DAKTRONICS INC /SD/
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the Quarterly Period Ended January 30, 2010
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)
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South
Dakota
(State
or other jurisdiction of incorporation or organization)
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46-0306862
(I.R.S.
Employer Identification Number)
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201
Daktronics Drive
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||
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Brookings,
SD
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57006
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(Address
of principal executive offices)
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(Zip
Code)
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(605)
692-0200
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||
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(Registrant’s
telephone number, including area
code)
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||
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 February 22,
2010 was 41,062,433.
DAKTRONICS,
INC. AND SUBSIDIARIES
FORM
10-Q
For the
Quarter Ended January 30, 2010
Table
of Contents
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Page
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||||||
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Exhibit Index:
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||||||
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Ex.
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10.1
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Loan
Agreement dated October 14, 1998 between U.S. Bank National Association
and Daktronics, Inc.
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||||
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Ex.
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10.2
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Sixth
Amendment to Loan Agreement Dated January 23, 2007 by and between
Daktronics, Inc. and U.S. Bank National Association
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||||
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Ex.
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10.3
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Eighth
Amendment to Loan Agreement Dated November 12, 2009 by and between
Daktronics, Inc. and U.S. Bank National Association
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||||
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Ex.
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10.4
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Renewal
Revolving Note Dated November 12, 2009 between Daktronics, Inc. and U.S.
Bank National Association
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||||
-1-
DAKTRONICS
, INC. AND SUBSIDIARIES
(in
thousands, except share data)
|
January
30,
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May
2,
|
|||||||
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2010
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2009
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|||||||
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(unaudited)
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(note
1)
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|||||||
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ASSETS
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||||||||
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CURRENT
ASSETS:
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||||||||
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Cash
and cash equivalents
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$ | 57,306 | $ | 36,501 | ||||
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Restricted
cash
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1,264 | 1,083 | ||||||
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Accounts
receivable, less allowance for doubtful accounts
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40,277 | 61,412 | ||||||
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Inventories
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37,494 | 51,400 | ||||||
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Costs
and estimated earnings in excess of billings
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24,402 | 27,541 | ||||||
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Current
maturities of long-term receivables, less allowance for
|
||||||||
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doubtful
accounts
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6,973 | 7,962 | ||||||
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Prepaid
expenses and other
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5,296 | 5,587 | ||||||
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Deferred
income taxes
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15,293 | 15,017 | ||||||
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Income
tax receivable
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6,223 | - | ||||||
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Property
and equipment available for sale
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182 | 470 | ||||||
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Total
current assets
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194,710 | 206,973 | ||||||
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Advertising
rights, net
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1,591 | 2,392 | ||||||
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Long-term
receivables, less current maturities
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13,469 | 15,879 | ||||||
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Investments
in affiliates
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530 | 2,541 | ||||||
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Goodwill
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3,262 | 4,549 | ||||||
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Intangible
and other assets
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3,920 | 2,804 | ||||||
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Deferred
income taxes
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395 | 311 | ||||||
| 23,167 | 28,476 | |||||||
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PROPERTY
AND EQUIPMENT:
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||||||||
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Land
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1,471 | 1,204 | ||||||
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Buildings
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54,821 | 50,810 | ||||||
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Machinery
and equipment
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52,837 | 50,013 | ||||||
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Office
furniture and equipment
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53,732 | 52,369 | ||||||
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Equipment
held for rental
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2,353 | 2,423 | ||||||
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Demonstration
equipment
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9,043 | 8,021 | ||||||
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Transportation
equipment
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4,531 | 5,115 | ||||||
| 178,788 | 169,955 | |||||||
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Less
accumulated depreciation
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94,883 | 80,528 | ||||||
| 83,905 | 89,427 | |||||||
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TOTAL
ASSETS
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$ | 301,782 | $ | 324,876 | ||||
-2-
DAKTRONICS,
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
(continued)
(in
thousands, except share data)
|
January
30,
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May
2,
|
|||||||
|
2010
|
2009
|
|||||||
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(unaudited)
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(note
1)
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|||||||
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LIABILITIES
AND SHAREHOLDERS' EQUITY
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||||||||
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CURRENT
LIABILITIES:
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||||||||
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Accounts
payable
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$ | 19,339 | $ | 30,273 | ||||
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Accrued
expenses and warranty obligations
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31,155 | 35,548 | ||||||
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Current
maturities of long-term debt and marketing obligations
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381 | 367 | ||||||
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Billings
in excess of costs and estimated earnings
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10,079 | 13,769 | ||||||
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Customer
deposits
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8,964 | 10,007 | ||||||
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Deferred
revenue (billed or collected)
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6,526 | 6,669 | ||||||
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Income
taxes payable
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522 | 2,935 | ||||||
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Total
current liabilities
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76,966 | 99,568 | ||||||
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Long-term
debt, less current maturities
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13 | 23 | ||||||
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Long-term
marketing obligations, less current maturities
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550 | 759 | ||||||
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Long-term
warranty obligations and other payables
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4,583 | 4,805 | ||||||
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Deferred
income taxes
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4,755 | 4,948 | ||||||
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Long-term
deferred revenue (billed or collected)
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4,354 | 2,862 | ||||||
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Total long-term liabilities
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14,255 | 13,397 | ||||||
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TOTAL
LIABILITIES
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91,221 | 112,965 | ||||||
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SHAREHOLDERS'
EQUITY:
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||||||||
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Common
stock, no par value, authorized
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||||||||
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120,000,000
shares; 41,082,899 and 40,657,552 shares
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||||||||
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issued
at January 30, 2010 and May 2, 2009, respectively
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29,936 | 27,872 | ||||||
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Additional
paid-in capital
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16,449 | 13,898 | ||||||
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Retained
earnings
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164,742 | 170,705 | ||||||
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Treasury
stock, at cost, 19,680 shares
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(9 | ) | (9 | ) | ||||
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Accumulated
other comprehensive loss
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(557 | ) | (555 | ) | ||||
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TOTAL
SHAREHOLDERS' EQUITY
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210,561 | 211,911 | ||||||
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TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
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$ | 301,782 | $ | 324,876 | ||||
-3-
DAKTRONICS
, INC. AND SUBSIDIARIES
(in
thousands, except per share data)
(unaudited)
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Three
Months Ended
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Nine
Months Ended
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|||||||||||||||
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January
30,
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January
31,
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January
30,
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January
31,
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|||||||||||||
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2010
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2009
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2010
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2009
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|||||||||||||
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Net
sales
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$ | 72,406 | $ | 128,692 | $ | 301,221 | $ | 459,618 | ||||||||
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Cost
of goods sold
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61,634 | 94,553 | 226,817 | 331,921 | ||||||||||||
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Gross
profit
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10,772 | 34,139 | 74,404 | 127,697 | ||||||||||||
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Operating
expenses:
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||||||||||||||||
