the periods. Backlog varies
significantly quarter to quarter due to the effects of large orders, and
significant variations can be expected, as explained previously. In addition,
our backlog is not necessarily indicative of future sales or net
income.
GROSS
PROFIT
Gross
profit decreased 30.3% to $33.6 million for the second quarter of fiscal 2010 as
compared to $48.2 million for the second quarter of fiscal 2009. For
the first six months of fiscal 2010, gross profit decreased 32.0% to $63.6
million compared to $93.6 million for the first six months of fiscal
2009. As a percent of net sales, gross profit was 29.1% and 27.8% for
the three and six months ended October 31, 2009 as compared to 28.4% and 28.3%
for the three and six months ended November 1, 2008. The decrease in
gross profit dollars was primarily the result of lower sales, which were
partially offset by lower warranty costs. Warranty costs declined by
more than $4.2 million in the second quarter of fiscal 2010 as compared to the
second quarter of fiscal 2009. For the first half of fiscal 2010,
warranty costs were approximately $6 million less than the same period of fiscal
2009. In addition, higher costs of manufacturing as a percent of cost
of goods sold adversely impacted gross profit percents. The decrease
in manufacturing costs for the second quarter of fiscal 2010 as compared to the
first quarter of fiscal 2010 was slightly more than expected as we experienced
much lower employee benefit costs, which we do not expect to sustain in future
quarters. Most of these savings were in health insurance costs, which
are volatile due to the nature of being self-insured. Had we achieved
the same percentage of cost of goods sold in the second quarter of fiscal 2010
as in the second quarter of fiscal 2009, manufacturing costs would have been
$2.6 million less. Manufacturing costs include a significant portion
of fixed costs which cannot be reduced during periods of lower
sales. However, we continue to reduce costs where we can, including
personnel and related costs, to lower this impact.
We are
and have been over the past two years investing significant resources into
standardizing our large video display product line, which we believe contained
excessive custom design, increasing our risk of warranty costs. In addition, to
reduce the level of warranty exposure, we have invested in enhanced product
reliability testing equipment and personnel to implement more rigorous product
testing procedures and to continue to enhance our quality processes in
manufacturing. We believe that we have made progress in gaining control over our
warranty costs but cannot be certain that new issues will not arise, including
those described in the notes to the consolidated financial
statements.
-23-
During
the third quarter of fiscal 2009, as described in the notes to the consolidated
financial statements, we discovered a warranty issue caused by our finishing
process for certain products which causes the paint on aluminum surfaces to peel
in certain conditions. During the second quarter of fiscal 2010, we quantified
the reserve and fully provided for all costs to be incurred in connection with
the issue. The final adjustment was not material to the consolidated
financial statements.
We strive
toward higher gross margins as a percent of net sales, although depending on the
actual mix, the performance of larger projects, and our ability to execute on
the business and level of future sales, margin percentages may not
increase. We continue to examine areas for cost reduction, including
personnel costs, and we believe that we can make reductions in manufacturing
costs in the future that will positively impact gross
profit. However, any improvements in gross profit margin percents are
subject to volatility based on issues described herein and in our risk factors
as contained in our Annual Report on Form 10-K.
Gross
profit in our Commercial market declined to approximately 27% in the second
quarter of fiscal 2010 from approximately 28% in the same period of fiscal
2009. For the first six months of fiscal 2010, gross profit margin
was approximately 24% as compared to 28% for the same period of fiscal
2009. The decline for both the quarter and year to date is the result
of a decline in margin within the national accounts and outdoor advertising
business. The decline resulted from greater costs of excess capacity caused by
lower sales as previously explained. In addition, the gross profit has
declined in most niches within the commercial market due to increased
competition and costs of services and warranties.
Gross
profit in our Live Events market decreased to approximately 28% in the second
quarter of fiscal 2010 as compared to approximately 33% in the second quarter of
fiscal 2009. For the first six months of fiscal 2010, the gross profit margin
was approximately 27% as compared to 32% for the same period of fiscal
2009. The decrease for the first six months of fiscal 2010 compared
to the same period of fiscal 2009 was primarily the result of higher service and
project engineering costs as a percent of sales. This has been
partially offset by slightly better product margins.