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Selling
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13,155 | 15,513 | 40,411 | 47,403 | ||||||||||||
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General
and administrative
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6,523 | 6,576 | 19,016 | 21,812 | ||||||||||||
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Product
design and development
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5,155 | 5,149 | 16,558 | 16,981 | ||||||||||||
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Gain
on insurance proceeds
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(1,496 | ) | - | (1,496 | ) | - | ||||||||||
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Goodwill
impairment
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1,410 | - | 1,410 | - | ||||||||||||
| 24,747 | 27,238 | 75,899 | 86,196 | |||||||||||||
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Operating
income (loss)
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(13,975 | ) | 6,901 | (1,495 | ) | 41,501 | ||||||||||
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Nonoperating
income (expense):
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||||||||||||||||
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Interest
income
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376 | 516 | 1,129 | 1,563 | ||||||||||||
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Interest
expense
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(38 | ) | (32 | ) | (149 | ) | (196 | ) | ||||||||
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Other
income (expense), net
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(265 | ) | (699 | ) | (1,577 | ) | (2,378 | ) | ||||||||
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Income
(loss) before income taxes
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(13,902 | ) | 6,686 | (2,092 | ) | 40,490 | ||||||||||
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Income
tax expense (benefit)
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(5,531 | ) | 2,524 | (2 | ) | 14,405 | ||||||||||
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Net
income (loss)
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$ | (8,371 | ) | $ | 4,162 | $ | (2,090 | ) | $ | 26,085 | ||||||
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Weighted
average shares outstanding:
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||||||||||||||||
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Basic
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41,004 | 40,629 | 40,862 | 40,500 | ||||||||||||
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Diluted
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41,004 | 40,953 | 40,862 | 41,178 | ||||||||||||
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Earnings
(loss) per share:
|
||||||||||||||||
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Basic
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$ | (0.20 | ) | $ | 0.10 | $ | (0.05 | ) | $ | 0.64 | ||||||
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Diluted
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$ | (0.20 | ) | $ | 0.10 | $ | (0.05 | ) | $ | 0.63 | ||||||
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Cash
dividend paid per share
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$ | - | $ | - | $ | 0.095 | $ | 0.09 | ||||||||
-4-
DAKTRONICS
, INC. AND SUBSIDIARIES
(in
thousands)
(unaudited)
|
Nine
Months Ended
|
||||||||
|
January
30,
|
January
31,
|
|||||||
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2010
|
2009
|
|||||||
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CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
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Net
income (loss)
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$ | (2,090 | ) | $ | 26,085 | |||
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Adjustments
to reconcile net income (loss) to net cash provided
|
||||||||
|
by
operating activities:
|
||||||||
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Depreciation
|
16,762 | 18,026 | ||||||
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Amortization
|
236 | 236 | ||||||
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Gain
on sale of property and equipment
|
(993 | ) | (977 | ) | ||||
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Stock-based
compensation
|
2,491 | 2,367 | ||||||
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Equity
in losses of affiliates
|
1,532 | 1,698 | ||||||
|
Goodwill
impairment
|
1,410 | - | ||||||
|
Provision
for doubtful accounts
|
(270 | ) | 71 | |||||
|
Loss
on sale of equity investee
|
230 | - | ||||||
|
Deferred
income taxes, net
|
(554 | ) | (356 | ) | ||||
|
Change
in operating assets and liabilities
|
19,059 | (19,520 | ) | |||||
|
Net
cash provided by operating activities
|
37,813 | 27,630 | ||||||
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CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchase
of property and equipment
|
(12,945 | ) | (19,306 | ) | ||||
|
Loans
to equity investees
|
- | (499 | ) | |||||
|
Purchases
of equity investment
|
(100 | ) | - | |||||
|
Purchases
of receivables from equity investee, net
|
(1,676 | ) | - | |||||
|
Proceeds from sale and insurance recoveries of property and
equipment
|
820 | 3,017 | ||||||
|
Proceeds
from sale of equity method investments
|
535 | - | ||||||
|
Net
cash used in investing activities
|
(13,366 | ) | (16,788 | ) | ||||
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CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
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Proceeds
from exercise of stock options
|
365 | 626 | ||||||
|
Excess
tax benefits from stock-based compensation
|
60 | 363 | ||||||
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Principal
payments on long-term debt
|
(13 | ) | (545 | ) | ||||
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Dividend
paid
|
(3,874 | ) | (3,635 | ) | ||||
|
Net
cash used in financing activities
|
(3,462 | ) | (3,191 | ) | ||||
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EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
(180 | ) | 214 | |||||
|
INCREASE
IN CASH AND CASH EQUIVALENTS
|
20,805 | 7,865 | ||||||
|
CASH
AND CASH EQUIVALENTS:
|
||||||||
|
Beginning
|
36,501 | 9,325 | ||||||
|
Ending
|
$ | 57,306 | $ | 17,190 | ||||
|
Supplemental
disclosures of cash flow information:
|
||||||||
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Cash
payments for:
|
||||||||
|
Interest:
|
$ | 227 | $ | 330 | ||||
|
Income
taxes, net of refunds
|
8,752 | 15,417 | ||||||
|
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||
|
Demonstration
equipment transferred to inventory
|
1,062 | 991 | ||||||
|
Purchase
of property and equipment included in accounts payable
|
993 | - | ||||||
|
Conversion
of accounts receivable to equity interest in affiliate
|
- | 1,947 | ||||||
|
See
notes to consolidated financial statements.
|
||||||||
-5-
DAKTRONICS
, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
(unaudited)
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 over which we have significant influence are accounted for by the
equity method. Investments in affiliates over which we do not have the ability
to exert significant influence over the investees operating and financing
activities are accounted for under the cost method of accounting. 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. The equity
method requires us to report our share of losses up to our equity investment
amount, including any financial support made or committed to. At such
time the equity investment is reduced to zero, we recognize losses to the extent
of and as an adjustment to the other investments in the affiliate in order of
seniority or priority in liquidation. Our proportional share of the
respective affiliate’s earnings or losses is included in other income (expense)
in our consolidated statement of income.
The
aggregate amount of investments accounted for under the cost method is
$100. The fair value of this investment has not been estimated as
there have not been any identified events or changes in circumstances that may
have a significant adverse effect on its fair value and it is not practical to
estimate its fair value.
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 to us in the amount of $1.6 million, and our
guarantee of its debt 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 $3.2 million. During the third
quarter of fiscal 2010, we had written down our equity investment to zero and
began writing down the convertible note based on our ownership level of the
convertible debt compared to all outstanding convertible debt of
Outcast. This level of ownership is 10%.
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) and reclassified
amounts between net sales and cost of goods sold.
-6-
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 and workers’
compensation claims, 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 $3,281 and $2,506 at
January 30, 2010 and May 2, 2009, respectively, and is included in accrued
expenses and warranty obligations in our consolidated balance
sheets.
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
$1,932 and $2,164 at January 30, 2010 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.
Long-Lived
Assets
:
Long-lived assets other than goodwill and indefinite-lived intangible assets,
which are separately tested for impairment, are evaluated for impairment
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable.
When
evaluating long-lived assets for potential impairment, we first compare the
carrying value of the asset to the asset's estimated future cash flows
(undiscounted and without interest charges). If the estimated future cash flows
are less than the carrying value of the asset, we calculate an impairment loss.
The impairment loss calculation compares the carrying value of the asset to the
asset's estimated fair value, which may be based on estimated future cash flows
(discounted and with interest charges). We recognize an impairment loss if the
amount of the asset's carrying value exceeds the asset's estimated fair value.
If we recognize an impairment loss, the adjusted carrying amount of the asset
becomes its new cost basis. For a depreciable long-lived asset, the new cost
basis will be depreciated (amortized) over the remaining useful life of that
asset.
Our
impairment loss calculations contain uncertainties because they require
management to make assumptions and to apply judgment to estimate future cash
flows and asset fair values, including forecasting useful lives of the assets
and selecting the discount rate that reflects the risk inherent in future cash
flows. We have not made any material changes in the accounting
methodology we use to assess impairment loss during the past three fiscal
years.
We do not
believe there is a reasonable likelihood that there will be a material change in
the estimates or assumptions we use to calculate long-lived asset impairment
losses. We also believe that recent changes in indicators in our business, such
as the decline in orders, the losses in the third quarter of fiscal 2010 and the
impairment of goodwill, among other things,
were an
indicator of impairment for our business units. As a result, we tested for
recoverability in accordance with ASC 360,
Property, Plant, and Equipment,
by
comparing the undiscounted cash flows expected from the use and eventual
disposition of the assets compared to the carrying amount of the assets.
We grouped the assets at the lowest level for which there are identifiable cash
flows that are independent of the cash flows of other assets and
liabilities. Based on this analysis, the undiscounted cash flows
significantly exceed the carrying amount of the long-lived assets and therefore
it was determined that there was no impairment.
If actual results
in the future are not consistent with our estimates and assumptions used in
estimating future cash flows and asset fair values, we may be exposed to future
losses that could be material.
-7-
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 we adopted the remaining parts of ASC 820 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.
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 must 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.
-8-
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.
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 605-25 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. The adoption of ASU 2009-05 did not have a
material impact on our consolidated financial statements.
In
January 2010, the FASB issued ASU 2010-06, which amends ASC 820
Fair Value Measurements and
Disclosures
:
Improving Disclosures about Fair
Value Measurements
. ASU 2010-06 amends ASC 820 to add new requirements
for disclosures about (1) the different classes of assets and liabilities
measured at fair value, (2) the valuation techniques and inputs used, (3) the
activity in level 3 fair value measurements, and (4) the transfers between
levels 1, 2, and 3 fair value measurements. ASU 2010-06 is effective for the
first reporting period beginning after December 15, 2009, except for the
requirement to provide the Level 3 activity of purchases, sales, issuances, and
settlements on a gross basis, which will be effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years. In
the period of initial adoption, entities will not be required to provide the
amended disclosures for any previous periods presented for comparative purposes.
However, those disclosures are required for periods ending after initial
adoption. Early adoption is permitted. We are currently evaluating the impact of
ASU 2010-06 on our consolidated financial statements.
-9-
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.
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 $1,591 as of January 30, 2010
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.
-10-
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 these 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 9.1% and 5.5% of net sales for the nine months ended January 30,
2010 and January 31, 2009, 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 U.S. 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 January 30, 2010.
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.
-11-
A
reconciliation of the income and common share amounts used in the calculation of
basic and diluted EPS for the three and nine months ended January 30, 2010
and January 31, 2009
follows:
|
Net
Income
|
Shares
|
Per
Share Amount
|
||||||
|
For
the three months ended January 30, 2010 :
|
||||||||
|
Basic
earnings per share
|
$
|
(8,371)
|
41,004
|
$
|
(0.20)
|
|||
|
Dilution
associated with stock compensation plans
|
- |
-
|
-
|
|||||
|
Diluted
earnings per share
|
$
|
(8,371)
|
41,004
|
$
|
(0.20)
|
|||
|
For
the three months ended January 31, 2009:
|
||||||||
|
Basic
earnings per share
|
$
|
4,162
|
40,629
|
$
|
0.10
|
|||
|
Dilution
associated with stock compensation plans
|
-
|
324
|
-
|
|||||
|
Diluted
earnings per share
|
$
|
4,162
|
40,953
|
$
|
0.10
|
|||
|
For
the nine months ended January 30, 2010 :
|
||||||||
|
Basic
earnings per share
|
$
|
(2,090)
|
40,862
|
$
|
(0.05)
|
|||
|
Dilution
associated with stock compensation plans
|
- |
-
|
-
|
|||||
|
Diluted
earnings per share
|
$
|
(2,090)
|
40,862
|
$
|
(0.05)
|
|||
|
For
the nine months ended January 31, 2009:
|
||||||||
|
Basic
earnings per share
|
$
|
26,085
|
40,500
|
$
|
0.64
|
|||
|
Dilution
associated with stock compensation plans
|
-
|
678
|
(0.01)
|
|||||
|
Diluted
earnings per share
|
$
|
26,085
|
41,178
|
$
|
0.63
|
|||
Options outstanding to purchase 3,464 shares of common stock with a weighted average exercise price of $12.89 during the three and nine months ended January 30, 2010 were not included in the computation of diluted earnings per share because the weighted average exercise price of those instruments exceeded the average market price of the common shares during the year and because of the loss recorded for the periods.
Options
outstanding to purchase 1,859 shares of common stock with a weighted average
exercise price of $17.98 during the quarter ended January 31, 2009 and 820
shares of common stock with a weighted average exercise price of $25.82 for the
nine months ended January 31, 2009 were not included in the computation of
diluted earnings per share because the weighted average exercise price of those
instruments exceeded the average market price of the common shares during the
year.
We
account for goodwill and intangible assets in accordance with ASC 350,
Goodwill and Other Intangible
Assets.
Under these provisions, goodwill is not amortized but
is tested for impairment on at least an annual basis. Impairment
testing is required more often than annually if an event or circumstance
indicates that an impairment or a decline in value may have
occurred. In conducting our impairment testing, we compare the fair
value of each of our business units (reporting unit) to the related carrying
value. If the fair value of a reporting unit exceeds its carrying
value, goodwill is not impaired. If the carrying value of a reporting
unit exceeds its fair value, an impairment loss is measured and
recognized. We conduct our impairment testing as of the first
business day of the third quarter each year.
We
utilize an income approach to estimate the fair value of each reporting
unit. We selected this method because we believe that it most
appropriately measures our income producing assets. We considered
using the market approach and cost approach, but concluded they were not
appropriate in valuing our reporting units given the lack of relevant and
available market comparisons. The income approach is based on the
projected cash flows which are discounted to their present value using discount
factors that consider the timing and risk of the forecasted cash
flows. We believe that this approach is appropriate because it
provides a fair value estimate based upon the reporting units’ expected
long-term operating cash performance. This approach also mitigates
the impact of the cyclical trends that occur in the industry. Fair
value is estimated using internally-developed forecasts and
assumptions. The discount rate used is the average estimated value of
a market participant’s cost of capital and debt, derived using customary market
metrics. Other significant assumptions include terminal value margin
rates, future capital expenditures, and changes in future working capital
requirements. We also compare and reconcile our overall fair value to
our market capitalization. While there are inherent uncertainties
related to the assumptions used and to our application of these assumptions to
this analysis, we believe that the income approach provides a reasonable
estimate of the fair value of our reporting units. The
foregoing assumptions to a large degree were consistent with our long-term
performance with limited exceptions. We believe that our future
investments for capital expenditures as a percent of revenue will decline in
future years due to our improved utilization resulting from lean initiatives,
and we believe that long-term receivables will decrease as we
grow. We also have assumed that through this economic downturn, our
markets have not contracted for the long term; however it may be a number of
years before they fully recover. These assumptions could deviate
materially from actual results.
-12-
We performed an analysis of goodwill as of the first business day of our third quarter in fiscal 2010. In addition, due to revisions in our forward-looking 12 month forecast during the month of January 2010, resulting from lower than expected order bookings and increased near-term uncertainty, primarily in our Live Events business unit, the significance of orders being delayed in all business units and the decline in our stock price, we believed that an additional goodwill impairment test was required as of January 31, 2010. Based on our test, we determined that the goodwill associated with the Schools and Theatres business unit, totaling $685 was impaired and that the goodwill associated with our International business unit of $725 was impaired. Because step two of the goodwill impairment testing is not complete, an estimated impairment charge of $1,410 was recorded as of January 30, 2010. Given the timing of the circumstances which led to the impairment we were unable to complete the step two fair value computations as this requires us to obtain appraisals of various assets. The impairment testing will be complete by the end of the fourth quarter of fiscal 2010 at which time any adjustments to the estimate will be recorded.
Goodwill
was $3,262 at
January
30, 2010, and $4,549 at May 2, 2009. Of the total of goodwill as of
January 30, 2010, $2,388 related to the Live Events business unit, $716 related
to the Commercial business unit and $158 related to the Transportation business
unit. Goodwill increased $123 during fiscal 2010 as a
result of the impact of foreign currency translation on goodwill denominated in
functional currencies other than the U.S. dollar. The fair value,
carrying value after impairment and the percentage in excess of carrying
value of each business unit as of January 30, 2010 is as follows:
|
Estimated
Fair Value
|
Carrying
Value
|
Percentage
of Fair Value in Excess of Carrying Value
|
|||
|
Live
Events
|
187,000
|
92,024
|
51%
|
||
|
Schools
& Theatre
|
31,000
|
31,593
|
(2%)
|
||
|
Commercial
|
121,000
|
45,985
|
62%
|
||
|
Transportation
|
66,000
|
26,183
|
60%
|
||
|
International
|
9,000
|
10,803
|
(20%)
|
We face a
number of risks to our business which can adversely impact cash flows in each of
our business units and cause a significant decline in fair values of each
business unit. This decline could lead to an impairment of goodwill
to some or all of our business units. Since the fair values of the
business units are based in part on the market price of our common stock, a
significant decline in the market price of our stock may offset the benefits of
the foregoing efforts and lead to an impairment. Notwithstanding the
foregoing, events could cause an impairment in goodwill in other business units
if the trend of orders and sales worsens and we are unable to respond in ways
that preserve future cash flows or if our stock price declines
significantly.
As
required by ASC 350, intangibles with finite lives are amortized. Included in
intangible assets are non-compete agreements and 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
January 30, 2010
is
$315, $288, $245, $228 and $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 January 30, 2010:
|
Gross
Carrying
|
Accumulated
|
Net
Carrying
|
||||||||||
|
Amount
|
Amortization
|
Value
|
||||||||||
|
Patents
|
$ | 2,282 | $ | 761 | $ | 1,521 | ||||||
|
Non-compete
agreements
|
348 | 262 | 86 | |||||||||
|
Registered
trademarks
|
401 | - | 401 | |||||||||
|
Other
|
87 | 75 | 12 | |||||||||
| $ | 3,118 | $ | 1,098 | $ | 2,020 | |||||||
-13-
Inventories
consist of the following:
|
January
30,
|
May
2,
|
|||||||
|
2010
|
2009
|
|||||||
|
Raw
materials
|
$ | 13,499 | $ | 20,644 | ||||
|
Work-in-process
|
5,570 | 7,561 | ||||||
|
Finished
goods
|
16,934 | 23,195 | ||||||
|
Finished
goods subject to
|
||||||||
|
deferred
revenue arrangements
|
1,491 | - | ||||||
| $ | 37,494 | $ | 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.
We have
five business units 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
retroactively adjusted to conform to these changes.
We do not
maintain information on sales by products and, therefore, disclosure of such
information is not practical.