Gross
profit in our Schools and Theatres market decreased to approximately 28% in the
second quarter of fiscal 2010 from approximately 29% in the second quarter of
fiscal 2009. For the first six months of fiscal 2010, gross profit was 30%
compared to 28% for the same period in fiscal 2009. This improvement on a year
to date basis resulted from higher margins on our standard products, primarily
scoreboards and Galaxy displays, as a result of tighter controls over
discounting as well as less variance in manufacturing as a result of more
efficient operations, which was reflected in better product lead times for the
market. This improvement was partially offset by lower margins in
services and other areas.
Gross
profit in our Transportation market increased to approximately 34% in the second
quarter of fiscal 2010 as compared to approximately 19% in the second quarter of
fiscal 2009. For the first six months of fiscal 2010, the gross profit margin
was approximately 35% as compared to approximately 20% in the same period in
fiscal 2009. The increase was the result of better margins achieved
on contracts booked for delivery in the first half of fiscal 2010 as compared to
the first half of fiscal 2009.
Gross
profit in the International market increased to approximately 33% in the second
quarter of fiscal 2010 as compared to approximately 7% in the same period one
year ago. For the first six months of fiscal 2010, the gross profit margin
was approximately 32%, compared to approximately 20% for the same period in
fiscal 2009. The increase in gross profit percent for fiscal 2010 on
a year to date basis was the result of lower warranty costs in fiscal
2010.
OPERATING
EXPENSES
Operating
expenses, which are comprised of selling, general and administrative expenses
and product design and development costs, decreased by approximately 14.1% to
$24.4 million in the second quarter of fiscal 2010 from $28.4 million in the
second quarter of fiscal 2009. As a percent of net sales, operating
expenses increased to 21.1% of net sales in the second quarter of fiscal 2010
from 16.7% of net sales for the second quarter of fiscal
2009. Operating expenses decreased 13.2% from $59.0 million for the
six months ended November 1, 2008 to $51.2 for the six months ended October 31,
2009. As a result of the downturn in orders and net sales that
arose during the third quarter of fiscal 2009, we began to decrease all types of
operating expenses to partially keep pace with the declining net sales. We
expect these efforts to continue throughout fiscal 2010. The ultimate level of
decreased spending is difficult to estimate, as it involves continuous and
evolving efforts. Our most significant cost factor within operating expense is
personnel related costs, and, to date, our approach has been focused on allowing
attrition to drive a significant portion of the decrease coupled with a general
hiring freeze. In addition, we have implemented wage freezes for salaried
employees beginning in fiscal 2010 and have implemented various other cost
reduction initiatives. We have limited the amount of decreases in spending so
that we do not adversely impact our business when the economy and the market for
our products improve, as our intention is to emerge from the downturn stronger
than when we entered it.
All areas
of operating expenses on a year to date basis were impacted because the first
quarter of fiscal 2009 included 14 weeks as opposed to the more common 13 weeks
of the first quarter of fiscal 2010.
-24-
Selling Expenses. Selling
expenses consist primarily of salaries, other employee-related costs, travel and
entertainment expense, facilities-related costs for sales and service offices,
and expenditures for marketing efforts, including collateral materials,
conventions and trade shows, product demos and supplies.
Selling
expenses decreased 16.8% to $12.9 million for the three months ended October 31,
2009 as compared to $15.5 million for the second quarter of fiscal 2009.
Selling expenses decreased 14.4% to $27.3 million for the six months ended
October 31, 2009 from $31.9 million for the same period in fiscal year
2009. Selling expenses increased to 11.2% of net sales for the second
quarter of fiscal 2010 from 9.1% of net sales for the second quarter of fiscal
2009.
Selling
expenses for the second quarter of fiscal 2010 were lower than selling expenses
in the second quarter of fiscal 2009 as a result of a decrease in personnel
costs, including taxes and benefits, of approximately $1.3 million, a decline of
$0.6 million in travel and entertainment costs, a $0.4 million decrease in costs
of conventions, a decrease of $0.3 million in bad debt expense and an increase
of $0.1 million in various other categories. The decrease in travel
and entertainment costs is a reflection of the lower level of sales
opportunities and cost savings initiatives in place. The decrease in
costs of conventions is a result of cost savings initiatives, which resulted in
a lower number of trade shows attended and decreased costs of those where
attendance was appropriate.