-14-
The following table sets forth certain financial information for each of our five functional operating segments:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
January
30,
|
January
31,
|
January
30,
|
January
31,
|
|||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Net
sales
|
||||||||||||||||
|
Commercial
|
$ | 20,903 | $ | 35,436 | $ | 69,011 | $ | 131,619 | ||||||||
|
Live
Events
|
22,773 | 63,281 | 125,617 | 204,772 | ||||||||||||
|
Schools
& Theatres
|
12,325 | 12,490 | 49,526 | 52,151 | ||||||||||||
|
Transportation
|
8,087 | 5,002 | 31,307 | 23,301 | ||||||||||||
|
International
|
8,318 | 12,483 | 25,760 | 47,775 | ||||||||||||
|
Net
Sales
|
72,406 | 128,692 | 301,221 | 459,618 | ||||||||||||
|
Contribution
margin
|
||||||||||||||||
|
Commercial
|
80 | 3,781 | 4,448 | 21,293 | ||||||||||||
|
Live
Events
|
(2,186 | ) | 14,645 | 18,046 | 51,141 | |||||||||||
|
Schools
& Theatres
|
(1,044 | ) | (1,828 | ) | 3,612 | 1,996 | ||||||||||
|
Transportation
|
964 | 240 | 7,213 | 1,658 | ||||||||||||
|
International
|
(111 | ) | 1,787 | 760 | 4,206 | |||||||||||
|
Total
Contribution Margin
|
(2,297 | ) | 18,625 | 34,079 | 80,294 | |||||||||||
|
Non-allocated
operating expenses
|
||||||||||||||||
|
General
& Administrative
|
6,523 | 6,576 | 19,016 | 21,812 | ||||||||||||
|
Product
Development
|
5,155 | 5,148 | 16,558 | 16,981 | ||||||||||||
|
Operating
income (loss)
|
(13,975 | ) | 6,901 | (1,495 | ) | 41,501 | ||||||||||
|
Nonoperating
income (expense):
|
||||||||||||||||
|
Interest
income
|
376 | 516 | 1,129 | 1,563 | ||||||||||||
|
Interest
expense
|
(38 | ) | (32 | ) | (149 | ) | (196 | ) | ||||||||
|
Other
income (expense), net
|
(265 | ) | (699 | ) | (1,577 | ) | (2,378 | ) | ||||||||
|
Income
(loss) before income taxes
|
(13,902 | ) | 6,686 | (2,092 | ) | 40,490 | ||||||||||
|
Income
tax expense (benefit)
|
(5,531 | ) | 2,524 | (2 | ) | 14,405 | ||||||||||
|
Net
income (loss)
|
$ | (8,371 | ) | $ | 4,162 | $ | (2,090 | ) | $ | 26,085 | ||||||
|
Depreciation
and amortization
|
||||||||||||||||
|
Commercial
|
$ | 1,794 | $ | 2,015 | $ | 5,443 | $ | 5,953 | ||||||||
|
Live
Events
|
1,905 | 2,340 | 5,641 | 6,685 | ||||||||||||
|
Schools
& Theatres
|
713 | 799 | 2,163 | 2,440 | ||||||||||||
|
Transportation
|
449 | 460 | 1,360 | 1,441 | ||||||||||||
|
International
|
325 | 189 | 765 | 508 | ||||||||||||
|
Unallocated
corporate depreciation
|
1,217 | 430 | 1,626 | 1,235 | ||||||||||||
| $ | 6,403 | $ | 6,233 | $ | 16,998 | $ | 18,262 | |||||||||
-15-
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:
|
||||||||||||
|
January
30, 2010
|
$ | 62,902 | $ | 9,504 | $ | 72,406 | ||||||
|
January
31, 2009
|
114,577 | 14,115 | 128,692 | |||||||||
|
Net
sales for nine months ended:
|
||||||||||||
|
January
30, 2010
|
$ | 270,521 | $ | 30,700 | $ | 301,221 | ||||||
|
January
31, 2009
|
400,691 | 58,927 | 459,618 | |||||||||
|
Long-lived
assets at:
|
||||||||||||
|
January
30, 2010
|
$ | 82,863 | $ | 1,042 | $ | 83,905 | ||||||
|
May
2, 2009
|
88,302 | 1,125 | 89,427 | |||||||||
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. The
restricted stock units granted to employees vest over five years provided that
they remain employed with the company. 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
|
Nine
Months Ended
|
||||||||||||||
|
January
30,
|
January
31,
|
January
30,
|
January
31,
|
|||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Cost
of sales
|
$ | 112 | $ | 106 | $ | 363 | $ | 307 | ||||||||
|
Selling
|
248 | 261 | 781 | 796 | ||||||||||||
|
General
and administrative
|
276 | 273 | 890 | 852 | ||||||||||||
|
Product
development and design
|
143 | 133 | 457 | 412 | ||||||||||||
| $ | 779 | $ | 773 | $ | 2,491 | $ | 2,367 | |||||||||
As of
January 30, 2010, there was $6,872 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.
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.
-16-
A summary
of comprehensive income is as follows:
| Three Months Ended |
Nine
Months Ended
|
|||||||||||
| January 30, | January 31, |
January
30,
|
January
31,
|
|||||||||
| 2010 | 2009 |
2010
|
2009
|
|||||||||
|
Net
income (loss)
|
$ | (8,371 | ) | $ | (4,162 | ) | $ | (2,090 | ) | $ | 26,085 | |
|
Net
foreign currency translation adjustment
|
22 | (97 | ) | (2 | ) | (197 | ) | |||||
|
Net
unrealized gain on derivatives
|
- | 10 | - | 10 | ||||||||
|
Total
comprehensive income (loss)
|
$ | (8,349 | ) | $ | (4,075 | ) | $ | (2,092 | ) | $ | 25,898 | |
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 guaranteed its 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 debt. 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 Outcast’s rollout of LCD displays in
connection with its core business. The total amount accrued relating
to the guarantee liability under the provisions of ASC 460 was $72 as of January
30, 2010. In addition to the foregoing, Outcast is obligated to pay
us on approximately $1,600 of loans that matured during the third quarter of
fiscal 2010. Outcast’s ability to pay these debts is contingent on
obtaining funding or a renegotiation of the debt. We have entered into a
forbearance agreement and a non-binding letter of intent whereby we agreed to
defer repayment of the amounts owed to the end of February 2010 in exchange for
a guarantee of the $1,060 senior debt owed by Outcast to a third party who is
also an indirect investor in Outcast. The letter of intent is
expected to result in all debts getting repaid, our convertible note of $500
being converted to equity in Outcast, and all of our equity interest being
transferred to a newly-formed limited partnership, in exchange for partnership
units. We also have received non-binding verbal commitments for a
significant amount of money to be invested in Outcast to repay the debts and
release us from any obligations under the guarantee. Based on the
foregoing, we have not reserved any amounts against the loans or
guarantees. If Outcast is unable to close on these arrangements, we may
incur losses to the extent of the loans and the guarantees. Approximately
$1,060 is secured by the assets of Outcast and a guarantee by a third party,
which we believe adequately secures that debt; however, the ultimate recovery
cannot be certain if Outcast and other guarantors cannot satisfy their
obligations.
-17-
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 term 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
our displays. The products and processes we implemented were based on
representations from certain suppliers and testing that we performed.
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
January 30, 2010, we had accrued $283 for remaining claims.
Changes
in our product warranties for the nine months ended January 30, 2010 consisted
of the following:
|
Amount
|
||||
|
Beginning
accrued warranty costs
|
$ | 18,205 | ||
|
Warranties
issued during the period
|
2,241 | |||
|
Settlements
made during the period
|
(4,034 | ) | ||
|
Changes
in accrued warranty costs for pre-existing
|
||||
|
warranties
during the period, including expirations
|
717 | |||
|
Ending
accrued warranty costs
|
$ | 17,129 | ||
Leases:
We lease
office space for sales and service locations, vehicles and equipment, primarily
office equipment. Rental expense for operating leases was $2,470 and $2,527 for
the nine months ended January 30, 2010 and January 31, 2009,
respectively. Future minimum payments under noncancelable operating
leases, excluding executory costs such as management and maintenance fees, with
initial or remaining terms of one year or more consisted of the following at
January 30, 2010:
|
Fiscal
years ending
|
Amount
|
|||
|
2010
|
$ | 860 | ||
|
2011
|
2,929 | |||
|
2012
|
1,831 | |||
|
2013
|
1,119 | |||
|
2014
|
773 | |||
|
Thereafter
|
1,839 | |||
|
Total
|
$ | 9,351 | ||
Purchase
commitments:
From time to time, we commit to purchase
inventory and advertising rights over periods that extend beyond a
year. As of January 30, 2010, we were obligated to purchase inventory
and advertising rights through fiscal 2013 as follows:
|
Fiscal
years ending
|
Amount
|
|||
|
2010
|
$ | 654 | ||
|
2011
|
1,010 | |||
|
2012
|
842 | |||
|
2013
|
800 | |||
|
2014
|
336 | |||
|
Thereafter
|
1,000 | |||
|
Total
|
$ | 4,642 | ||
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. The
total extent of the property damage and other expected costs to rebuild and
cover losses are estimated to be approximately $3.3 million. 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.
-18-
During the third quarter, we have received or settled on $2.5 million in insurance proceeds related to this incident. Additional recoveries may result related to business interruption claims to be settled in the fourth quarter of fiscal 2010. Due to the fire, gross assets were written down by approximately $713, along with the associated accumulated depreciation on those assets in the amount of $379, resulting in a net book value decrease in assets of about $333. As of January 30, 2010, we had invested $555 to replace the manufacturing equipment and had incurred $710 in cleaning the damaged facility and replacing destroyed operating assets. In addition, we decided to move this operation to a newly-acquired facility adjacent to our main campus. We had committed to purchasing this new facility in fiscal 2007. We have invested $3.2 million in the building and will invest approximately $700 in building improvements for the new location. Insurance proceeds received to reimburse costs to reconstruct the facility, replace manufacturing equipment, supplies and contents resulted in gains of $1,496 for the quarter ended January 30, 2010, or $0.04 per share, net of taxes. Additionally, we recorded $512 in business interruption reimbursements for extra expenses incurred during the non-operating period. At January 30, 2010, approximately $2,351 was included in accounts receivable for insurance reimbursements. Subsequent to January 30, 2010, we received $1,840 of this receivable.
As of
January 30, 2010, 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.
Our
annual statutory rate on a domestic basis is approximately 38%. Our
overall effective rate for the third quarter of fiscal 2010 was approximately
40%. On a year to date basis, the effective rate was approximately
1%. The difference on a year-to-date basis between the domestic statutory
rate and the actual effective rate is due primarily to the mix between foreign
and domestic income. The difference between the year to date
effective rate and the quarterly rate as of January 30, 2010, is the result of
other adjustments made during the third quarter of fiscal 2010 which have a much
greater percentage impact on the smaller year-to-date pre-tax income as compared
to the pre-tax income for the quarter and the difference in mix between foreign
and domestic income. Congress has not reinstated the tax credit for
research and development activities which expired on December 31,
2009. This has had an adverse impact on our effective tax rate as the
credit was approximately $0.9 million in the prior year. As of
December 31, 2009, we are therefore not recognizing any future benefits until
such time as it is reinstated.
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.
-19-
Our
financial assets as of January 30, 2010 measured at fair value on a recurring
basis were $52,023, which consisted of money market funds. We used
level 1 inputs to determine the fair value of our financial
assets. We had no other significant measurements of assets or
liabilities at fair value on a nonrecurring basis subsequent to this initial
recognition except as discussed in Note 5 and Note 1 as it relates to goodwill
and long-lived assets.
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.
We have
evaluated the existence of both recognized and unrecognized subsequent events
through February 25, 2010, the filing date of this Quarterly Report on Form
10-Q, and we have none to report.
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 five 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.
-20-
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 January 30, 2010 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 January 30, 2010 and May 2, 2009, we had
approximately $17.1 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 January 30, 2010 and May 2, 2009, we had $10.9
million and $9.5 million of deferred revenue related to separately priced
extended warranty and product maintenance agreements, respectively.
-21-
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.
-22
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
|
Nine
Months Ended
|
|||||||
|
January
30,
|
January
31,
|
January
30,
|
January
31,
|
|||||
|
2010
|
2009
|
2010
|
2009
|
|||||
|
Net
sales
|
100.0%
|
100.0%
|
100.0%
|
100.0%
|
||||
|
Cost
of goods sold
|
85.1%
|
73.6%
|
75.3%
|
72.3%
|
||||
|
Gross
profit
|
14.9%
|
26.4%
|
24.7%
|
27.7%
|
||||
|
Operating
expenses
|
34.2%
|
21.1%
|
25.2%
|
18.7%
|
||||
|
Operating
income (loss)
|
(19.3%)
|
5.3%
|
(0.5%)
|
9.0%
|
||||
|
Interest
income
|
0.5%
|
0.4%
|
0.3%
|
0.3%
|
||||
|
Income
expense
|
0.0%
|
0.0%
|
0.0%
|
0.0%
|
||||
|
Other
income (expense), net
|
(0.4%)
|
(0.5%)
|
(0.5%)
|
(0.5%)
|
||||
|
Income
(loss) before income taxes
|
(19.2%)
|
5.2%
|
(0.7%)
|
8.5%
|
||||
|
Income
tax expense (benefit)
|
(7.6%)
|
2.0%
|
0.0%
|
3.1%
|
||||
|
Net
income (loss)
|
(11.6%)
|
3.2%
|
(0.7%)
|
5.7%
|
||||
NET
SALES
Net sales
decreased 43.7% to $72.4 million for the three months ended January 30, 2010 as
compared to $128.7 million for the same period of fiscal 2009. Net
sales decreased 34.5% to $301.2 million for the nine months ended January 30,
2010 as compared to $459.6 million for the same period of fiscal
2009. The first three and nine months of fiscal 2009 had one more
week than the first three and nine months of fiscal 2010, which impacts the
comparison between the periods.
The
following table sets forth net sales and orders by customer market for the
periods indicated:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
January
30,
|
January
31,
|
January
30,
|
January
31,
|
|||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Net
Sales
|
||||||||||||||||
|
Commercial
|
$ | 20,903 | $ | 35,436 | $ | 69,011 | $ | 131,619 | ||||||||
|
Live
Events
|
22,773 | 63,281 | 125,617 | 204,772 | ||||||||||||
|
Schools
& Theatres
|
12,325 | 12,490 | 49,526 | 52,151 | ||||||||||||
|
Transportation
|
8,087 | 5,002 | 31,307 | 23,301 | ||||||||||||
|
International
|
8,318 | 12,483 | 25,760 | 47,775 | ||||||||||||
|
Total
Net Sales
|
$ | 72,406 | $ | 128,692 | $ | 301,221 | $ | 459,618 | ||||||||
|
Orders
|
||||||||||||||||
|
Commercial
|
$ | 21,892 | $ | 24,491 | $ | 65,554 | $ | 114,163 | ||||||||
|
Live
Events
|
32,280 | 70,373 | 113,729 | 190,695 | ||||||||||||
|
Schools
& Theatres
|
10,280 | 10,414 | 48,076 | 47,056 | ||||||||||||
|
Transportation
|
9,403 | 10,899 | 25,473 | 28,820 | ||||||||||||
|
International
|
8,628 | 9,310 | 32,336 | 33,983 | ||||||||||||
|
Total
Orders
|
$ | 82,483 | $ | 125,487 | $ | 285,168 | $ | 414,717 | ||||||||
Commercial Market.
For the
third quarter of fiscal year 2010, net sales decreased 41.0%, and for the first
nine months of fiscal year 2010, net sales decreased 47.6% as compared to the
same periods of last fiscal year. For the third quarter of fiscal
2010, net sales in all areas of this market decreased. Net sales to
outdoor advertising (digital billboard) customers decreased by approximately
$6.8 million or approximately 59.1% as compared to the third quarter of fiscal
2009, and for the first nine months of fiscal year 2010, net sales declined
$50.4 million or approximately 77.5% as compared to the first nine 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 $5.4 million or approximately 31.4% for the third
quarter of fiscal year 2010 and $8.8 million or approximately 18.9% for the
first nine months of fiscal 2010.
-23-
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 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 some time in calendar year 2011, based on industry
reports. It is 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 third quarter and year-to-date in
fiscal 2010 was due to a lower level of sales of standard Galaxy displays as
well as a decline in sales of large video display systems. We
attribute the decline in sales of Galaxy displays to the weaker economic
conditions in the first three quarters of fiscal 2010 as compared to the same
period of fiscal 2009. As compared to the second quarter of
fiscal 2010, orders in the reseller niche decreased slightly in the third
quarter of fiscal 2010 and we are expecting them to increase in the fourth
quarter of fiscal 2010 led by opportunities in large video display systems. 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. Net sales and orders also
decreased in the third quarter of fiscal 2010 as compared to the second quarter
of fiscal 2010 as a result of delayed booking of orders, primarily in the
national account niche. Some of this delay appears to be resulting
from aggressive competition causing, customers to hesitate and evaluate
opportunities more carefully. 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. Net sales in the
Commercial business unit decline historically in the third quarter due to the
lower number of working days in the quarter and seasonality. Although
it appears as though sales may be rebounding, we cannot be certain that this
trend 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 10.6% for the third
quarter of fiscal 2010 as compared to the third quarter of fiscal
2009. For the first nine months of fiscal 2010, orders declined by
approximate 42.6% 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 reasons described above.
Live Events Market.