Throughout
the rest of fiscal 2010, we anticipate selling costs to decline from the current
level. This estimate is subject to containing costs, such as bad debt
expense and travel and entertainment costs, and achieving additional employee
attrition during the remainder of fiscal 2010.
General and Administrative.
General and administrative expenses consist primarily of salaries, other
employee-related costs, professional fees, shareholder relations fees,
facilities and equipment-related costs for administration departments,
amortization of intangibles and supplies.
General
and administrative expenses decreased 21.1% to $6.0 million for the second
quarter of fiscal 2010 as compared to $7.6 million for the second quarter of
fiscal 2009. General and administrative expenses decreased 17.8% to
$12.5 million for the first six months of fiscal 2010 as compared to $15.2
million for the first six months of fiscal 2009.
General
and administrative expenses increased to 5.2% as a percent of net sales for the
second quarter of fiscal 2010 from 4.5% of net sales for the second quarter of
fiscal 2009. For the first six months of fiscal 2010, general and
administrative expenses increased to 5.5% of net sales as compared to 4.6% of
net sales for the first six months of fiscal 2009.
General
and administrative expenses decreased in the second quarter of fiscal 2010 over
the same period in fiscal 2009 due to decreases of $0.3 million in personnel
costs, including taxes and benefits, $0.5 in professional and consulting fees,
$0.1 in recruitment fees, $0.2 in software and hardware costs, and $0.5 in other
various expenses. Generally, all declines in spending within this
area are due to ongoing cost reduction efforts. We expect to continue
examining opportunities for cost reductions within general and administrative
expenses; however, material declines from the current level may become more
difficult to realize.
Product Design and Development.
Product design and development expenses consist primarily of salaries,
other employee-related costs, facilities and equipment-related costs and costs
of supplies.
Product
design and development expenses increased 3.8% to $5.5 million for the second
quarter of fiscal 2010 as compared to $5.3 million for the second quarter of
fiscal 2009. Product design and development expenses decreased 3.4%
to $11.4 million for the first six months of fiscal 2010 as compared to $11.8
million for the first six months of fiscal 2009.
Product
design and development expenses increased to 4.8% as a percent of net sales for
the second quarter of fiscal 2010 from 3.1% of net sales for the second quarter
of fiscal 2009. For the first six months of fiscal 2010, product
design and development expenses increased to 5.0% of net sales as compared to
3.6% of net sales for the first six months of fiscal 2009.
During
the second quarter of fiscal year 2009, we committed to specific plans for
developing a new module product platform for our large display technology for
the purpose of gaining reliability and improved operational
control. As a result, we have scaled back our expectations for cost
reductions in product development. In addition, we have transferred
some personnel from other areas of the company to product development to help
speed this development and aid in other development projects.
Based on
the foregoing, we expect that product design and development expenses will
approximate between 5.0% and 5.5% of net sales for fiscal 2010.
INTEREST
INCOME AND EXPENSE
We
occasionally generate interest income through product sales on an installment
basis, under lease arrangements or in exchange for the rights to sell and retain
advertising revenues from displays, which result in long-term receivables. We
also invest excess cash in short-term temporary cash investments and marketable
securities that generate interest income. Interest expense is
comprised primarily of interest costs on our notes payable and long-term
debt.
-25-
Interest
income decreased 20.0% to $0.4 million for the second quarter of fiscal 2010
compared to $0.5 million for the second quarter of fiscal 2009. For
the first six months of fiscal 2010, interest income decreased 20.0% to $0.8
million from $1.0 million for the first six months of fiscal
2009. The decrease was the result of lower levels of interest-bearing
long-term receivables. We expect that the amount of interest income
will decrease in fiscal 2010 over fiscal 2009 due to the lower levels of
interest-bearing receivables, but that the decrease will be partially offset by
the interest income on higher levels of temporary cash investments; however, our
business is characterized by a great deal of volatility of working capital
components, and therefore cash balances could be lower than expected, leading to
lower interest income.