Net sales
in the Live Events market decreased by approximately 64.0% in the third quarter
of fiscal 2010 as compared to the same quarter of fiscal 2009 and on a
year-to-date basis were down approximately 38.7%. The decrease in net
sales for the third 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 contributed approximately $4.3 million and $29.9 million in net
sales during the third quarter and first nine months of fiscal year 2010
compared to approximately $32.3 million and $116.8 million for the same periods
in fiscal 2009. In addition, orders and net sales were less than
expected as a result of expected orders related to professional baseball
facilities being delayed for the season. We believe this was due to
economic concerns and various other factors. Overall, we believe that
these orders are not lost but only delayed until the period preceding the next
baseball season or until approximately December 2010 through March 2011. This
dynamic is causing us to increase our uncertainty as to what the ramifications
will be for the fall sports season which we expect to become apparent in the
first quarter of fiscal 2011.
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. Although, it appears that these pressures may be declining
somewhat, it is generally too early to assume that to be the case. In
addition, over the next 24 months, most professional sport leagues are expected
to be renegotiating labor contracts with players. This could
negatively impact orders during this period. Until these pressures
are reduced or eliminated, they are likely to adversely affect our ability to
book orders and our gross profit margin. As a result of these competitive
factors and general economic conditions, it is difficult to forecast net sales
for the rest of fiscal 2010 and into fiscal 2011. In addition, although our Live
Events business is typically resistant to economic conditions, the severity of
the current economic environment may impact this business. There have been
transactions which have been delayed due to economic conditions, as previously
described, which has had a significant negative impact on our
business. However, over the long term, we expect to see growth,
assuming that the economy improves and we are successful at counteracting
competitive pressures.
-24-
Order
bookings in the Live Events market were down more than 54.1% in the third
quarter of fiscal 2010 as compared to the same period in fiscal 2009 and on a
year-to-date basis, were down approximately 40.4% due to the decrease in large
orders, competitive pressures, which we believe have caused us to lose orders we
otherwise would have earned, and various other factors, all as explained
above.
Our
expectations regarding growth over the long term in large sports venues is due
to a number of factors, including facilities trending to spend 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 are
generally less likely to have a significant adverse 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 have caused a
significant impact. 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 third quarters of fiscal 2010 and fiscal 2009.
Schools and Theatres
Market.
Net sales in the Schools and Theatres market decreased
1.3% in the third quarter of fiscal 2010 as compared to the same quarter in
fiscal 2009 and on a year-to-date basis were down approximately 5.0% compared to
the same period one year ago. Orders for the market decreased 1.3% for the
third quarter of fiscal 2010 as compared to the third quarter of fiscal 2009
but, on a year-to-date basis, were up approximately 2.2%. We are
seeing more sales opportunities for the next three quarters in video systems in
this business unit, however, like the Live Events business unit, there is some
uncertainty over how the economy will impact this business unit. It
is possible that we could experience growth in fiscal 2011 as compared to 2010,
if the orders that we are pursuing develop. For the long-term, we
believe that this business presents growth opportunities. Based on
the results year-to-date, we expect that orders and net sales for this market
will end fiscal 2010 near the levels of fiscal 2009.
Transportation Market
. Net
sales in the Transportation market increased approximately 61.7% in the third
quarter of fiscal 2010 as compared to the same period in fiscal 2009 and on a
year-to-date basis were up approximately 34.4% compared to the same period one
year ago. Orders for the third quarter of fiscal 2010 were down
approximately 13.7% over the same period in fiscal 2009 but, on a year-to-date
basis, were up approximately 11.6% over the same period in fiscal
2009. The decrease in orders in the third quarter of fiscal 2010 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. In January 2010, we received a notice of award of a contract
from a customer for up to approximately $25 million over a five-year
period. This award requires a minimum commitment of approximately $9
million, which we expect to deliver over 24 months beginning in mid to late
fiscal 2011. The award is subject to final contract
execution. Based on this award, we believe that we will continue
seeing growth in this business unit in fiscal 2011. However, similar
to the other business units, it appears that the competitive environment has
become more intense as a limited number of competitors have become more
aggressive in pricing. Although we expect that this pricing pressure
is not 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 and orders in the Transportation market will
grow in fiscal 2010 as compared to fiscal 2009.
International
Market.
Net sales in the International market in the third
quarter of fiscal 2010 as compared to the third quarter of fiscal 2009 were down
approximately 33.4% and, on a year-to-date basis, were down approximately
46.1%. Orders were down approximately 7.3% for the third quarter of
fiscal 2010 as compared to the third quarter of fiscal 2009 and, on a
year-to-date basis, were down approximately 4.8%. The decrease in net
sales for the first nine months of fiscal 2010 as compared to the first nine
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 and the first
three quarters 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 fiscal 2009.
Advertising
Revenues.
We occasionally sell products in exchange for the
advertising revenues generated from use of the products. These sales
represented less than 1.0% and 1.7% of net sales for the first nine months of
fiscal 2010 and 2009, respectively. The gross profit percent on these
transactions has 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.
-25-
Backlog.
The order
backlog as of January 30, 2010 was approximately $100 million as compared to
$128 million as of January 31, 2009 and $90 million at the beginning of the
third 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
As
compared to the third quarter of fiscal 2009, gross profit decreased 68.4% to
$10.8 million for the third quarter of fiscal 2010 as compared to $34.1 million
for the third quarter of fiscal 2009. For the first nine months of
fiscal 2010, gross profit decreased 41.7% to $74.4 million compared to $127.7
million for the first nine months of fiscal 2009. As a percent of net
sales, gross profit was 14.9% and 24.7% for the three and nine months ended
January 30, 2010 as compared to 26.4% and 27.7% for the three and nine months
ended January 31, 2009. The decrease in gross profit dollars was
primarily the result of lower sales. The decline in gross profit
margin percent was primarily the result of higher manufacturing costs as a
percentage of sales, higher inventory writedowns and additional product
liability costs. Going into the third quarter of fiscal 2010, we had
expected net sales to be significantly higher than the reported amount of $72.4
million. Our manufacturing conversion costs, which are generally
fixed in the short term, adversely impacted gross margin percents by more than
four percentage points due to the lower than expected level of
sales. In addition, incremental product maintenance costs and
inventory write-downs reduced gross margin by more than two percentage
points. On the positive side, we reduced our manufacturing costs
again on a sequential basis by more than $1.1 million. Since the
first quarter of fiscal 2009, we have reduced manufacturing costs by
28.3%. We expect gross profit margins to increase in future
quarters.
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.
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 for the fiscal year ended May 2,
2009.
Gross
profit in our Commercial market declined to approximately 11% in the third
quarter of fiscal 2010 from approximately 22% in the same period of fiscal
2009. For the first nine months of fiscal 2010, gross profit margin
was approximately 20% as compared to 26% for the same period of fiscal
2009. The decline for the third quarter of fiscal 2010 as compared to
the same period in fiscal 2009 was primarily due to competitive factors, an
increase in warranty reserves in the outdoor advertising business, and a decline
in margins for national accounts due to competitive factors and higher
manufacturing costs. On a year-to-date basis, gross profit margins
declined due to lower margins in the outdoor advertising marketplace for these
same reasons.
Gross
profit in our Live Events market decreased to approximately 6% in the third
quarter of fiscal 2010 as compared to approximately 30% in the third quarter of
fiscal 2009. For the first nine months of fiscal 2010, the gross profit margin
was approximately 23% as compared to 31% for the same period of fiscal
2009. The decrease for the first nine months of fiscal 2010 compared
to the same period of fiscal 2009 was primarily the result of lower margins on
sales due to the competitive factors described above and the costs of excess
capacity in manufacturing and other areas. The third quarter of fiscal
2010 had lower margins due to the cost of excess capacity in manufacturing and
other areas and due to higher warranty costs and lower project margins due to
competitive pressures.
Gross
profit in our Schools and Theatres market increased to approximately 21% in the
third quarter of fiscal 2010 from approximately 13% in the third quarter of
fiscal 2009. For the first nine months of fiscal 2010, gross profit was
27% compared to 24% 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 and some cost reductions in manufacturing. In addition,
warranty related costs decreased in the third quarter of fiscal 2010
compared to the third quarter of fiscal 2009 due to the reduced costs related to
the paint issue in fiscal 2010 as mentioned elsewhere in this
report. This improvement was partially offset by lower margins in
services and other areas.
-26-
Gross
profit in our Transportation market decreased to approximately 21% in the third
quarter of fiscal 2010 as compared to approximately 25% in the third quarter of
fiscal 2009. For the first nine months of fiscal 2010, the gross profit margin
was approximately 31% as compared to approximately 21% in the same period in
fiscal 2009. The increase on a year-to-date basis was the result of
better pricing 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 34% in the third
quarter of fiscal 2010 as compared to approximately 33% in the same period one
year ago. For the first nine months of fiscal 2010, the gross profit
margin was approximately 32%, compared to approximately 24% 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 primarily of selling, general and administrative
expenses and product design and development costs, decreased by approximately
9.1% to $24.7 million in the third quarter of fiscal 2010 from $27.2 million in
the third quarter of fiscal 2009. As a percent of net sales,
operating expenses increased to 34.2% in the third quarter of fiscal 2010 from
21.1% for the third quarter of fiscal 2009. Operating expenses
decreased 11.9% to $75.9 million for the nine months ended January 30, 2010 from
$86.2 for the nine months ended January 31, 2009. As a percent of net
sales, operating expenses increased to 25.2% of net sales for the nine months
ended January 30, 2010 from 18.7% for the nine months ended January 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, coupled with a general hiring freeze, to drive a significant portion
of the decrease in personnel costs. In addition, we have implemented wage
freezes for salaried employees beginning in fiscal 2010 and have implemented
various other cost reduction initiatives. Given the results for the third
quarter of fiscal 2010, we have begun to get more aggressive on cost reduction
to ensure that we return to profitability while continuing to deliver products
and services that our customers value. As we look back over the past six
quarters, we have reduced operating expenses by over 18% and manufacturing costs
by over 30%. We do not believe that this is adequate in the current
environment. There are many areas that we need to reexamine and challenge
our view about how we can deliver value to customers through a lower cost
structure.
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.
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 14.8% to $13.2 million for the three months ended January 30,
2010 as compared to $15.5 million for the second quarter of fiscal 2009.
Selling expenses decreased 14.8% to $40.4 million for the nine months ended
January 30, 2010 from $47.4 million for the same period in fiscal year
2009. Selling expenses increased to 18.2% of net sales for the third
quarter of fiscal 2010 from 12.1% of net sales for the third quarter of fiscal
2009.
Selling
expenses for the third quarter of fiscal 2010 were lower than selling expenses
in the third quarter of fiscal 2009 as a result of a decrease in personnel
costs, including taxes and benefits, of approximately $1.0 million, a decline of
$0.2 million in travel and entertainment costs and commissions, a $0.1 million
decrease in costs of conventions, a decrease of $0.6 million in bad debt expense
and a net decrease of $0.3 million in various other categories. The
decrease in travel and entertainment costs is a reflection of cost savings
initiatives and the lower level of sales opportunities. The decrease
in costs of conventions is a result a lower number of trade shows attended and
decreased costs of those where attendance was appropriate. The decrease in bad
debt expense is due to the natural volatility of bad debt expense that we
experience.
We are
currently examining ways to decrease our infrastructure costs in light of the
level of sales in the third quarter of fiscal 2010. We are also
evaluating other areas of reduction within selling expense and expect that it
will decline in the fourth quarter of fiscal 2010 on a sequential
basis. This expectation is subject to our ability to contain 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.
-27-
General
and administrative expenses decreased 1.5% to $6.5 million for the third quarter
of fiscal 2010 as compared to $6.6 million for the third quarter of fiscal
2009. General and administrative expenses decreased 12.8% to $19.0
million for the first nine months of fiscal 2010 as compared to $21.8 million
for the first nine months of fiscal 2009.
General
and administrative expenses increased to 9.0% as a percent of net sales for the
third quarter of fiscal 2010 from 5.1% of net sales for the third quarter of
fiscal 2009. For the first nine months of fiscal 2010, general and
administrative expenses increased to 6.3% of net sales as compared to 4.7% of
net sales for the first nine months of fiscal 2009.
General
and administrative expenses decreased in the third 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, offset by an increase in charitable
contributions and other expenses of $0.3 million. 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 2.0% to $5.2 million for the third
quarter of fiscal 2010 as compared to $5.1 million for the third quarter of
fiscal 2009. Product design and development expenses decreased 2.4%
to $16.6 million for the first nine months of fiscal 2010 as compared to $17.0
million for the first nine months of fiscal 2009.
Product
design and development expenses increased to 7.1% as a percent of net sales for
the third quarter of fiscal 2010 from 4.0% of net sales for the third quarter of
fiscal 2009. For the first nine months of fiscal 2010, product design
and development expenses increased to 5.5% of net sales as compared to 3.7% of
net sales for the first nine 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
efficiencies. 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 for the
fourth quarter of fiscal 2010 will approximate levels similar to the quarterly
spending levels of the last three fiscal quarters.
Gain on insurance
proceeds:
During the third quarter of fiscal 2010, we recorded
a gain on insurance proceeds of $1.5 million related to the fire at our Star
Circuits manufacturing facility as described in Note 10 of the notes to the
consolidated financial statements.
Goodwill
Impairment:
During the third quarter of fiscal 2010, we
recorded a goodwill impairment of $0.7 million related to our Schools and
Theatres business unit and $0.7 million related to our International business
unit. The impairment for both business units was generally related to
a decline in the market value of our stock during the period and lower sales
expected over the next 12 months.
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.
Interest
income decreased 20.0% to $0.4 million for the third quarter of fiscal 2010
compared to $0.5 million for the third quarter of fiscal 2009. For
the first nine months of fiscal 2010, interest income decreased 31.3% to $1.1
million from $1.6 million for the first nine 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 third quarter of fiscal 2010 as compared to
the third quarter of fiscal 2009. For the first nine months of fiscal
2010, interest expense decreased 50.0% to $0.1 million from $0.2 million for the
first nine 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.
-28-
OTHER INCOME (EXPENSE), NET
Other
income (expense) increased for the third quarter of fiscal year 2010 to a loss
of $0.3 million as compared to a loss of $0.7 million for the third quarter of
fiscal year 2009. For the first nine months of fiscal 2010, it
decreased to a loss of $1.6 million as compared to a loss of $2.4 million for
the same period in fiscal 2009. The decrease of net other expense
resulted 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 resulted from 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 $0.1 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 were approximately $0.4 million less in the third
quarter and $0.2 million less year-to-date for fiscal 2010 as compared to the
same periods one year ago. During the quarter, our equity basis in
these losses was reduced to 10%, which caused the decline. We began to recognize
losses at the rate of 10% since we have written our equity investment down to
zero, and the rate of 10% represents our share of losses based on our ownership
percentage of the next senior security which is the convertible
debt. See notes 1 and 10 of the consolidated financial statements for
additional information. 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 this report, we had entered into a non-binding letter of
intent with Outcast, which contemplates repayment of accounts owed to us, and we
have obtained additional collateral in the form of a guarantee from a third
party on a portion of the amount owed.
INCOME
TAX EXPENSE
Income
taxes were approximately ($5.5) million in the third quarter of fiscal 2010 and
$2.5 million for the third quarter of fiscal 2009. For the first nine
months of fiscal 2010, income taxes decreased to $0.2 million as compared to
$14.4 million for the first nine months of fiscal 2009. The effective
rate for the third quarter of fiscal 2010 was approximately 39.8% as compared to
37.8% for the third quarter of fiscal 2009. The effective tax rate
for the nine months ended January 30, 2010 was 0.1% as compared to 35.6% for the
first nine months of fiscal 2009. The decrease in the effective rate
on a year-to-date basis is the result of the losses in foreign jurisdictions
which have low tax rates relative to the United States. Congress has
not reinstated the tax credit for research and development activities which
expired on December 31, 2009. This has had an adverse impact on our
effective tax rate as the credit was approximately $0.9 million in the prior
year. As of December 31, 2009, we are therefore not recognizing any
future benefits until such time as it is reinstated.
LIQUIDITY
AND CAPITAL RESOURCES
Working
capital was $117.7 million at January 30, 2010 and $107.4 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 nine months of fiscal 2010 was $37.9
million. The net loss of $2.1 million plus $17.9 million in
changes in net operating assets, adjusted by depreciation and amortization of
$17.0 million, the add-back of $1.5 million of equity in net losses of equity
investments, and $2.5 million of stock-based compensation, and $1.4 million of
goodwill impairment and various other items, generated most of the cash provided
by operations.
The most
significant drivers of the change in net operating assets for the first nine
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.
Cash used
by investing activities of $13.4 million for the first nine months of fiscal
2010 included $12.9 million for purchases of property and equipment, $1.7
million of purchased receivables from an affiliate, and a $0.1 million
investment, which was offset by $0.7 million of proceeds from insurance for
assets destroyed in a fire and $0.5 million from sale of Ledtronics, our
Malaysian affiliate. During the first nine months of fiscal 2010, we
invested approximately $3.6 million in manufacturing equipment, $1.9 million in
product demonstration equipment, $1.6 million in information systems
infrastructure, including software, $3.8 million in facilities, and $2.0 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. The
investment in facilities related to the closing of a transaction we committed to
in fiscal 2007 to purchase a building in Brookings, South Dakota. As
of the end of the third quarter of fiscal 2010, capital expenditures were 4.3%
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 its business.
-29-
Cash used
by financing activities of $3.5 million for the first nine months of fiscal 2010
consisted of the dividend paid to shareholders of $3.9 million on June 23, 2009,
which was partially offset by $0.4 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 of fiscal 2010 as a result of incentives
and pricing considerations.