Interest
expense decreased slightly for the second quarter of fiscal 2010 as compared to
the second quarter of fiscal 2009. For the first six months of fiscal
2010, interest expense decreased 50.0% to $0.1 million from $0.2 million for the
first six months of fiscal 2009. The decrease is due to lower average
borrowings outstanding during the first half of fiscal 2010 as compared to the
first half of fiscal 2009 and lower bank costs for letters of
credit. We expect that interest expense will remain at relatively low
levels for the rest of fiscal 2010.
OTHER
INCOME (EXPENSE), NET
Other
income (expense) decreased for the second quarter of fiscal year 2010 to a loss
of $0.7 million as compared to a loss of $1.3 million for the second quarter of
fiscal year 2009. For the first six months of fiscal 2010, it
decreased to a loss of $1.3 million as compared to a loss of $1.7 million for
the same period in fiscal 2009. The decrease of net other expense
results from the effects of earnings attributable to unconsolidated affiliates
and currency gains and losses and a pre-tax loss of approximately $0.2 million
in the first quarter of 2010 from the sale of our investment in Ledtronics, our
Malaysia affiliate. Finally, as a result of the loss in value of the
U.S. dollar, we experienced lower levels of currency losses on U.S. dollar
advances to foreign subsidiaries. On a year to date basis we have
realized approximately $0.7 million more in currency gains in fiscal 2010 versus
the same period in fiscal 2009. We also continue to have losses
resulting from our equity investment in OutCast Media International, Inc.
(“OutCast”), formerly known as FuelCast Media International,
LLC. These losses are approximately $0.2 million higher in the second
quarter and year to date for fiscal 2010 as compared to the same periods one
year ago. Furthermore, our losses could increase in the rest of
fiscal 2010, as explained in Note 10 of the consolidated financial
statements. The losses could result if OutCast is unable to refinance
its debt which includes approximately $1.6 million owed to us and approximately
$1.8 million which we guarantee. As of the date of filing we have
entered into a letter of intent which includes repayment of accounts owed to
us.
INCOME
TAX EXPENSE
Income
taxes were approximately $3.9 million in the second quarter of fiscal 2010 and
$6.8 million for the second quarter of fiscal 2009. For the first six
months of fiscal 2010, income taxes decreased to $5.5 million as compared to
$11.9 million for the first six months of fiscal 2009. The effective
tax rate for the six months ended October 31, 2009 was 46.8% as compared to
35.1% for the first six months of fiscal 2009. The effective rate for
the second quarter of fiscal 2010 was approximately 44.8% as compared to 35.7%
for the second quarter of fiscal 2009. The increase for the quarter
and year to date in the effective rate is due to the size of losses incurred in
foreign jurisdictions relative to domestic income, which causes the effective
rate to increase. In addition, due to the lower levels of income
expected for the year domestically, the items that cause a change from the
statutory rate to the effective rate have a more significant
impact. If we are able to increase our income, we would expect that
the effective tax rate will decrease.
LIQUIDITY
AND CAPITAL RESOURCES
Working
capital was $121.5 million at October 31, 2009 and $107.3 million at May 2,
2009. We have historically financed working capital needs through a
combination of cash flow from operations and borrowings under bank credit
agreements.
Cash
provided by operations for the first six months of fiscal 2010 was $29.7
million. Net income of $6.3 million plus depreciation and
amortization of $11.3 million, $9.4 million in changes in net operating assets,
and the add-back of $1.3 million of equity in net losses of equity investments,
and $1.7 million of stock-based compensation, and various other items, generated
the cash provided by operations.
The most
significant drivers of the change in net operating assets for the first six
months of fiscal 2010 were the decreases in accounts receivable, long-term
receivables, inventories, and costs and estimated earnings in excess of billings
and increases in customer deposits. These changes were offset by
decreases in accounts payable, billing in excess of costs and estimated
earnings, accrued expenses and warranty obligations, and income taxes
payable. The decrease in accounts receivables and inventories was the
result of the lower level of net sales; however, days sales outstanding
increased by two days over fiscal 2009 year end levels. Days
inventory outstanding decreased slightly as compared to the end of fiscal
2009. Other changes in net operating assets were not significant and
generally related to the change in overall business during the
quarter. Overall, changes in operating assets and liabilities can be
impacted by the timing of cash flows on large orders, as described above, that
can cause significant fluctuations in the short term. As a result of
various initiatives underway, including changes in manufacturing, purchasing,
collections and payment processes, we expect to continue improving our cash flow
relative to sales and costs of goods from operating activities.
-26-
Cash used
by investing activities of $5.9 million for the first six months of fiscal 2010
included $6.2 million for purchases of property and equipment and $0.3 million
of purchased receivables from an affiliate, which was offset by $0.1 million of
proceeds from the sale of property and equipment and $0.5 million from sale of
Ledtronics, our Malaysian affiliate. During the first six months of
fiscal 2010, we invested approximately $1.7 million in manufacturing equipment,
$1.3 million in product demonstration equipment, $1.3 million in information
systems infrastructure, including software, $0.3 million in facilities, and $1.7
million in rental equipment. These investments were made to support
sales, in the case of demo and rental equipment, and other areas, primarily for
maintaining existing infrastructure rather than for growth
needs. As of the end of the second quarter of fiscal 2010,
capital expenditures were 2.7% of net sales. The purchase of
receivables from an affiliate consists of our purchase of receivables from
OutCast to facilitate cash flow from operations of their business.
Cash used
by financing activities of $3.7 million for the first six months of fiscal 2010
consisted of the dividend paid to shareholders of $3.9 million on June 23, 2009,
which was partially offset by $0.2 million of proceeds from the exercise of
stock options. During the second quarter of fiscal 2010, we paid off
the long-term debt related to a purchase of a long-term software maintenance
agreement incurred in the first quarter as a result of incentives and pricing
considerations.
Included
in receivables as of October 31, 2009 was approximately $6.6 million of
retainage on long-term contracts, all of which is expected to be collected
within one year.
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 the
customer’s delivery needs. We often receive down payments or progress payments
on these product orders. To the extent that 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.
Our
product development activities during the first six months of fiscal 2010
included the enhancement of existing products and the development of new
products from existing technologies. Product design and development expenses
were $5.5 million for the second quarter of fiscal 2010 as compared to $5.3
million for the second quarter of fiscal 2009. We intend to incur expenditures
at a rate of approximately 5.0% to 5.5% of fiscal year 2010 net sales
to develop new display products using various display technologies to offer
higher resolution and more cost effective and energy efficient displays. We also
intend to continue developing software applications for our display systems to
enable these products to continue to meet the needs and expectations of the
marketplace.
We have a
credit agreement with a bank, which was amended on November 12, 2009, which
provides for a $35.0 million line of credit and includes up to $15.0 million for
standby letters of credit. The line of credit is due on November 15,
2010. The interest rate ranges from LIBOR plus 125 basis points to LIBOR plus
175 basis points depending on certain ratios. The effective
interest rate was 1.0% at October 31, 2009. We are assessed a loan
fee equal to 0.125% per annum of any non-used portion of the loan. As
of October 31, 2009, there were no advances under the line of
credit. The credit agreement is unsecured and requires us to comply
with certain covenants, including the maintenance of tangible net worth of at
least $75 million, a minimum liquidity ratio, a limit on dividends and
distributions and a minimum adjusted fixed charge coverage ratio. We
were in compliance with all covenants as of October 31, 2009.
Daktronics
Shanghai, Ltd., has established a line of credit for $1.5 million to facilitate
the issuance of bank guarantees in connection with orders it
receives. The fees on the line are equal to 0.5% of the outstanding
bank guarantees, and the line of credit is secured by a letter of credit issued
by us. The line expires on May 31, 2010. As of October 31,
2009, no advances under the line of credit or bank guarantees were
outstanding.
On May 28
2009, our Board declared an annual dividend payment of $0.095 per share on our
common stock for the fiscal year ended May 2, 2009. Although we
intend to pay regular annual dividends for the foreseeable future, all
subsequent dividends will be reviewed annually and declared by our Board of
Directors at its discretion.
We are
sometimes required to obtain performance bonds for display installations, and we
have a bonding line available through a surety company that provides for an
aggregate of $100 million in bonded work outstanding. At October 31, 2009, we
had approximately $20.9 million of bonded work outstanding against this
line.