Included
in receivables as of January 30, 2010 was approximately $6.2 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 nine 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 $5.2 million for the third quarter of fiscal 2010 as compared to $5.1
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 that 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 the ratio of interest-bearing debt to EBITDA, as
defined. EBITDA is defined as net income before income taxes,
interest expense, depreciation and amortization. The effective
interest rate was 1.0% at January 30, 2010. We are assessed a loan
fee equal to 0.125% per annum of any non-used portion of the loan. As
of January 30, 2010, there were no advances under the line of
credit.
The
credit agreement is unsecured. In addition to provisions that limit
dividends to the current year net profits after tax, the credit agreement also
requires us to be in compliance with the following financial
ratios:
|
a.
|
A
minimum fixed charge coverage ratio of 2 to 1 at the end of any fiscal
year. The ratio is equal to (a) EBITDA less dividends, a
capital expenditure reserve of $6 million, and income tax expense, over
(b) all principal and interest payments with respect to debt, excluding
debt outstanding on the line of credit,
and
|
|
b.
|
A
ratio of interest-bearing debt, excluding any marketing obligations, to
EBITDA of less than 1 to 1 at the end of any fiscal
quarter.
|
We were
in compliance with all applicable covenants as of January 30, 2010 and expect to
be in compliance with all applicable covenants at the end of fiscal year
2010. The minimum fixed charge coverage ratio as of May 2, 2009 was
7.1 to 1, and the ratio of interest-bearing debt to EBITDA as of January 31,
2010 was approximately 0.04 to 1.
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 January 30,
2010, 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 January 30, 2010, we
had approximately $30.4 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. 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.
-30-
FOREIGN
CURRENCY EXCHANGE RATES
Through
January 30, 2010, 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 third quarter of fiscal 2010 were approximately 13.1% 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 our foreign subsidiaries’ operating cash needs
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 January 30, 2010, 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 January 30, 2010. 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 January 30, 2010, our outstanding long-term
receivables were approximately $20.4 million. Each 25 basis point increase in
interest rates would have an associated annual opportunity cost to us of
approximately $0.1million.
The
following table provides information about our financial instruments that are
sensitive to changes in interest rates, including debt obligations, for the last
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
|
$ | 4,374 | $ | 3,314 | $ | 3,053 | $ | 2,757 | $ | 1,593 | $ | 5,351 | ||||||||||||
|
Average
interest rate
|
6.0 | % | 8.0 | % | 8.0 | % | 8.0 | % | 8.2 | % | 8.0 | % | ||||||||||||
|
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
|
$ | 20 | $ | 341 | $ | 253 | $ | 151 | $ | 134 | $ | 7 | ||||||||||||
|
Average
interest rate
|
8.8 | % | 8.8 | % | 8.7 | % | 8.6 | % | 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
$52.6 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.
-31-
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 January 30, 2010,
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 January 30, 2010, 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 January 30,
2010, 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.
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.
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 as amended
and supplemented by the risk factors listed below. They describe
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.
Difficult and volatile conditions in
the capital, credit and commodities markets and in the overall economy could
continue to materially adversely affect our financial position, results of
operations and cash flow, and we do not know if
these conditions will improve in the
near future.
Our financial position, results of operations and cash flow
could continue to be materially adversely affected by the current and continuing
difficult conditions and significant volatility in the capital, credit and
commodities markets and in the overall worldwide economy. These factors,
combined with declining business and consumer confidence and increased
unemployment, have precipitated a worldwide economic slowdown and recession in
the United States and other parts of the world. The continuing impact that these
factors might have on us and our business is uncertain and cannot be predicted
at this time. Current economic conditions have accentuated each of
the risks described in this Annual Report on Form 10-K and magnified their
potential effect on us and our business. The difficult conditions in these
markets and the overall economy affect our business in a number of ways. For
example:
-32-
|
·
|
Although
we believe we have sufficient liquidity under our credit agreement with a
bank to run our business, under extreme market conditions, there can be no
assurance that such funds would be available or sufficient and, in such a
case, we may not be able to successfully obtain additional financing on
favorable terms, or at all.
|
|
·
|
Market
volatility has exerted downward pressure on our stock price, which may
make it more difficult for us to raise additional capital in the
future.
|
|
·
|
Economic
conditions could continue to result in our customers experiencing
financial difficulties or electing to limit spending because of the
declining economy, which may result in decreased net sales and earnings
for us.
|
|
·
|
Economic
conditions combined with the weakness in the credit markets could continue
to lead to increased price competition for our products, increased risk of
excess and obsolete inventories and higher overhead costs as a percentage
of revenue.
|
|
·
|
If
the markets in which we participate experience further economic downturns,
as well as a slow recovery period, this could continue to negatively
impact our sales and revenue generation, margins and operating expenses,
and consequently have a material adverse effect on our business, financial
condition and results of operations
|
We do not
know if market conditions or the state of the overall economy will improve in
the near future or when improvement will occur.
Circumstances could arise in which
our goodwill and intangible assets could become impaired, causing us to
recognize substantial non-cash impairment charges, which would adversely affect
our financial results.
We have pursued and will continue to seek
potential acquisitions to complement and expand our existing businesses,
increase our revenues and profitability, and expand our markets. As a result of
prior acquisitions, we have goodwill and intangible assets recorded on our
balance sheet as described in the notes to the consolidated financial statements
contained elsewhere in this report. We will continue to evaluate the
recoverability of the carrying amount of our goodwill and intangible assets on
an ongoing basis, and we may incur substantial non-cash impairment charges,
which would adversely affect our financial results. There can be no assurance
that the outcome of such reviews in the future will not result in substantial
impairment charges. Impairment assessment inherently involves judgment as to
assumptions about expected future cash flows and the impact of market conditions
on those assumptions. Future events and changing market conditions may impact
our assumptions as to prices, costs, holding periods or other factors that may
result in changes in our estimates of future cash flows. Although we believe the
assumptions we used in testing for impairment are reasonable, significant
changes in any one of our assumptions could produce a significantly different
result. A decline in our market capitalization or in our estimated forecasted
discounted cash flows also could result in an impairment of our goodwill and
intangible assets. A non-cash impairment charge could materially and adversely
affect the net income for the reporting period in which it is
recorded.
Uncertainties inherent in certain
accounting matters could adversely affect our operating results.
The
discussion of goodwill impairment and long-lived assets matters in Notes 1 and 5
to our consolidated financial statements is incorporated by
reference.
Not
applicable.
Not
applicable.
Not
applicable.
Not
applicable.
Certain
of the following exhibits are incorporated by reference from prior
filings. The form with which each exhibit was filed and the date of
filing are as indicated below.
|
10.1
|
Loan
Agreement dated October 14, 1998 between U.S. Bank National Association
and Daktronics, Inc.
(4)
|
|
10.2
|
Sixth
Amendment to Loan Agreement Dated January 23, 2007 by and between
Daktronics, Inc. and U.S. Bank National Association.
(3)
|
-33-
|
10.3
|
Eighth
Amendment to Loan Agreement Dated November 12, 2009 by and between
Daktronics, Inc. and U.S. Bank National Association.
(1)
|
|
10.4
|
Renewal
Revolving Note Dated November 12, 2009 between Daktronics, Inc. and U.S.
Bank National Association.
(2)
|
|
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.
(5)
|
|
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.
(5)
|
|
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).
(5)
|
|
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).
(5)
|
|
|
(1)
|
Incorporated
by reference to Exhibit 10-1 filed with our Current Report on Form 8-K
filed on November 12, 2009.
|
|
|
(2)
|
Incorporated
by reference to Exhibit 10-2 filed with our Current Report on Form 8-K
filed on November 12, 2009.
|
|
|
(3)
|
Incorporated
by reference to Exhibit 10-1 filed with our Current Report on Form 8-K
filed on January 25, 2007.
|
|
|
(4)
|
Incorporated
by reference to Exhibit 10-6 filed with our Quarterly Report on Form 10-Q
filed on December 11, 1998.
|
|
|
(5)
|
Filed
herewith electronically.
|
-34-
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:
February 25, 2010
-35-
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1. Basis Of Presentation and Summary Of Critical Accounting PolicesNote 2. Recently Issued Accounting PronouncementsNote 3. Revenue RecognitionNote 4. Earnings Per Share ( Eps )Note 5. Goodwill and Other Intangible AssetsNote 6. InventoriesNote 7. Segment DisclosureNote 8. Share-based CompensationNote 9. Comprehensive IncomeNote 10. Commitments and ContingenciesNote 11. Income TaxesNote 12. Fair Value MeasurementNote 13. Exit Or Disposal CostsNote 14. Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission Of Matters To A Vote Of Security HoldersItem 5. Other InformationItem 6. Exhibits