We
believe that if our growth extends beyond current expectations or if we make any
strategic investments, we may need to increase our credit facility or seek other
means of financing our growth. We anticipate that we will be
able to obtain any needed funds under commercially reasonable terms from our
current lender or other sources. We believe that our working capital
available from all sources will be adequate to meet the cash requirements of our
operations in the foreseeable future.
-27-
RECENT
EVENTS
In
October 2009, our subsidiary Star Circuits, Inc., which produces circuit boards
for use in our products, had a fire which damaged or destroyed its key
production equipment and building mechanical and structural
components. Operations have been stopped in this facility until new
equipment is installed and building repair is completed, which is estimated to
be in the fourth quarter of fiscal 2010. Our insurance policies and
coverages entitle us to receive payments for business interruption, as well as
recoveries for damage to the building and equipment as a result of the fire.
Income resulting from business interruption insurance, if any, and property
damage insurance will not be recognized until all contingencies are resolved.
The total extent of the property damage and other expected costs to rebuild and
cover losses are estimated to be between approximately $2.0 to $4.0
million. Although there are assets included within inventory and
property and equipment that have been impaired, we believe that insurance
proceeds will be sufficient to cover substantially all of the losses and the
additional expenses incurred and therefore we have not recognized any losses as
of October 31, 2009. This estimate is subject to change based on the
final insurance settlement and completion of our analysis of potential losses.
We have been able to source the circuit boards from an outside
vendor.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
FOREIGN
CURRENCY EXCHANGE RATES
Through
October 31, 2009, most of our net sales were denominated in United States
dollars, and our exposure to foreign currency exchange rate changes on net sales
has not been significant. Net sales originating outside the United States for
the second quarter of fiscal 2010 were approximately 12.4% of total net sales,
of which a portion was denominated in Canadian dollars, euros, Chinese renminbi
or British pounds. If we believed that currency risk in any foreign location was
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 this business could be denominated in foreign
currencies. In addition, we fund operating cash to foreign subsidiaries in the
form of loans denominated in United States 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 that we engage in international sales denominated in United States
dollars, an increase in the value of the United States 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 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 financial results in the
future.
INTEREST
RATE RISKS
Our
exposure to market rate risk for changes in interest rates relates primarily to
our debt and long-term accounts receivables. We maintain a blend of both fixed
and floating rate debt instruments. As of October 31, 2009, our outstanding debt
approximated less than $0.1 million, substantially all of which was in variable
rate obligations. Each 100 basis point increase or decrease in interest rates
would have an insignificant annual effect on variable rate debt interest based
on the balances of such debt as of October 31, 2009. For fixed-rate debt,
interest rate changes affect its fair market value but do not affect earnings or
cash flows.
In
connection with the sale of certain display systems, we have entered into
various types of financings 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 October 31, 2009, our outstanding long-term
receivables were approximately $20.6 million. Each 25 basis point increase in
interest rates would have an associated annual opportunity cost to us of
approximately $0.1 million.
-28-
The
following table provides information about our financial instruments that are
sensitive to changes in interest rates, including debt obligations, for the last
two quarters of fiscal year 2010 and subsequent fiscal years.
|
|
Fiscal
Years (dollars in thousands)
|
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Thereafter
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
receivables, including
|
|
|
|
|
|
|
|
|
|
|
|
|
current
maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
$ |
4,627 |
|
$ |
3,347 |
|
$ |
3,095 |
|
$ |
2,734 |
|
$ |
1,564 |
|
$ |
5,314 |
Average
interest rate
|
|
|
7.6% |
|
|
8.0% |
|
|
8.0% |
|
|
8.0% |
|
|
8.2% |
|
|
8.4% |
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-
and short-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
$ |
13 |
|
$ |
26 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
Average
interest rate
|
|
|
0.0% |
|
|
0.0% |
|
|
0.0% |
|
|
0.0% |
|
|
0.0% |
|
|
0.0% |
Long-term
marketing obligations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
$ |
105 |
|
$ |
361 |
|
$ |
247 |
|
$ |
137 |
|
$ |
134 |
|
$ |
7 |
Average
interest rate
|
|
|
9.2% |
|
|
8.9% |
|
|
8.8% |
|
|
8.7% |
|
|
8.9% |
|
|
8.4% |
The
carrying amounts reported on the balance sheet for long-term receivables and
long- and short-term debt approximates their fair value.
Approximately
$53.0 million of our cash balances are 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 subsidiary.
Item 4. CONTROLS AND PROCEDURES
We
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our “disclosure
controls and procedures,” as that term is defined in Rule 13a-15(e) and Rule
15d-15(e) under the Securities Exchange Act of 1934, as of October 31, 2009,
which is the end of the period covered by this report. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that as of October 31, 2009, our disclosure controls and procedures
were effective.
Based on
the evaluation described in the foregoing paragraph, our Chief Executive Officer
and Chief Financial Officer concluded that during the quarter ended October 31,
2009, there was no change in our internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Our
company and two of our executive officers are named as defendants in a
consolidated class action filed in the U.S. District Court for the District of
South Dakota in November 2008 on behalf of a class of investors who purchased
our stock in the open market between November 15, 2006 and April 5, 2007.
In an Amended Consolidated Complaint filed on April 13, 2009 (“Complaint”), the
plaintiffs allege that the defendants made false and misleading statements of
material facts about our business and expected financial performance in the
company’s press releases, its filings with the Securities and Exchange
Commission, and conference calls, thereby inflating the price of the company’s
common stock. The Complaint alleges claims under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, as amended (“Exchange Act”). The
Complaint seeks compensatory damages on behalf of the alleged class in an
unspecified amount, reasonable fees and costs of litigation, and such other and
further relief as the Court may deem just and proper. On June 5,
2009, we filed a motion to dismiss the Complaint. In July 2009, the
plaintiffs filed a memorandum of law in opposition to our motion to
dismiss. In September 2009, we filed a reply memorandum in support of
the motion to dismiss. Briefing on the motion is
underway.
We
believe that we, and the other defendants, have meritorious defenses to the
claims made in the Complaint, and we intend to contest these actions vigorously.
We are not able to predict the ultimate outcome of this litigation, but
regardless of the merits of the claims, it may be costly and disruptive. The
total costs cannot be reasonably estimated at this time. Securities class action
litigation can result in substantial costs and divert our management’s attention
and resources, which may have a material adverse effect on our business,
financial condition and results of operations, including our cash
flow.
In the
third quarter of fiscal 2008, our Board of Directors received letters from
lawyers acting on behalf of three of our shareholders. The letters
demanded that our company pursue claims against our officers, directors, and
unspecified others for allegedly wrongful conduct based upon the same general
events as are alleged in the Complaint. The Board referred the demands to
a special committee of independent directors for investigation and action.
The special committee concluded its investigation and determined that it would
not be in the best interests of the company to take any action on the
allegations contained in the demands at this time and that it will continue to
monitor the matter and revisit the demands if more information becomes
available.
-29-
The
discussion of our business and operations included in this Quarterly Report on
Form 10-Q should be read together with the risk factors described in Item 1A. of
our Annual Report on Form 10-K for the fiscal year ended May 2,
2009. It describes various risks and uncertainties to which we are or
may become subject. These risks and uncertainties, together with other factors
described elsewhere in this Report, have the potential to affect our business,
financial condition, results of operations, cash flows, strategies or prospects
in a material and adverse manner. New risks may emerge at any time, and we
cannot predict those risks or estimate the extent to which they may affect
financial performance.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
Not
applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not
applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Not
applicable.
Item 5. OTHER INFORMATION
Not
applicable.
The
following exhibits are filed with this Quarterly Report on Form
10-Q:
31.1 |
Certification
of the Chief Executive Officer required by Rule 13a-14(a) or Rule
15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
Certification
of the Chief Financial Officer required by Rule 13a-14(a) or Rule
15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 |
Certification of the
Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. Section 1350). |
32.2 |
Certification of the
Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. Section 1350). |
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
/s/
William R. Retterath
|
|
Daktronics,
Inc.
|
|
William
R. Retterath,
|
|
Chief
Financial Officer
|
|
(Principal
Financial Officer
|
|
and
Principal Accounting
|
|
Officer)
|
Date:
November 25, 2009
-31-